Real Estate

Have An Adjustable-Rate Mortgage? What To Do Now

Mortgage rates have skyrocketed recently. If you have an adjustable-rate mortgage (ARM), you may be wondering what you need to do now to stay in your home affordably. Keep reading as we share things to consider to stay on track with your financial goals while staying in your home.

How Long Is Your Mortgage Rate Guaranteed?

Knowing how long you can keep your current mortgage payment is important when planning for the future. If you had recently refinanced your mortgage before rates started to rise, you may have some time before current mortgage rates hit your payments. On the other hand, if you only have a three-year ARM or purchased your mortgage a few years ago, a significant increase in your mortgage payment could be coming soon. The bottom line is to determine when your next mortgage rate adjustment will occur and mark your calendar.

What Are The Terms Of Future Mortgage Rate Adjustments?

Not all adjustable-rate mortgages are created equally. I’ve been reading the fine print on a few of my clients’ ARMs recently, and the terms have varied widely from bank to bank. Terms can vary from mortgage to mortgage with the same lending institution.

One of my financial planning clients has a current mortgage rate of just 2.25%. In nine years, this rate could increase by a maximum of 2% per year, with a capped mortgage rate of 7.25%. These terms essentially give them three additional years of mortgage payments below current market rates. Nothing is pressing to change here.

Another financial planning client of mine has a mortgage at 2.5%, with eight years left before rates could reset. Unfortunately, their mortgage allows for 5% per year increases, with no cap on the mortgage rate. This homeowner could be back at full market mortgage rates in eight years. They are still quite a way off, but the fine print of the adjustable-rate mortgage means they need to be a bit more proactive with a plan to make their mortgage payments in the future.

Where Will Mortgage Rates Be In The Future?

I don’t have a crystal ball, but today’s mortgage rates were right around the rate when I purchased my first home in 2007. At the time, that was about how low mortgage rates were. While I hope mortgage rates won’t jump up substantially higher than they are today, I would be shocked if they dropped back below 3% anytime soon. More to the financial planning point, I don’t think you’d like the state of the housing market and/or economy that would allow/cause rates to drop that low again. Remember the great financial crisis? Yeah, that wasn’t fun.

Can You Refinance Your Mortgage To Lower Your Mortgage Payment?

Extending the terms of your loan can help lower your monthly payments. For example, if you purchased your home with a 10 ARM, once your rates reset, you would have 20 years left on your mortgage. If you could refinance your mortgage, you would be able to amortize the remaining balance over a longer period. This would allow you to have a lower monthly payment. However, the lower monthly payment would mean paying more interest over the life of the loan. But, if this means you can avoid having to move or being severely house-poor, it could be worth it.

Should You Start A House Payoff Fund?

Many people hate having a mortgage and always seem to be in a rush to pay off that debt entirely. Heck, I even have the urge in the back of my head to make extra mortgage payments every so often. If interest rates on your bank account are higher than your mortgage rate, you would likely be better off setting up a house payoff fund. Short version: you set up an investment account of a high-yield savings account with all the money you would have been putting towards paying down the mortgage. You will come out ahead if you can earn more on your investment or savings than your mortgage. This also gives you an extra cushion if you ever find yourself unemployed or needing to pay for some extensive home repair.

Related: Should Your Rent Or Own Your Home In Retirement?

Should You Marry The House And Date The Mortgage Rate?

You may have heard the phrase “Marry the house, date the rate” from someone trying to get you to spend more on a house. This mindset only works if you can afford the house at the current mortgage payment. If rates drop in the future and you can lower your cost of home ownership with a refi, that is great. But you don’t want to struggle to make mortgage payments while praying for lower rates.

This phrase is often accompanied by “When rates drop back to 2%, your home value will skyrocket.” Economically, this makes sense, but, and this is a huge deal, there is no guarantee of when or if rates will drop, let alone drop enough to cause a further surge in home prices.

Homeownership can be great, but it can also be a huge pain. It is much more enjoyable when you can afford the home you live in. Don’t let your adjustable-rate mortgage derail your other financial goals.