How to Handle Adjustable Rate Mortgages
While the low initial interest of an adjustable-rate mortgage can attract many first-time homeowners, the rising interest rates often sound easier to cope with than they actually are. If you’re stuck in a mortgage with steadily increasing interest, here are a few financial maneuvers you can use to keep your family sane and secure:
- Start a cushion account. Although you can’t control how much your mortgage interest rates will rise and fall, you can at least make sure that you’ll be able to make your monthly payments on time by stashing a portion of your paycheck in a savings account every two weeks. This way, you’ll have a cushion in case the prime index rate jumps unexpectedly. And if you’ve still got money left over at the end of the year, you can absorb it into your general savings or checking account.
- Plan ahead. If you look at the trends in the prime index rate that your mortgage uses (take a look at the past few years), you’ll be able to get a good idea of which direction your interest is heading in the future. If you have trouble analyzing the data yourself, you can always search the Internet for economists’ predictions. Planning ahead will make it easier to keep the money on hand to cover your increased monthly payments.
- Refinance your mortgage. With foreclosures at an all-time high, banks are looking for strategies to get homeowners to pay their mortgage consistently. For many homeowners, this means refinancing an adjustable-rate mortgage, turning it into a fixed-rate mortgage instead. If you’ve got equity in your home and the fixed period of your ARM isn’t up yet, you’re an especially good candidate for a fixed-rate mortgage. However, you should be aware that this move likely means that you’ll have to stay with your real estate investment for a few more years before you’re able to sell it.
In the current buyer’s market, an ARM might actually be more affordable than a fixed-rate mortgage. But if you’re uncomfortable with the shifting interest rates, now is a perfect time to modify or refinance your loan in order to extend your fixed-rate period.