Today's high interest rate environment feels like a ticking time bomb for many who took out adjustable-rate mortgages (ARMs) during the COVID-19 pandemic. According to ICE Mortgage Technology, about 330,000 homeowners who obtained ARM loans in 2019 are nearing the end of their five-year fixed-rate period, with another 100,000 homeowners joining them next year.

With current mortgage rates at a 20-year high, many homeowners may face rate increases that could significantly raise their monthly mortgage payments, potentially doubling them. While ARM adjustments can be unsettling, homeowners can employ various strategies to navigate these changes and avoid financial distress.

First, homeowners need to thoroughly understand the specific terms of their ARM to make the most informed financial decisions. William Anthony, a mortgage originator with Ace Land Mortgage, advises that homeowners should be clear on when their rates will adjust, the potential new rates, and any caps on rate increases. Knowing these details can help homeowners craft a strategic plan and avoid costly surprises.

Refinancing is often the initial reaction for homeowners facing rate hikes. However, whether to refinance depends on comparing the current rate with refinancing rates. If the existing rate is set to increase but remains below current market rates, refinancing might not be beneficial. Conversely, if rates surge to unmanageable levels, refinancing to a slightly lower rate could provide significant relief.

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For homeowners struggling with new mortgage obligations, loan modifications might be an effective solution. Modifications can extend the loan term, such as converting a 30-year loan to a 40-year one, spreading the payments over a longer period to reduce monthly costs. Anthony highlights that this can substantially lower principal and interest payments, easing monthly financial pressure.

Another refinancing strategy is purchasing discount points. Homeowners can prepay fees to lower their mortgage rates. Each point costs 1% of the loan amount and typically reduces the rate by less than 1%. If homeowners plan to stay in their property long-term, this could be a wise investment, reducing monthly payments and total interest over the loan’s life.

Homeowners with stocks or non-retirement account investments might consider liquidating some assets to pay down mortgage principal. This strategy is particularly effective if planning to refinance. Ralph McLaughlin, a senior economist at Realtor.com®, notes that while new mortgage rates might exceed adjusted ARM rates, significantly reducing the principal can lower or maintain current monthly payments, making them more manageable.

McLaughlin advises ARM borrowers to use extra cash to pay off debts like credit cards, auto loans, or student loans, thereby reducing overall monthly expenses. This strategy optimizes financial obligations, ensuring more income is available to handle increased mortgage payments.

If the adjusted payments become unmanageable and other strategies fail, selling the property to leverage accrued equity could be another option. Anthony points out that if the property has appreciated, selling it could yield substantial profits, allowing for downsizing to more affordable living conditions. This doesn't mean a decline in living standards but rather an adjustment to a manageable mortgage. If payments surge without a corresponding income increase, wisely using assets to maintain financial control is crucial.