With an adjustable-rate mortgage (ARM), the interest rate may go up or down. Many ARMs will start at a lower interest rate than a fixed-rate mortgages. This initial rate may stay the same for months or years. When this introductory period is over, your interest rate will likely change.
Part of the interest rate you pay will be tied to a broader measure of interest rates, called an index. Your payment goes up when this index of interest rates moves higher. When interest rates decline, sometimes your payment may go down, but that is not true for all ARMs. Many ARMs will limit the amount of each adjustment, and set a maximum or “cap” on how high your interest rate can go over the life of the loan. Some ARMs also limit how low your interest rate can go.
If you are planning to be in your home for the next several years, and have an ARM, now may be a good time to review options to cap potential increases in your adjustable-rate mortgage payment.
You may want to consider refinancing your loan into a fixed rate loan or choosing a new adjustable-rate mortgage with a longer term until your interest rate (and your payment) can adjust.
If capping your potential mortgage payment for a longer period of time is of interest to you, please contact us to discuss these or other options in more detail.