Suggestions to Protect Yourself
from ARM Rate Shock
If you have an ARM (Adjustable Rate Mortgage), it’s important to know when your reset date will arrive. But what can you do to protect yourself from rate shock when it does? Here are a few suggestions:
Refinance to a fixed-rate mortgage before the reset date arrives. If you’re concerned about rising interest rates, consider refinancing. While your monthly payments may increase, you will be protected from future increases. But be sure to check if your mortgage has any prepayment penalties and to consider all of the other costs involved to determine if refinancing is right for you. Also, refinancing usually only makes sense if you plan to be in your home for several more years.
Start a savings account so you can pay off a substantial portion of your mortgage when the reset date arrives. Check whether the terms of your mortgage allow you to do this without a prepayment penalty.
Pay more than the minimum amount if you have an option ARM. If you’ve been paying only the least amount required, start paying the fully amortized amount. This will begin to reduce your mortgage balance before the recalculation date. If that’s not feasible, switch to the interest-only option so at least your mortgage balance won’t increase any more.
Consolidate your debt. If a higher mortgage payment is going to make it hard for you to get by, consider seeing a credit counselor. There may be ways to restructure some of your high-interest debt by consolidating it into one lower-interest loan so you can afford the higher payments on your mortgage.
Cut other expenses. Look to where you can cut costs to save more money. Some good places to start are services such as cable, DVR (digital video recorder), cell phone, satellite radio, broadband Internet, etc.
Rent out part of your home. If your home is large enough, and your zoning regulations allow it, consider taking in tenants to help generate some extra cash to make the new payments.
Downsize. If none of the above options can solve your problem, you may have to consider selling your home and downsizing to a home you can more easily afford. It’s better than facing the threat of defaulting on your mortgage. And you can always move up again in a few years once you’ve built up your home equity.
