ARM Loan Adjusting to Higher Rate

Reader Question: My boyfriend bought a house almost two years ago. His mortgage is an adjustable mortgage. It will adjust next year. His loan is at a 10.25% on a $68,000 loan. He says that in his contract the loan won't get too high? Is this true? And if not, what could his loan be estimated to go up to?

Your boyfriend should contact his lender to get an estimate of what his new mortgage payment will be, after the adjustment next year. Lenders are required to provide this kind of information in accordance with loan disclosure laws. This will help him decide what to do -- whether to refinance or to keep the current loan, for example. In fact, getting away from an adjusting ARM loan is one of the top reasons people refinance their mortgages.

Much of the legislation on loan disclosure (particularly for adjustable rate mortgage loans) is currently being revised. This comes as a result of the subprime mortgage crisis. Adjustable rate mortgages are not "evil" in and of themselves. But when lenders don't disclose the significance of the interest rate increase after the adjusting process, homeowners can be caught off guard by the larger payments.

This is part of the reason why record numbers of Americans are losing their homes to foreclosure right now -- they got a low "teaser" rate on an ARM loan, they kept the loan through the adjustment period, and they couldn't afford the new payments.

If he plans to stay in the home for many more years, he might want to run the numbers to see if it makes sense to refinance.

I can't predict how your boyfriend's ARM loan will adjust. He will have to contact his lender for that kind of information. But I can tell you it's important to do so. The last thing he wants is to be caught off guard by a huge increase in interest, which equates to a larger monthly mortgage payment. Better to look into it now.