Paying Your Adjustable Rate Mortgage
Many mortgage borrowers have adjustable rate mortgages (ARMs) but do not know exactly what to expect from it.
Most ARM borrowers received this mortgages during the housing boom over the past couple prior years when people were buying regardless if they had the necessary finances to make the monthly payments, just out of fear that listed homes were getting scarce and the prices would continue to escalate.
The article, “Adjustable Rate Mortgage: Understand the Risks of Variable Rate Mortgage Loans,” written by Louie Latour and posted on jumbolaonrates.net explains what borrowers should expect or do if their fixed rate period is almost expired.
“If you refinanced your old mortgage or purchased your home with an Adjustable Rate Mortgage, you might wonder what will happen once the introductory period of your loan ends. Many homeowners that financed their homes with these risky variable interest rate mortgages are in for a shock when the mortgage lender adjusts the interest rate and monthly payment.”
Unfortunately, lenders have loosened their underwriting guidelines in recent years, starting during the “boom.” This resulted in many borrowers taking out loans that were too much to handle financially. People took out interest only and other nontraditional adjustable rate loans with low initial monthly payments. Many of these borrowers are just getting by month-to-month with their minimum monthly mortgage payment, but that will all change soon.
Since the fixed period of adjustable rate mortgages are usually around five years, believe it or not, many borrowers forget that their monthly payment will change.
“What does this mean for you [the borrower]? If your mortgage was a thirty year interest only mortgage with a five year interest only period, the mortgage payment will be based on a 25 year payment schedule at the end of the interest only period. Not a big deal right? It means your monthly payment will be much higher, not simply because the interest rate has gone up, but because you now have less time to pay back the full amount of your loan than if you used a traditional mortgage to finance your home.”
Your minimum monthly payment may double or more, which may lead you to having difficulty making the payments for the remaining 25 or so years.
If you do not think you will be able to make these new payments, you should definitely consider refinancing your mortgage. Refinancing is intended for borrowers in this situation, although you need very good credit to qualify.
“If you are coming up on the end of your introductory period and do not know what your monthly payment will be, you should contact your lender immediately and ask about the change. If you do not qualify to refinance the mortgage and will not be able to afford the payments, you may need to take on a second job or consider selling your home.”