Homeowners with adjustable-rate mortgages face payment increases when their introductory rates expire. Those who locked in rates around 3% during the pandemic could see monthly payments jump by hundreds of dollars or more once the ARM resets.
Start by confirming when your initial fixed-rate period ends. With a 5/1 ARM, the fixed rate lasts five years before annual adjustments begin. With a 7/1 ARM, you keep the initial rate for seven years. Your new rate will be calculated by adding your lender's margin to a benchmark index, such as the Secured Overnight Financing Rate (SOFR). Most ARMs include rate caps that limit how much the interest rate can increase. Your mortgage servicer must send an adjustment notice at least 210 days before the reset date.
Before refinancing, run the numbers. Refinancing into a fixed-rate mortgage may not save money. In one example, a $300,000 mortgage balance with 25 years remaining would cost $1,754 per month at a 5% ARM rate but $2,061 per month if refinanced into a 7.32% fixed-rate mortgage. The ARM would save about $307 monthly. Refinancing makes more sense if you plan to stay long-term, want predictable payments, or expect your ARM rate to rise substantially. Factor in closing costs, which typically run 2% to 5% of the loan amount.
Making extra principal payments before your rate adjusts could lower your payment when the ARM resets. A mortgage recast allows eligible borrowers to make a lump-sum principal payment and have the lender recalculate the monthly payment. Availability varies by lender and loan type.
Contact your mortgage servicer early if you're concerned about affording the new payment. Depending on your situation, your servicer may offer a loan modification or mortgage relief program. A HUD-approved housing counselor can provide free or low-cost guidance.
Budget for the increase now. If your payment will rise by $400 monthly, that's $4,800 per year. Review your spending and identify areas to cut discretionary costs or temporarily adjust savings goals. Building a reserve for the first several months after the rate changes can help ease the transition.