You can’t control interest rates. But you can protect yourself when rates are on the rise by refinancing your adjustable rate mortgage (ARM). Here are some options to consider:
Chances are, you originally chose an ARM because it offered a lower initial interest rate than a fixed-rate mortgage. However, if monthly payment increases have become more difficult than you bargained for, or you’re concerned that further jumps will seriously strain your budget, you may want to consider refinancing to a fixed-rate mortgage. The rate you’ll get may be somewhat higher than your current ARM rate, but you’ll have peace of mind -- your monthly payment will be consistent for the entire term of the loan, and you can budget accordingly.
Another option is a hybrid ARM. These mortgages have an initial period (usually between three and 10 years) during which the interest rate is fixed, after which it is adjusted annually. They carry lower rates than 30-year fixed-rate loans, yet they offer stability for the medium term. If you believe rates will rise for a while longer but then settle or begin to drop again, refinancing to a 3/1 or 5/1 ARM may be worth a look. (The first number indicates the length in years of the fixed-term; the second indicates the adjustment interval once the fixed-term period has expired.)
More stable index
There’s something else to consider if you’re thinking about how your ARM will be affected by rising interest rates. At each adjustment period, your interest rate moves up or down based on a particular index. Some indexes are more volatile than others, meaning that they are subject to bigger peaks and valleys. By switching to an ARM with a more stable index, you will be less vulnerable to interest-rate swings.
More favorable caps
Your ARM also has built-in “caps,” or maximum amounts the rate or monthly payment can rise from one adjustment period to the next. By refinancing to an ARM with more favorable caps, you can limit your exposure to higher rates.