If you took an ARM loan because you loved the low rate you were getting, you may be regretting that choice now. If your interest rate adjusted and it’s for the worse, you may be feeling a bit of payment shock. While it can be overwhelming and frustrating, there are ways that you can handle the situation.
It’s best if you approach the ARM before it adjusts, but if you overlook it and don’t get there early enough, there are still ways you can fix the situation.
Refinancing Before the Rate Adjusts
Before your first rate adjustment, your lender is supposed to give you several months’ notice of the impending change. If you know of the change, you can assess the situation. While you can’t predict what your index rate will be on your rate change day, you can see what the market is like now. Also, look back historically to see what rates did. If the current index rate scares you, it may be time to refinance. If you don’t like the uncertainty of not knowing your interest rate, it may also be time to refinance.
You have a few options when you refinance:
- You can opt for another ARM. This way you get the introductory rate for another 5 to 7 years depending on the term you choose.
- You can opt for a fixed-rate loan. If you don’t want to deal with the changing interest rates, you can just lock in today’s rate as a fixed rate and leave your loan alone moving forward.
Refinancing After the Rate Adjusts
If you refinance after the rate adjusts, any rate that is lower than your current rate is going to sound good. Make sure you exercise caution, though. Talk with a few lenders and see what they have to offer. If they know your current rate is high, they could use that to their advantage and quote you slightly higher interest rates than they might quote someone that doesn’t have that high interest rate.
If you opt for a fixed-rate loan, make sure you are comfortable with the rate provided. You will have this rate for the next 15 – 30 years. Don’t just jump into the first loan you find as you could find that the payment isn’t that much lower than what your adjusted payment became on your ARM loan.
Deciding on the Right Type of Loan
If you do decide to refinance, you have to figure out what type of loan you want. The ARM loan can be enticing since you’ll get that introductory rate again. But then in 5 – 7 years, you’ll be in the same boat again. Do you want to do that to yourself? Typically, the people that choose the ARM again are those that know they will move in the next 5 – 7 years. If they move before the rate adjusts, they had the opportunity to pay the lower, introductory rate for double the introductory period by taking two ARM loans.
If this is your forever home, you may want to put an end to the adjustable rates. If rates get too high, you’ll just find yourself refinancing again. Because refinancing isn’t free, you really should exercise caution when doing so. You should only refinance if there is a true benefit of the loan. Knowing that you’ll stay in the home for the long-term, you may want the fixed-rate loan. This way you know to the date when you’ll own the home free and clear. You may even speed up the process by making extra payments towards your loan’s principal.
Refinancing an ARM loan is a big decision. Deciding to do it beforehand is a gamble because you don’t know if rates will increase or decrease. Waiting until after the rate adjusts is another gamble, though, as you’ll be on the hook for the payment no matter what it adjusts to after your adjustment date. Think of the big picture and your plans to help you decide what is right.