Paying Off ARMs Early

Many home-owners wish to pay off the balance of their mortgage early, especially if they experience a positive change in their financial situation that allows them to pay more per month. Paying off your mortgage early can save you lots of money in interest payments over the years.

One factor to consider about adjustable rate mortgages (ARMs) is that they are fairly difficult to pay off early. The reasons for this difficulty are simple, but sometimes aren’t considered by lenders when making the decision to go for an ARM rather than a fixed-rate mortgage.

Most home-owners looking to pay off their mortgage early will do so by adding extra money to their monthly payment. For example, you might pay $600 each month rather than the $500 minimum payment you are required to make. If you have a fixed-rate mortgage, this will work to reduce your principle and lead to early completion of your payment obligations. However, if you have an adjustable rate mortgage, this extra payment won’t have the same effect. Instead, these extra payments will act to reduce your monthly payments after readjustment. When your interest rate is readjusted, your monthly payment will be recalculated to pay off the principle in the time remaining in the original term.

Of course, lower required monthly payments during the next period are not a bad thing, and will still save you money, but you will not be able to pay off the entire loan as early as you could with a fixed rate mortgage. You can still pay off your ARM by making a lump sum payment for the remainder of your principle. However, most consumers do not have enough money to go this route, making it difficult to end your ARM and achieve outright ownership early.