For ARM Mortgage Holders, Now May Be the Time to Switch to Fixed Rate

Even though interest rates still remain low, rates are expected to begin to rise as we progress through 2010. Many experts are speculating that rates will begin to go up as soon as the Federal Reserve ends its mortgage-backed securities purchase program sometime this year. For homeowners who are enjoying low ARM rates, those days could soon be coming to an end.

ARM mortgages are mortgages that start with a very attractive lower fixed interest rate, generally for 1, 3 or 5 years. The negative or positive of these loans is that when the trial time runs out, the loan rate is reset, reflecting today’s conditions. Sometimes, like currently, this can be a good thing and your rate will actually go lower. On the flip side, the rate could go much higher. After your loan leaves the intro fixed rate period, your loan will usually adjust now on a yearly basis.

Many eligible homeowners with ARM’s have not yet taken advantage of low refinancing rates, mainly because they are enjoying low rates at the moment, many below 3 percent. If they were to refinance, while it would put them into a stable fixed rate mortgage, it would raise their current interest rate and their overall monthly payment.

Homeowners that do decide to hold on for as long as they can to the low interest ARM’s should have a game plan in place. When rates begin to rise they could be in trouble if they do not take immediate action. They should carefully watch the markets and know when they will need to make a move to lock in a fixed rate.

Jack Guttentag, professor of finance emeritus at the Wharton School of the University of Pennsylvania warns consumers that, “The market can change very fast. If you’re an ARM borrower you can’t look at your ARM rate and wait for that to change.”

If rates rise, mortgages could go up as much as a couple of percentage points. He says if you wait for that to happen, you are most likely headed to a higher possibly shocking payment. This could leave you in the dust, missing out on a fixed low rate for the life of your loan. While you might pay a little more now, if you wait, you could be paying a lot more later.

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