ARM Reset Options
Q. My adjustable rate mortgage (ARM) is about to reset. What are my options?
A. You have two options: Refinance, or do nothing. Before you decide, you need to consider your monthly budget, how long you plan to stay in your home, and how much risk you are willing to accept.
Option 1: Refinance. If you plan to stay in your home for at least three more years, consider refinancing. And this option also involves another decision – what type of loan to choose when you refinance. Two common options are a fixed-rate or a hybrid adjustable-rate mortgage (ARM)?
The hybrid ARM. This is an adjustable-rate mortgage that has an initial fixed-rate term, anywhere from one to ten years (most commonly three or five). If you think you’ll be in your home for approximately three years, consider a hybrid ARM. Interest rates for ARMs are often lower than for fixed-rate mortgages, because you assume more risk. Weigh that risk carefully: if interest rates get higher and you are still in your home when your new ARM resets again, you may have to shoulder a significantly higher monthly payment.
The fixed-rate mortgage. If you are going to be in your home for a longer period of time, or you are not comfortable with risk, a fixed-rate mortgage may be the right option for you. You may pay a slightly higher interest rate than for a hybrid ARM, but the piece of mind that comes with a fixed monthly payment may be more than worth it.
Option 2: Do nothing. Sounds easy, right? If you think you are likely to move in the next year or two, refinancing may not make sense, since you may not be in the house long enough to recoup the cost of refinancing. But this decision involves more risk. Interest rates may move higher and you may stay longer than you had planned. Check your mortgage paperwork to see how much your interest rate can rise in any year and what the lifetime rate cap is. Then run the numbers and see if you can afford the worst case scenario.
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