I got a 3-year adjustable rate mortgage and now interest rates are going up. I am afraid I will be squeezed out of my new house. How can I protect myself?
From: Worried
Adjustable rate mortgages (ARMs) are like the little girl in the fairy tale--when she's good, she's great and when she's bad, she's wicked! The starting rate on an ARM is lower than a traditional 30-year fixed rate mortgage so in the first few years (1, 3, 5 or 7, depending on the ARM), the payment is lower. This means you can buy more house. But once the honeymoon period is over, the rate adjusts (hence the name) to the current market index.
Read your contract (that big fat document called the Note or Promissory Note you signed when you bought the house) to see exactly how much and how often your rate will adjust. If you're worried you won't be able to afford the higher mortgage payments, you have at least three options:
1. Start saving now to prepare for the possibility of higher mortgage payments when the rate adjusts.
2. Refinance and lock in a fixed rate now. It may be a little higher but you'll have the security of knowing exactly what your mortgage payment will be. If the rates for a 30-year fixed make your payment unaffordable and you can stand the risk, consider a five or seven-year ARM. The issue will rear its head again but at least you've locked in your rate for a longer period and your payments will still be less than with a traditional 30-year mortgage. Consult a mortgage broker you trust or one who's been referred by someone you know. A good one should look at your contract and give you specific advice tailored to you.
3. If all else fails, move. You'll at least have learned what level of risk you're comfortable with for the future.
