In the recent past, a lot of homeowners just barely made it into a new house with an adjustable rate mortgage. But that strategy is no longer safe, with interest rates on the rise.
Adjustable Rate Mortgage Loans
Adjustable rate mortgages (also called ARMs) are quite the wager for a homeowner to make. Getting an ARM is taking advantage of low interest rates now in the hope that they won't rise too drastically later on. If your bet pays off then you can consider yourself lucky. But if rates go up, you need to look at your alternatives to keep from getting trapped in a high-interest loan and suffering from unaffordably high monthly payments.
Over the previous three to four years, the interest rates for adjustable rate mortgages were extraordinarily low. Many people took a gamble and locked themselves into one of these ARMs with low, low rates to get more house than they could realistically afford. When Alan Greenspan, Chairman of the Federal Reserve, started hinting at increasing lender borrowing rates in 2004 he wasn't kidding. Though the Federal Reserve Bank doesn't control mortgage rates per se, they pretty much set the bar for mortgage lenders. Because of its suggestion to make rates higher, lots of people are facing financial crises right now.
Safeguard Yourself from Rising Interest Rates
Realistically, there are just two real answers to getting around the interest rate increase on adjustable rate mortgage loans. One strategy is to transfer yourself to a fixed rate mortgage product as soon as possible. Compare to interest rates for the last 50 years, fixed rates are really very reasonable. By switching to a fixed rate,you'll lock in to a low rate and have the peace of mind knowing that your budget can handle your predictable payments from here on out. As time goes on, keep tabs on current interest rates because if they decrease down the road you can always convert back to an ARM to take advantage of the low rates.
Ultimately, however, some people will just have to cut their losses and accept that they lost a gamble. If you realize that there is no way to meet the monthly payments of your fixed loan,you'll need to sell your house and get a smaller one that you can afford. Most of the time this will be most beneficial to you because you've spent all this time building home equity, and the last thing you need is to lose a large portion of it while the market continues its downward spiral. Selling your house and downgrading might sound like the end of the world, but things could be worse. You still have a large piece of equity.
Like it or not, interest rates are rising steadily. It's better to take action early on and do something about your own adjustable rate mortgage now while you still have options, not when you are struggling to make payments on your mortgage.
Bill Gatton, "Adjustable Rate Mortgages", Mortgage Loans Guide and Resources