ARMs Control: How to Avoid Mortgage-Reset Grief

Pay attention to the details if you have an adjustable-rate mortgage. Many three-year ARMs are due to reset to higher rates over the next 18 months, and many homeowners aren't prepared.

ARMs are mortgage loans with payments based on indexes that adjust periodically. The amount due each month may go up several times over the life of the loan.Many people with ARMs still don't know when their ARMs reset, what the new rates will be or whether they face prepayment penalties, according to Allen Fishbein, director of housing and credit policy at the Consumer Federation of America. "We've been recommending for a long time that people pull out their mortgage-loan documents so that they really understand the terms," Mr. Fishbein said.

Richard Musci, vice president of Charles Schwab Bank, says mortgage lenders as a group don't make it easy for homeowners by flagging a reset. But now, "More of us will be reaching out to clients and saying, 'Hey, this event is coming up.'" Look at the timetable for resets and at what the new rates will be, and think hard about whether you can manage the payments, he added. Make sure you know if rates will reset more than once, too.

Now's the time to think it all through. Don't wait until the loan resets or even until a few months before that to start watching interest rates and thinking about refinancing, said Mr. Fishbein.

Time to Go 'Fixed'?

Staying with an ARM isn't the best route for everyone. As the recent credit crisis has revealed, many people who got ARMs in recent years weren't able to sustain the rate resets. They may have been able to make payments initially, but not once rates went higher. "For most people of average income, a fixed-rate mortgage makes sense," said Mr. Fishbein.

These loans give the peace of mind of monthly payments that are set, not escalating. The trade-off is that long-term financing typically costs more. So the homeowner may pay more to lock in a rate but the approach pays off if interest rates go higher. Caveat: The difference between ARMs and fixed-rate mortgages isn't always huge, so compare costs.

Adjustable-rate mortgages are still good for some people who don't plan to stay long in a house, or for high earners who are willing to trade off lower rates today with possibly higher rates in the future, according to Mr. Musci.

"There are plenty of people who knowingly went into ARMs for the right reasons," he said.


By Arden Dale From The Wall Street Journal Online