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How To Avoid ARM Shock Syndrome

Jan 18, 2008
If you have an adjustable rate mortgage (ARM) that is scheduled to adjust sometime in the near future, it's very likely that you are beginning to experience the first signs of "ARM shock syndrome". Many people take out ARM loans when purchasing a home in order to take advantage of low initial interest rates.

These types of loans typically have low rates for the first few years of the loan, and then they adjust at pre-determined times during the entire life of the loan. When an ARM adjusts, the interest rate can go up or down, depending on the economic index to which the loan's interest rate is tied. The homeowners payments change along with the interest rate. Many homeowners who financed homes with ARM loans over the past few years did so with the intention of refinancing before their rate actually changes.

When it's time for the interest rate on an ARM loan to adjust, the term often used to describe the change in interest rates is "ARM Reset". This phrase accurately reflects that fact that the loan's interest rate actually resets from its current rate to a different interest rate. The new rate can be lower or higher, but typically does represent an increase. Those facing an initial RM adjustment in the near future can almost definitely expect an increase when their rate is reset.

If you have an ARM loan, the best thing you can do to avoid being shocked when your ARM adjusts is to plan ahead. Even if your mortgage is brand new, the time for your loan's interest rate to adjust gets closer with each passing day. The minute you take out an ARM loan, you need to start researching your options for avoiding problems with rising interest rates when it's time for your rate to adjust.

If you don't make plans for refinancing prior to time for an adjustment, you might find yourself facing a steeply increasing payment when your rate resets. When interest rates are on the upswing, people with ARM loans sometimes find themselves dealing with mortgage payments that raise so much that they can no longer afford to make the payments on their homes. It's important to take steps to avoid facing this unpleasant reality so that you don't find yourself stuck with having to cope with ARM reset shock.

While you are in the initial stages of an adjustable rate mortgage and you are enjoying the benefits of lower interest rates, it's a good idea to invest money in paying down the principal of your loan. This will help you reduce your overall outstanding mortgage balance, which can help you refinance when the time comes, and even help you pay your home loan off early should you choose to do so.

If you find yourself stuck with an increased payment due to an ARM adjustment, you are going to have to find a way to make the new payment fit into your budget, at least until you have an opportunity to refinance. The worst thing you can do is allow yourself to fall behind on your payments, because then getting a refinance to a better interest rate might become impossible. If your payment is going to increase and you don't have time to refinance before the adjustment kicks in, you're going to have to make budget cuts to deal with the higher payments until you can get a new loan. To avoid finding yourself in this situation, don't let yourself lose sight of the need to plan ahead to avoid "ARM shock syndrome".
About the Author
For more information on all things refinancing please visit our main site Refinancing Right. Becoming an informed consumer it by far the best way to protect yourself from unethical loan providers that don't have your best interest in mind.
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