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Worried about ARM Reset

Q: My wife and I have a five-year fixed rate that will turn into an adjustable rate at the end of May. When we bought our house we put 20% down and never thought we would have to worry about equity, but with values dropping we're worried. My wife just finished college and we both have good jobs and we've never been late on a mortgage payment. But because our credit scores are very good, and not much if any equity, we're scared.

A: If you ARM is going to reset this spring, you have two options. One, you can look for a refinance to a new long-term fixed rate product. If you don't have much equity, you can look into a FHA-backed loan, which will only require a 3.5% equity stake in the property. There will of course be costs for the refinance plus fees to get into the FHA insurance pool, but your concerns about rates and such will be covered. Two, you can let your rate adjust; the new rate will very likely be below what you have been paying, at least for a year (and very possibly longer). You could use any savings to build a cushion against future rate increases, or perhaps better, pay down your loan to build equity a little quicker while also making a payment increase in the future somewhat smaller.

Good jobs and good credit will see you through a lot of troubles. The fluctuating value of your home is beyond your control, and even if the mortgage ends up being more than the market value of the home (you are "underwater") you won't encounter any trouble as long as you keep making your payments. Should you need to sell, you might encounter a different set of trouble, but this doesn't seem to be an immediate concern for you.

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