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Do you have a variable rate mortgage? Time is running out, here’s what you need to do now

Today’s high interest rates have created a time bomb for the many buyers who took out an adjustable rate mortgage at the start of the COVID-19 pandemic.

About 330,000 homeowners who obtained an ARM in 2019 have already seen their five-year fixed-rate term end, and another 100,000 will join them next year, according to ICE Mortgage Technology.

With mortgage rates currently at their highest level in 20 years, many buyers could face upward rate adjustments, which could cause their monthly mortgage payments to balloon or even double.

Facing an adjustment to an ARM can be intimidating, but owners can handle these changes in different ways. Here’s how to handle an adjustment without rocking your financial boat.

Understanding Your ARM Terms

First, it’s crucial to start with a solid understanding of the specific terms of your ARM to make the most financially sound decision.

“Homeowners should be fully aware of when their rate will adjust, the potential new rate, and any caps limiting rate increases,” says William Anthony, mortgage originator at Ace Land Mortgage. “This understanding is essential for planning for the future and exploring viable options. Becoming familiar with these details allows for better strategic planning and could avoid costly surprises.

About 330,000 homeowners who obtained an ARM in 2019 have already seen their five-year fixed-rate term end. Bussakon – stock.adobe.com

Explore refinancing

Refinancing may seem like a knee-jerk reaction. However, the process and decision to refinance will depend heavily on the borrower’s current rate versus what they would refinance to.

For example, if your rate is expected to increase but remains below current market rates, a refi might not be beneficial. Conversely, finding a slightly lower rate could provide significant relief if rates climb beyond manageable.

Learn About Loan Modifications

For homeowners who are struggling to meet their newly adjusted mortgage obligations, a loan modification could be the right solution. Modifications can adjust the terms or length of your mortgage, such as extending a 30-year loan to 40 years, which reduces monthly payments by spreading them over a longer period.

“This can significantly reduce principal and interest payments, easing monthly financial pressure,” adds Anthony.

If your rate is expected to increase but remains below current market rates, a refi may not be beneficial. Andrii Yalanskyi – stock.adobe.com

Use discount points

Another refinancing strategy is to purchase discount points. This option allows homeowners to pay an upfront fee to lower their mortgage interest rate.

“Each point, which costs 1% of your loan amount, typically reduces your interest rate by less than 1%,” notes Anthony. “This can be a wise investment if you plan to stay in your home long-term, as it lowers the monthly payments and overall interest paid over the life of the loan.”

Use extra money

For those with stock investments or non-retirement accounts, consider liquidating some of these assets to make a large payment toward your mortgage principal. This tactic can be particularly effective if you are considering refinancing.

“Although the new mortgage rate may be higher than the adjusted ARM rate, the substantial principal reduction could reduce or maintain the current monthly payment, making it more manageable,” says Ralph McLaughlin, senior economist at Realtor.com®.

And let’s not forget that maybe you can make higher monthly mortgage payments if you free up money elsewhere.

McLaughlin advises ARM borrowers to “try to reduce their total monthly expenses by using extra cash available to pay off things like credit cards, car loans, or student debt, which would amount to a zero net change in total monthly payments.

This strategy optimizes your financial obligations to ensure that more of your income is available to meet increasing mortgage payments.

“Each point, which costs 1% of your loan amount, typically reduces your interest rate by less than 1%,” notes Anthony. wutzkoh – stock.adobe.com

Explore your home equity and downsizing

Finally, if adjusted payments become unmanageable and other strategies prove insufficient, selling your home to capitalize on the accumulated equity is another option.

This approach can provide a substantial financial influx, providing the opportunity to move to a more affordable living situation, thereby reducing overall monthly expenses. This strategy is particularly relevant in markets where property values ​​have increased significantly.

“If your home has appreciated and selling it could generate a profit, then downsizing might be the best option,” says Anthony.

“It’s not about a lower quality of life, but rather an adjustment to a mortgage you can comfortably afford,” he continues. “If your payments are increasing – say by $500 or $600 a month – and your income hasn’t increased, using your equity wisely could be key to keeping your financial situation manageable.

New York Post

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