If you are like millions of other American’s you may have purchased a home during our housing boom with an ARM or adjustable rate mortgage to save a little money on your home payment given the high prices during that time. This means that your interest rate was fixed for some period of time (1, 3, 5, 7 years) and it resets after that to some new rate. If you have this kind of mortgage and aren’t familiar with the details, you should get out a copy of your mortgage or call your bank immediately for the details.
I’ve had a few clients with their 7-year adjustable mortgage contact me just becoming aware of the details of their rate reset. Especially shocking to some of my clients who may have paid interest-only loans is the sticker shock of the reset. Many of these loans are based on some interest rate index (i.e. Libor; 12-month LIBOR, currently 0.626%, but has been as high as 0.973% in the last 12 mos) plus some margin (2.5% for example), making your effective new rate 3.13% (2.5%+.63%).
When your rate resets, it will do so again at some fixed period of time- 6 mos and 1 year are common. However, if you paid interest only, you are now paying this new rate which may be higher or lower than your current rate PLUS the principle amount which is likely now due but based on a shorter amortization table (principle & interest based on 23 years as opposed to 30 years for a 7-year ARM).
Run, don’t walk, to your file cabinet and pull your deeds of trust (otherwise known as “your loan documents”). OR, if you have no idea where you put them (paperwork schmaperwork, right?), go to your county recorder and search for them there (in Maricopa County: http://recorder.maricopa.gov/recdocdata/getrecdataselect2.aspx). Look closely for your Adjustable Rate Rider and find the terms in there for the following:
- The initial rate
- The first reset date and future dates
- The interest rate index that the rate is based upon, i.e. Libor 1-year rate
- The rate margin ceiling (highest it can be) and floor (lowest it can be)
Then google the current rate. Bankrate.com or the Wall Street Journal (wsj.com) usually have most of indexes and use a mortgage calculator (again Bankrate.com is a great source) and calculate your new payment. If this is still just too much to do, look on your mortgage statement for the contact number for your bank and ask them to help you calculate it. What you find out, may not be anything to fret over but you’ll know where you stand and how to plan accordingly.
Either way, plan ahead. Is your new rate better than what you’re currently paying? If so, for how long and what is your next step? If it’s worse, call your REALTOR® or me and we can see whether you have enough equity in your home to refinance or whether it may be time to make a move if you’ve been holding off. Based on market gains over the last year or two, you just might be surprised at what your home is worth. Knowledge is power!