Adjustable Rate Mortgages – Interest Rate Strategy

Over the last few years, many individuals have squeezed into new homes using adjustable rate mortgages (ARMs). With interest rates now on the rise, it's time to reassess your interest rate strategy.

Adjustable Rate Mortgages – ARMs

Adjustable rate mortgages involve a degree of risk for homeowners. Essentially, you trade lower initial interest rates and payments for the uncertainty that rates may increase over time. If rates remain low, you benefit significantly. However, if rates increase, you need to explore your options to avoid being stuck with a high-interest loan and the resultant cash flow issues from increased monthly payments.

For the past three to four years, ARMs have been offered with exceptionally low interest rates, enabling many people to purchase homes that would otherwise be unaffordable. Starting in 2004, Federal Reserve Chairman Alan Greenspan hinted at increasing borrowing rates, and he has followed through on these indications. Although mortgage rates are not directly tied to the Federal Reserve Bank, they are heavily influenced by it, leading to tighter finances for many homeowners.

Avoid Rising Rates

There are two primary strategies to mitigate the impact of rising interest rates on adjustable rate mortgages:

1. Convert to a Fixed Rate Mortgage: The first strategy is to switch to a fixed rate mortgage product. Fixed rates remain historically low compared to rates over the past 50 years. By converting to a fixed rate, you can stabilize your budget and finances, knowing exactly what your monthly payments will be. If rates decrease in the future, you can always consider switching back to an adjustable mortgage.

2. Sell and Downsize: Unfortunately, some homeowners may find that they cannot afford the monthly payments required by a fixed rate loan. In this case, selling the home and downsizing becomes necessary. It is often better to do this sooner rather than later, as you have likely built up significant equity over the past few years. Downsizing may seem like a setback, but retaining your equity is crucial as the market cools down. This option allows you to avoid greater financial losses.

Interest rates are increasing, whether you want to acknowledge it or not. The time to address your adjustable rate mortgage is now, not when you are struggling to make payments. By acting promptly, you can protect your financial stability and ensure a more secure future.