If you have an adjustable-rate mortgage (ARM) and your fixed-rate period is drawing to an end, your first rate adjustment is looming. It's time to devise a plan.
Begin by examining the ARM you have. How often can the rate adjust? How much can the rate rise at each adjustment? How much will your monthly payment increase at each adjustment? What's the limit on the rate increase over the life of the loan?
When your ARM comes due for an adjustment, you have three basic options:
1. Refinance into a fixed-rate 30-year (or shorter term) mortgage. You'd never have to worry about rate adjustments again for as long as you live in your home. But fixed-rate loans have higher rates than ARMs. You'll also have to pay closing costs to refinance (usually 2% to 4% of the mortgage amount), and your current ARM may have prepayment penalties. Check your contract.
2. Refinance into a new ARM that has terms better suited to your situation. You'll face the decision again in a few years about what to do when the rate adjusts. Still, a new ARM might be a viable option if you plan to sell your house in a couple of years. You'd save a bit on monthly payments in the meantime. Remember to factor in closing costs and any prepayment penalties.
3. Stay with the ARM you have and take the rate adjustment. If you have a low-rate ARM and it can't climb much, you might want to stay in it for the remaining few years and see what happens—if you can live with the uncertainty. It also makes sense to stay in your current ARM if you plan to sell your home soon.
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