Facing the reality of interest-rate adjustments on your adjustable-rate mortgage (ARM)1 can cause various reactions -- from concern over your ability to make new payments to a desire to search for alternatives.
The following information can guide you through this adjustment, assisting you in evaluating your options and dealing with your concerns.
What’s Behind the Change?
If you have an ARM, you probably selected it because it offered a lower initial interest rate. This lower initial rate increased your borrowing power and provided you with lower monthly payments than you would get from a fixed-rate mortgage.
However, that low initial rate doesn’t stay that way forever; it’s scheduled to change periodically. When and how often it changes depends on the type of ARM you selected:
- The initial interest rate can remain fixed for the first one to 10 years. After that, it’s adjusted periodically based on financial market conditions and the type of loan you have.
- During the initial fixed-rate period, your monthly payments are lower than those of a fixed-rate loan.
- After the fixed-rate period expires, your loan will adjust every six months or every year, depending again on the ARM product you have.
Consult your loan agreement for details about how the adjustments are determined, the percentage that’s added to determine your new rate, and the maximum amount the rate can increase over the life of the loan.
Considering Your Options
When your ARM is about to adjust, you have several choices:
- Remaining with your existing loan. A higher monthly payment may be troubling. But before you try to lower your payment by refinancing, be sure that you’re considering all the costs and factors involved. Since refinancing typically involves some closing costs, in some cases it might be less costly to accept the payment change and remain with your current loan.
For example, some people select an ARM because they expect to move or refinance before the initial fixed-rate term expires. If you don’t expect to be in your home much longer, compare the costs of refinancing against the monthly payments on your ARM for the amount of time you expect to be in your home.
- Refinancing to get a fixed-rate loan. If you’ve determined that refinancing makes financial sense, you might want to consider the advantages of a fixed-rate mortgage. With a fixed-rate loan, you gain:
- Protection from rising interest rates
- The security and predictability of fixed monthly payments for the entire term of the loan
- Faster equity growth
You can choose from a variety of fixed-rate options, with longer terms offering lower monthly payments, and shorter terms providing faster equity growth and lower interest costs.
- Refinance with a new adjustable-rate mortgage. If you think you may want to sell or refinance in a few years, selecting another ARM may be appropriate. You’ll benefit from lower monthly payments during the initial fixed-rate period. A good rule of thumb is to try to match the amount of time that you think you’ll own your home with the ARM’s initial fixed-rate period.
- Select a refinance program that offers the advantages of both fixed- and adjustable-rate loans. Some loan programs enable you to combine the low initial rates of an adjustable-rate mortgage (ARM) with the predictable monthly payments of a fixed-rate loan. These programs allow you to “buy down” the start rate of your loan. Since rate adjustments are limited to a certain maximum, you can enjoy some peace of mind.
Dealing with Concerns
If you’ve fallen behind in your payments or you’re concerned about your ability to make your new payment, don’t despair. Many lenders can work with you to find short-term solutions for paying your overdue amount. Depending on your situation, some lenders may even be able to offer an alternative repayment option. Many lenders also offer programs for those who have experienced financial difficulties, including credit, debt or difficult-to-document income.
Learn More
NEA members and their families can call the NEA Home Financing Program® at 1-800-NEA-4-YOU (1-800-632-4968) to speak to one of Wells Fargo Home Mortgage’s experienced home mortgage consultants. Ask about the $200 NEA Member Closing Cost Rebate.2 If you prefer, stop by your local Wells Fargo office to work directly with a local home mortgage consultant, or visit us online at www.neamb.com/loans/hmfpge.jsp . Be sure to mention you are an NEA member.
Deaf/hard of hearing individuals may call 1-800-842-3548 TTY. Spanish speakers may call 1-800-544-3482.
1 Rate is subject to increase after consummation. 2Borrowers are eligible for a closing cost discount after closing on any new purchase or refinance, secured by a first mortgage or deed of trust, closed through the NEA Home Financing Program, provided by Wells Fargo Home Mortgage (New Loan), on or after 12/01/2007, subject to qualification, approval and closing. Discount may not exceed your out-of-pocket costs. This discount is not available on home equity loans and lines of credit, FHA mortgage loans, assumption or modification loans, loans originated through brokers, joint ventures or other third parties, and cannot be combined with any other offer or discount. This discount must be mentioned at the time of application, and all eligibility requirements met no later than two days prior to your New Loan closing date. Only one discount permitted per New Loan. This discount is void where prohibited, subject to program availability.
