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Housing


What to Do When Your ARM Is Due

by Dianne Molvig / December 11th, 2020


If you have an ARM (adjustable-rate mortgage) and your fixed-rate period is drawing to an end, your first rate adjustment is about to occur. Many homeowners with ARMs say they don't know what they'll do when their rate adjusts. If you're among those who feel unsure, consider a few pointers.

Begin by closely examining the ARM you have. How often can the rate adjust? How much will your monthly payment increase at each adjustment? What's the limit on the rate increase over the life of the loan? 

If your ARM is coming due for adjustment—or even if you have some time before you'll face that decision—you have three basic options:

1. Refinance into a fixed-rate 30-year (or shorter term) mortgage.

Refinancing into a fixed-rate mortgage means you'll never have to worry about rate adjustments again for as long as you live in your home. Usually the interest rate on a fixed-rate loan is higher than for an ARM but that depends on the economic environment at that time. 

Another possible obstacle to refinancing into a new mortgage is closing costs, which usually run 2% to 4% of the mortgage amount. A $200,000 mortgage, for example, could have closing costs of at least $4,000. In addition, your current ARM may have prepayment penalties, which can be several thousands of dollars. Check your contract. Still, if you plan to stay in your house for more than 5 years, it may be worth spending the money to refinance to a fixed rate and eventually recoup the closing costs. As a general guideline, your length of stay should be at least three to five years. But that will depend on exactly what your closing costs and any prepayment penalties add up to.

2. Refinance into a new ARM that has better terms.

This might be a viable option for a borrower who plans to sell the house in a couple of years. But again, factor in closing costs and any prepayment penalties. 

3. Stay with the ARM you have now and take the rate adjustment.

This buys you some time to see what interest rates do, which, of course, is anyone's guess. You'd have to be willing to take your chances and live with the uncertainty. The other thing to consider is how long you want to be in that house. If you're in a 3/3 ARM (a fixed rate for the first 3 years, then adjusts every 3 years) and you plan to sell within 24 to 36 months, it might make sense to remain in your current ARM. 

We’re Here to Help

If your understanding about your ARM is a little fuzzy, talk to a loan professional at your credit union, whether or not you got the ARM there. He or she can explain your ARM in clear terms, review your options, and help you decide what to do next based on your individual circumstances.

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