Adjustable rate mortgages (ARMs) have an interest rate that changes periodically based on market indices. When the original term of your interest rate is about to come due it is time to consider your options. As interest rates rise, homeowners may choose to refinance into a fixed rate mortgage. The information below can guide you through this change and assist you in making a sound decision. Regardless of your situation, Ross Mortgage Corporation has the expertise required to help you make the right decision
What's Behind the Change?
If your current home loan is an Adjustable Rate Mortgage (ARM) it likely offered a lower interest rate than what would have been available with fixed interest rate options at the time it was originated. This lower initial rate allowed you to:
Increase the amount of money you could borrow.
Make a lower monthly payment than would have been the case with a fixed rate mortgage.
There are many different types of ARM's, each of which offer an initial interest rate that is scheduled to change periodically. The initial rate can be fixed for a term ranging from 6 months to 10 years. At the conclusion of that term, the rate can adjust based on current market conditions.
The closing package you received details the specifics of your ARM. It will tell you of how much your rate can increase (or decrease) and whether it includes annual and lifetime limits on potential increases, also known as "caps."
Evaluating the Equity Effect
A mortgage payment consists of two components: principal and interest. Principal is the amount that reduces the outstanding loan balance. Interest is the cost for using the borrowed money. It is important to have a mortgage payment that you can afford and also reduces the principal loan balance.
Recently, interest only mortgages have become popular. While this option does offer a lower payment, it does not reduce the principal loan balance. As a result, there are several important points to keep in mind when considering an interest only loan:
- If you don't make principal payments, you lose the ability to increase your home equity by decreasing your loan's outstanding balance.
- When the interest only period expires, your payment may increase substantially because the remaining balance is paid over a shorter time period. For example, if you have a 30-year mortgage with the first 10 years consisting of interest only payments, your principal repayment will be amortized over the remaining 20 years.
- If property values decline, you could end up owing more than your home is worth
In most cases, Interest Only Mortgages or Option ARM's (an Adjustable Rate Mortgage with an option for reduced monthly payments) loans are for consumers who plan on refinancing in the near future. If you have questions about your current loan structure, our experienced loan officers are always available to provide answers.
Considering Your Options
When the interest rate on your ARM is about to adjust, you have many options:
- Remain with your existing loan;
Depending on market conditions this option may result in a higher monthly payment. However, the rate adjustment may also result in a lower monthly payment. It is important to remember that if you choose to keep your ARM you remain subject to possible future rate adjustments based on the terms and conditions of your mortgage agreement.
- Refinancing to a fixed rate loan;
Ross Mortgage has a variety of fixed rate mortgages from which to chose. Terms can vary from 10 to 40 years. We also offer low to no closing costs refinancing options to help you save. A fixed rate loan will provide the following advantages:
- Protection from rising interest rates.
- Security and predictability of fixed monthly payments for the entirety of your loan.
- Faster equity growth.
- Refinance to a new ARM;
If you plan to sell your home in the next few years, selecting a new ARM may be your best option. The benefit will be lower monthly payments for the short time that the loan is in effect.
Our team of professionals will help you select the adjustable rate term that fits your timetable. Ross Mortgage provides ARMs that offer initial fixed rate periods of 1, 3, 5, 7, and 10 years. Also, if you are an existing Ross Mortgage customer, you may qualify for a streamlined refinance that carries no closing costs.
Dealing with Concerns
Your home is one of your most valuable assets and we at Ross Mortgage are dedicated to protecting your investment. We are available to meet with you to personalize a plan that best suits your needs. Contact Us