ARM vs Fixed Rate Mortgage Advice

Risks to the Homeowner

Today, the expanded offering of interest only loans and alternative ARMs has left homeowners with a false sense of security with low monthly payments. They fail to fully recognize the danger of an increased interest rate. For example, if a homeowner’s mortgage has a balance of $175,000 and has a starting rate of 5.00% it could adjust as high as 11.00%. That would cause the monthly payments to increase by more than $700.00. Even if the rate only increases by 1%, the monthly payments would increase by more to $100.00.

Another risk is the Option ARM, named for its various payment options. With an Option ARM loan, a homeowner has the option to only pay a low minimum monthly payment. If the minimum monthly payment is not sufficient to pay the monthly interest due it results in negative amortization and the unpaid interest amount is added to the total amount owed to the lender. Therefore, by the end of the year, the homeowner could owe more than the initial principal borrowed and have an ‘upside-down’ home mortgage.

All indicators show that all of the risks related of the interest only loans and ARMs will soon become a reality. The Federal Reserve has made it clear that they plan to continue increasing interest rates to control inflation that has been aggravated by high energy prices and recent natural disasters.

Refinance to a Fixed Mortgage Now

In order to avoid the financial impact caused by increasing interest rates, homeowners who will own their home for more than a short period should refinance their current ARM to a fixed rate mortgage.