What to Do When the Interest on Your Adjustable-Rate Mortgage Rises

An adjustable-rate mortgage (ARM) starts out with a low interest rate for a set amount of time before periodically adjusting based on market conditions, making it an attractive option for borrowers who don’t plan to stay in their home for a long period of time. Borrowers in this situation can lock in a low interest rate for the first several years and then move to another home before having to worry about the rate adjusting and their monthly payments skyrocketing.

But those who plan to stay in their home for an extended period of time often experience a shock when their interest rates reset—and their monthly payments jump. If you have an ARM, and affording your new monthly payments will be a stretch as the interest rate begins to fluctuate, you have options when it comes to refinancing your mortgage.

How an Adjustable-Rate Mortgage Works
An ARM has an adjustment period that refers to how frequently the rate will change. For example, with a one-year ARM, the interest rate will adjust once per year after the initial low interest rate expires. Lenders refer to several indexes to set their interest rates when ARMs adjust. Ask your lender which index it uses to set rates, and pay attention to how that index fluctuates over time. Your loan servicer should send you an estimate of what your new payment amount will be after the rate adjustment several months before the change occurs.

What to Do If You Can’t Afford Your New Mortgage Payments
If higher monthly payments would leave you struggling to cover your mortgage and other bills, you might be able to refinance your loan. You could choose a fixed-rate mortgage or a hybrid ARM with a low introductory rate that would adjust later.

You might also be able to switch to a fixed-rate mortgage with a longer repayment period than your initial loan, which could give you lower monthly payments than you would have at the new rate with your ARM. If you decided to take out a 40-year fixed-rate mortgage, the interest rate would likely be a little higher than it would be with a 30-year fixed loan.

Another option is to take out a home equity loan, or second mortgage. Doing so could allow you to lower your interest rate and possibly shorten the term of the loan with little effect on your monthly payments.

Stay Calm and Explore Your Options
If your interest rate on an adjustable-rate mortgage has risen and your mortgage payments have jumped significantly, you may be feeling shocked and overwhelmed, but you have options that can help you avoid stretching your budget too thin. While working closely with your lender is critical when it comes to choosing the best mortgage for your situation, it’s also important to understand how an adjustable-rate mortgage works, and how and when the interest rate will reset.

This article is intended for informational purposes only and should not be construed as professional or legal advice.