How to Minimize ARM Reset Shock

If you bought a house in the last few years, there's a good chance that you have an Adjustable Rate Mortgage (ARM). In an adjustable rate mortgage, the interest changes on a periodic basis throughout the life of the loan. The initial interest rate is also low, which can be a powerful incentive. When you select an adjustable rate mortgage, you also agree to the interest rate adjusting after a set period of time. Two-year and three-year ARMs have been very popular, although ARMs can have an initial lower interest rate period that lasts five, seven or even ten years before adjusting to a higher rate, often called an ARM Reset.

It can be easy just to put your impending ARM reset on the back burner when you first get your mortgage, thinking that you have a whole two or three years before you have to worry about it. In the excitement of a moving to a new home, a new neighborhood, new schools and making new friends, those first few years can pass quickly. All of a sudden two or three years have passed and you're up against a mortgage payment that has increased substantially, sometimes even doubling. This is what is has come to be called ARM Reset Shock.

The best way to avoid ARM reset shock is to plan ahead. As soon as you purchase a home with an adjustable rate mortgage, you should begin to plan for the coming adjustment. Learn as much as you can about your particular ARM loan and to what degree the coming reset will likely increase your mortgage payment.

If your ARM allows you to prepay or pay more toward the principal, and you have the financial ability to do this, paying additional toward your principal every month is a good way to begin to pay down the overall mortgage balance, which will give you more options once the rate change comes closer. You can also start a savings account to save money to pay off part of your mortgage balance.

If you have determined that your ARM reset is going to stretch your budget, but not break it, you can also look into ways to readjust your budget in order to afford the new mortgage payment. In many cases, cutting back on services such as cable, pest control and cell phones or canceling unused gym, website or other memberships, as well as cutting back on unnecessary spending can free up several hundred dollars a month, making the new mortgage payment more affordable.

Although the best way to avoid ARM reset shock is to prepare for the adjustment before it happens, sometimes, for whatever reason, time gets away from us and the adjustment comes seemingly out of nowhere, leaving us scrambling..

When you first discover that your mortgage payment will be increasing to the point where you can no longer afford it, this is a good time to look into refinancing. Don't wait until you have depleted your savings, run up your credit cards or fallen behind in your payments before checking into all of your refinancing options.