Your low, annually adjusted, interest-only mortgage loan is likely running out of time.
Many of the ARM loans (Adjustable Rate Mortgage) made in 2004-2009 have recently adjusted down for people, thereby lowering their payments. Combined with the fact that many of these loans are also require the interest-only payment, those payments are exceptionally low and very nice right now….but be sure to check your “Note” on the loan.
The Note will outline the terms of your ARM loan, and it will likely show you that you are able to pay the interest-only for just the first 10 years, then after that the loan will become fully-amortized over the next 20 years. Combined with the interest-rates likely going up in the next couple of years you could be looking at up to 6% higher rate and on a 20 year amortization.
For example: Take a $300,000 mortgage loan at 4.5% on an ARM made in 2006 on a 5 year fixed period with a 10 year interest-only payment.
Now, in 2011 the rate began adjusting, because the 5 yr fixed period was up. The major indexes like the 6-month LIBOR had dropped and remains very very low, therefore the 4.5% likely became more like 2.5% in 2011 at that first adjustment, and maybe even lower since then.
So the payment on 300k started at $1125/month. In 2011, the rate adjusted down to 2.5%, with a payment of $625/month! Wow that’s great! Remember, still interest-only payments for the first 10 years.
Ok, so you are paying $625/month and everything is great, each year comes around and you get the notice your rate is up for adjustment again but because the indexes are so low it will stay at 2.5%.
Now, here we are in 2014, with the federal stimulus ending and the indexes at record-lows for the past few years…something has to give, the indexes/rates will go up in the next few years, even if just a little. Well, say they go up even 2% by summer 2016, and now so does your mortgage loan rate so now the notice you get in the mail says it’s 4.5% which still wouldn’t be bad except this is the year your 10 yr interest-only period expires!
So now, the 300k, which you still owe because you have been paying just the interest this whole time, is at 4.5% and is amortized over 20 years….which is $1897/month. The payment tripled from one month to the next. Not good.
How to avoid this? Ask your current lender for a copy of the Note and send it to me. I will do the math for you and research the indexes and the rules in place for your particular loan so you know exactly what you are in for.
Then, I will show you what a fixed rate mortgage loan looks like right now, while the rates are at very close to record lows. Refinancing a 2.5% interest only loan for 300k into a 30 yr fixed mortgage loan at 4.0% takes your payment from the $625/month up to $1432/month, yes, but it’s fixed forever and it’s fully amortized so you will be paying down that 300k balance with every single monthly payment.
It’s a great idea to refinance your adjustable rate mortgage NOW, despite your payment and interest rate likely increasing, because the fixed mortgage rates are so low right now.