When your adjustable-rate mortgage is adjusted.
September 10, 2007
Sponsored by Wells Fargo
Part 1 in a two-part series
Facing the reality of interest-rate adjustments on your adjustable-rate mortgage (ARM)1 can cause various reactions — from concern over your ability to make new payments to a desire to search for alternatives.
The following information can guide you through this adjustment, assisting you in evaluating your options and dealing with your concerns.
If you have an ARM, you probably selected it because it offered a lower initial interest rate. This lower initial rate:
However, that low initial rate doesn't stay that way forever; it's scheduled to change periodically. When and how often it changes depends on the type of ARM you selected:
Consult your loan agreement for details about how the adjustments are determined, the frequency of adjustments to your interest rate, and the maximum amount the interest rate can increase over the life of the loan.
Because your home is likely your most valuable financial asset, it's critical that you take steps to protect your investment. This is an important perspective to maintain now, when you might be tempted to focus only on the more immediate effects of a change to your monthly payment.
While it's necessary to have a monthly payment that fits within your budget, it's important to pay some amount of the loan's outstanding balance — known as principal — each month.
Your monthly mortgage payment consists of two components: principal and interest.
Loans that permit you to pay only the interest component — or just a portion of the monthly interest payment — have become quite popular. Because these loans with the Interest-Only payment feature2 don't include the principal portion of your payment, the low monthly payments they offer can appear quite attractive.
But remember: Having a manageable monthly payment is only part of the equation. You also have to consider the long-term effect of your loan. Let's look at some of the effects of these loans.
Loans that permit Interest-Only payments
Loans with payments that are less than your full monthly interest payment
How do you know if your mortgage is an Interest-Only or option ARM? Take a look at your most recent mortgage statement, and use the information to answer this question: Is your outstanding balance higher or lower than the amount you originally borrowed?
In most cases, Interest-Only or option ARM loans are best viewed as "transition mortgages." As soon as you can manage a larger payment, consider making additional payments to principal or refinancing into a loan that includes regular principal payments.
If you have questions about your loan, experienced mortgage consultants from the AICPA-Sponsored Home Mortgage Program and Wells Fargo Home Mortgage are available. Call 1-800-CPA-1210 for more information or conduct a free break-even analysis online.
Stay tuned for next month’s CPA Insider, which will feature more information on refinancing strategies when your ARM resets, including Considering Your Options and Dealing with Concerns.
1. Rates may vary and are subject to increase after consummation. 2. The Interest-Only payment feature will allow you to make minimum interest payments for a set period of time, then full principal-and-interest payments for the rest of your loan/line term. At the end of the interest-only period, you will be required to pay down the outstanding principal, which will increase your monthly payment, possibly substantially, even if you have a fixed interest rate. Always consider making more than the minimum payment during the interest-only period to begin reducing principal. Depending on the product specifics, a loan/line with the Interest-Only payment feature may result in higher interest rates or Annual Percentage Rates than a traditional mortgage product. Wells Fargo Home Mortgage is a division of Wells Fargo Bank, N.A.
© 2007 Wells Fargo Bank, N.A. All rights reserved. #49800 7/07-10/07 Equal Housing Lender.