Loan Officer Surprised By Higher Mortgage Payment. Forgetting She Had A 7/1 Arm Was A Costly Mistake

An ARM (Adjustable-Rate Mortgage) loan is a home loan with an interest rate that can change periodically. This means that monthly payments can vary over the life of the loan. Typically, ARMs start with a fixed interest rate for a specified period, usually 3, 5, 7, or 10 years. 

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During this initial fixed period, the interest rate remains unchanged. After this period, the interest rate adjusts at regular intervals (annually, semiannually, etc.), based on a specific index or benchmark plus a margin set by the lender.

ARMs gained a bad reputation after the 2007-2008 housing crisis because many people couldn’t handle the payment increases. However, since 2019, millions of homeowners have taken out ARMs and many are now entering their adjustment periods. According to Intercontinental Exchange, 328,000 homeowners have already passed the end of their fixed period, and another 102,000 will face this change in the next year.

As CNN reports, Jennifer Hernandez was stunned when her mortgage payments on her Houston home shot up by around $2,000 a month. In 2016, she had refinanced her home using an adjustable-rate mortgage. Unlike fixed-rate mortgages, ARMs can initially seem like a good deal but come with risks that can catch homeowners off guard.

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Jennifer’s ARM had a fixed rate for seven years. After that, the rate started adjusting each year based on current market conditions. With interest rates reaching their highest point in decades, many people with ARMs, like Jennifer, now face much higher monthly payments.

Jennifer, a loan officer herself, initially thought she had a 10/1 ARM (fixed for 10 years). However, she had actually taken out a 7/1 ARM (fixed for seven years). When her rate jumped by 2% last October, it reached 5.125% — the highest increase allowed in the first year of adjustment.

Most ARMs have a cap on how high the rate can go to prevent excessive increases. For Jennifer, the cap is 8.125%, five percentage points above her starting rate. She decided against refinancing because fixed mortgage rates were still higher than her new adjusted rate. However, she anticipates another increase in her monthly payments this October.

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According to CNN, some loan officers report a surge in ARM applications as borrowers hope the Federal Reserve will cut interest rates in the coming years, allowing them to refinance before their rates reset. About 40% of high-value loans are now ARMs, saving borrowers hundreds of dollars each month.

ARMs can be a great option if one plans to stay in their home for only a few years or expects their income to increase. The lower initial interest rate can make monthly payments more affordable, which is beneficial for short-term savings.

However, the interest rate can rise after a few years, leading to higher monthly payments. It is essential to be prepared for this possibility and comfortable with the risk of payment fluctuations. Above all, borrowers should not forget the terms and conditions they agreed to when signing their mortgage years ago. 

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