Adjustable Rate Mortgage (ARM) Rate Resets - How to Combat Them

Nearly $1.5 trillion dollars in adjustable rate mortgages (ARM) are scheduled for a rate reset at the beginning of the next fiscal quarter. A rate reset is when the ARM lending institution adjusts the interest rate charged against the ARM principal, based on the current market conditions. Based upon today's market conditions, for the vast majority of the adjustable rate mortgage holders this is going to result in an increase in their monthly mortgage payment. For many it is going to be a multiple interest percentage rate increase which could cause their monthly mortgage payment to jump hundreds of dollars. This can be a painful adjustment. What can you do?

Unfortunately, other then refinancing, there is little you can do to get the lending institutions to assist you. The government's bailout programs also offer little assistance, unless you are approaching or already in foreclosure. For those of you who will be encountering an ARM rate reset adjustment, your only alternative is conscious budget trimming. You will read many advertisements from lending institutions that promise no fee refinancing. Though often hidden, there are always fees. If it is not an up-front fee, it may be a slightly higher interest percentage than the rate posted in their ad. It is important you weight the cost of refinancing against what you stand to gain. Initially it may appear to be the answer, as you seek to protect yourself from future scheduled ARM rate reset shock. Refinancing at the current prevailing rate may increase your mortgage interest rate 3 to 4 percentage points. Are you prepared for that type of jump in your monthly mortgage payment?

The truly best approach is to cut your spending and make the adjustable rate mortgage rate reset payment affordable. Look at your monthly expenditures. Can you trim your cable bill, eliminate your telephone landline, or change your cell phone service? How about eating out and buying lunch everyday, is that really a necessary expense, can it be scaled back? Increasing your insurance deductible on your automobile and homeowner's coverage can reduce your monthly premium. There are a number of other expenses you may be able to reduce and eliminate when you look close enough. Do not rule out part-time employment. If after all of your cost cutting and trimming you discover you still can not afford to cover your new ARM rate reset payment, maybe you should consider selling the property. I realize that is an extremely drastic move, but consider, falling behind on your mortgage payments, constant delinquencies, and foreclosure on your home can ruin your credit and financial life for a very long period of time.

Immediately running out and refinancing your adjustable rate mortgage to avoid future rate reset shock may not always the best the best approach. Adjustable rate mortgage rate resets do not always increase. The market fluctuates up and down. A bull market this quarter has turned into a bear market for multiple quarters to follow. There is a great likelihood that future rates will stay where they currently are or even decrease slightly due to today's market investor's uncertainty. Paring your spending habits and unearthing a few extra hundred dollars of additional cash each month is much better preparation for an ARM rate reset and the truly responsible route.

Resource: Personal Experience