> Advice For Borrowers
Forewarned Is Forearmed If You Have An ARM
by Broderick Perkins
Your monthly mortgage payment could slowly, insidiously creep up hundreds of dollars if economic forecasters are correct about interest rates rising this year and you have an adjustable-rate mortgage (ARM). Consumer Reports recently published an advisory to let you know you do have options if you have an adjustable-rate mortgage that could be affected by rising interest rates. As an example of what could happen to your monthly mortgage payment, the independent consumer products and services rating publication examined how higher rates would affect a mortgage payment. Based on information from HSH Associates and the Federal Reserve, Consumer Reports reported a $100,000 one-year ARM at the then going average rate of 4.26 percent cost $492.58 a month in principle and interest. Add another percentage point and the monthly cost goes to $552.82, another percentage point pushes it up to $616.36 and, if the rate was three percentage points higher, your monthly mortgage rate would be $682.85 -- almost $200 more a month. Chances are rates aren't going to rise by three or even two percentage points anytime soon, but should inflation rear its ugly head you may have less time than you think. It's a lot like boarding up your home long before a hurricane hits. Now is a good time to at least examine your options. If you are buying a home and want to avoid the risk of a market where rates are forecast to trend up, simply get a fixed rate, lock in your payment and ride it out. Consumer Reports says a fixed-rate mortgage doesn't necessarily mean fixed for 30 years. Most homeowners move every seven years or so and a "two-step" or hybrid mortgage may be a good fit. Two-step loans are adjustable-rate mortgages (ARMs) that come with mortgage rates that are effectively fixed for the first step of three, five, seven or 10 years. After the first step, the loan converts to a one-year ARM with rates that adjust each year for the remaining term of the loan. During the first step of the loan, the locked-in rate is cheaper than a conventional 30-year, fixed-rate loan, so for those first few years the mortgage provides some financial stability. The shorter the first step, the cheaper the mortgage, however, once they convert rates can really jump. They are not risk free, just less risky than the one-year arm in the face of rising rates. Don't forget to weight in the cost of refinancing your current mortgage -- about two percent of the mortgage amount says Consumer Reports. Conversely, if you have a home equity loan with a variable rate credit line type of loan, switching to a fixed rate will give you that security but at a cost. Fixed-rate equity loans can be upwards of two percent more than a variable rate. If you are holding a large home equity loan for several years or more, it could be safer to switch to the fixed rate or to combine your first and second with one refinanced first. If the home equity amount is smaller and you plan to hold it only a year or two, staying the course may be a better option. In any event, all ARM mortgage holders need to keep tabs on interest rates. Thus far this year they haven't risen as predicted, but that could change -- without notice. | 
