You know the adjustable rate mortgage (ARM) you took out three years ago is going to reset (or “recast") soon. Interest rates have risen lately. Your payment will be going up and you are worried. Understandable. In this article we will take a calm look at your options.
You chose your ARM probably because it offered an initial low interest rate. But now the honeymoon is almost over, right? If you had taken a fixed rate mortgage you would not be worrying about a change in interest rate, since fixed rate mortgages do not change payment for principle and interest, only property taxes or homeowners insurance changes. But, you must admit, you did enjoy the savings for a few years, right?
Almost no one took an ARM betting that interest rates would be lower when the time to recast arrived. Not low enough, at least, to cause their already low rate to actually go down and payments decrease. Your plans were, back then, to perhaps have sold the home by now, or you just figured you would refinance into another loan.
Well, if you had sold you would not be reading this article now, so let us assume you are now at the point of either accepting the new and higher payment as a new fact of life to factor into your budget, or you feel you must refinance.
A lot of borrowers just did not realize or see that the real estate boom could not last forever, with values spiraling upward every year. So now they may have a loan on a home that has not appreciated much or has actually decreased in value and a new loan may not even be tenable.
Well, if you own a home you can always get a loan. But at what rate? Lenders have become very cautious, they scrutinize income, loan to value ratio (LTV), debt to income ratio (DTI), assets and credit very carefully now, perhaps much more than when you originally got your loan. A lot of people have loans now that they would no longer even qualify for if an underwriter went by today's standards!
Your lender is required by law to give you at least twenty-five business days notice before your mortgage recasts. Some lenders actually give much more notice. But 25 days is plenty of time to shop for a new loan if that is what you have decided you need to do. The notice must, by law, inform you of the following:
- Payment change date
- Old and new Index Rates
- Margin, or variability above the Index Rate
- Old and new interest rates
- Old and new payment (principle and interest)
When you receive this official notice, double check your own loan documents to be sure the index, margin and rate are correctly stated. Loans get sold all the time and it may be that something did not carry over correctly. Also make sure the margin amount is still the same, that and the index used are not supposed to change.
If you original loan rate was fairly close to what you will now have to pay, there may not be a problem. Refinancing has expenses and it may be better to just hold on to the loan you have. Unless you had one of those teaser rates like 2% for 2 years. IN that case, get ready for payment shock! Most ARM's actually do have a maximum rate by which they can adjust, called the “cap rate. " So the adjustment can only go so high.
Now - what if your home is now worth LESS than your loan balance? Well, the last thing any lender wants is a foreclosure, you walking away from your home. Before that happens they may be willing to re-negotiate with you. So. . . talk to them.
As a mortgage broker, I am always amazed, when I speak to a client with an ARM, that they almost never know their three loan components : index, margin and cap rate. So dig out your loan documents and read up on your loan before you make any decisions.
And consult a good mortgage broker!
James Hussher is a Certified Mortgage Planner and licensed in all 50 states. Please visit James at http://www.ezmortgages123.com for all of your residential and commercial mortgage needs. Apply online, check current offered rates and loan programs and more! Many free articles and educational resources may be accessed at http://www.swifthussherrealestate.com which James also runs!