How to Keep Your Adjustable Rate Mortgage (ARM) from Going Up (Part I of II)

Advice on How to Renegotiate Your ARM Mortgage

The sub-prime lending market spawned a host of "no money down," and "no doc" mortgage loans over the last few years. Many of these loans were adjustable rate mortgages, better known as ARMs. Proof?

In 2005, 43% of first-time homebuyers used no money down loans, according to the National Association of Realtors. No doc loans, a popular product with real estate investors, made up more than $386 billion in 2006. This was up 28% from 2005.

Now that rates are adjusting on these loans, many homeowners find themselves in trouble.

What are Adjustable Rate Mortgages?

In simple terms, they are loans where the rate adjusts at some point in time over the life of the loan. In the beginning, the rate is often quite low. This serves as an incentive because many don't think long term. They just look at what their mortgage payment will be in the beginning.

However, after the initial fixed period, the rate is usually adjusted annually, reflecting current rates. If rates go down, so does your mortgage payment. BUT, as is often the case, if rates go up, so do your payments.

An example: a "5/1 ARM" is fixed at an initial rate for the first 5 years; it then adjusts every year based on an index. Common adjustable rate mortgages are: 1/1, 3/1, 5/1, 7/1, and 10/1. These adjustable rate mortgages stay fixed for 1 year, 3 years, 5 years, 7 years and/or 10 years, depending on which one you choose. They then adjust every year after that.

And, these adjustments are not small potatoes. Many jump by whole points, eg, from 7.25% to 8.75 or 9.25%. This adds up to hundreds of dollars extra a month.

Once a rate adjusts, many homeowners can not afford the new payments and this is why so many are losing their homes to foreclosure.

See how easy it is to get in trouble with ARMs?

Compare this to a fixed rate mortgage.

The Old-School Fixed Rate Mortgage

A fixed rate mortgage is one where the payments stay the same over the life of the loan. It's not based on any index. The payment is the same year in and year out. Many call these "old school loans" because they are predictable, and they're not fancy.

Who Should Take Out Adjustable Rate Mortgages?