With rising interest rates, it’s time to look over your home loan

It might be time to refinance your mortgage or your payments may go up

Nearly 70% of Americans own their own homes, a percentage that is now at an all time high. This is partly due to the fact that interest rates have been astonishingly low for most of the past five years. Three or four years ago, interest rates were at rates not seen since the 1960’s, and millions of Americans flocked to either buy homes or refinance the homes they already owned. Predictably, as these things always do, the rates have slowly been increasing.

If you haven’t given any thought to your mortgage in a while, now might be a good time to give it a look. With rates rising, adjustable rate loans are not the bargain they were just three years ago. In fact, if you took one out three years ago, you may soon be in for a huge shock. The terms of adjustable rate mortgages vary, but some of them are set up to have an initial low interest rate that adjusts after a period of three or five years. If you took out a loan in 2003 that had a three year period at a low rate, that loan may be about to adjust. If it does, you could find that your payments could actually double. That’s right, they could actually double after the rate resets.

What can you do if you have such a loan? The best thing to do would be to start talking to a lender to see what options might be available.

Check your loan paperwork. Your loan documents will specify certain aspects of your interest rate and how it can change:

• How often it can change
• How much it can change at one time
• How high (or low) it can go during the lifetime of the loan

By looking over these documents, you will have some sort of idea as to how your mortgage might behave in the future. As rates are likely to continue to increase, it might be a good time to consider refinancing your loan and moving over to a fixed rate mortgage. Believe it or not, fixed rates are actually quite affordable right now.

Before refinancing, you should take the time to do the math and find out if it is worthwhile for you to do so. Refinancing costs money, and those closing costs could amount to several thousand dollars. If you have no plans to stay in your home for a long period of time, it may not be worth your while to refinance. If yo do, you can divide the closing costs by the amount you will save each month if you refinance. The resulting number is the number of months you need to stay in your home to reach your “break even” point.

Adjustable rate loans often can represent good deals, especially if you get a good initial rate and don’t play to stay in the house very long. When rates go up and you plan to hold for the longer term, however, an ARM can be a high priced nightmare. Now would be a good time to look over your paperwork and see what, if anything, you should do.