Remember how you felt when your mortgage loan was approved, and you bought your first home? You may not have paid close attention to the terms of your mortgage, but the main goal was getting into your home and gaining the benefits of homeownership. Now you've received notice from your lender that your interest rate is going up, and your payments are increasing. What happened, and what can you do to avoid such surprises in the future?
Non Traditional Mortgages Subject to Adjustment
Mortgages designed to help buyers qualify often rely upon adjustable rates, or "exotic" payment structures that start out low and gradually increase. These types of mortgages are designed with certain assumptions about increasing income and home equity that may or may not occur. This can cause problems if you are either are unaware of or have not planned for payment increases.
Looking at Your Mortgage Documents and Your Finances
If you're concerned about the terms of your mortgage, it's a good idea to review your mortgage documents, specifically your mortgage note. The note shows how much you owe, your interest rate, and the amount of your monthly payments. If you have an adjustable rate or exotic mortgage loan, there should be a schedule attached to the note that shows when your payments are due to adjust. The amount of the payment adjustments may depend upon current interest rates, which could not be known at the time you got your mortgage. Knowing when and how much your payments will adjust will help you manage your budget in advance to accommodate payment changes.
Adjustable Rate Mortgage, Adjustable Household Budget
Part of planning for ARM adjustments involves adjusting your budget. You may need to adjust spending habits, savings, and investment contributions. If you have a lot of consumer debt, you may want to consider refinancing your mortgage to pay off that debt and fix your mortgage interest rate. Your lender and financial advisor can help you plan for increasing ARM payments through budget planning or refinancing.
