What to Do When Your ARM Adjusts

Facing a rate boost? You're better off converting to a fixed-rate loan.

Russell Wild is a poster boy for borrowers with adjustable-rate mortgages. When rates hit rock bottom in 2003, the financial planner and author traded in a 6.75%, 30-year fixed-rate mortgage on his four-bedroom colonial in Allentown, Pa., for a 5.12%, five-year ARM. He refinanced for $16,500 more than his old mortgage balance so that he could invest the extra cash, and he has dutifully been putting aside the $100-a-month savings on his mortgage payment. Assuming his portfolio continues to return 14% a year, as it has for the past three years, he'll have a kitty of $39,700 by the time his first adjustment kicks in.

That increase is capped at two percentage points a year (or 7.12%), so when his ARM's annual adjustments begin in December 2008, Wild won't pay much more than he did on his old fixed-rate mortgage. With a lifetime interest-rate cap of 10.12%, the worst-case scenario is a "nice fat tax write-off," he says. Will he refinance again? Maybe. "I've got nearly two years and plenty of options, one of which is paying off the mortgage altogether."

Subscribe to Kiplinger’s Personal Finance

Be a smarter, better informed investor.

Save up to 74%

Sign up for Kiplinger’s Free E-Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

Sign up

To continue reading this article
please register for free

This is different from signing in to your print subscription

Why am I seeing this? Find out more here