Facing A Major Increase in Your Mortgage Payment? It May Be Time To Refinance
Many of us are facing increasing mortgage payments in the months and years ahead because of adjustable rate mortgages (ARM) that are beginning to adjust. For some people, their average payment can jump as much as 100% — from 600 per month to over 1,200 a month. Unfortunately, it can often be hard to deal with these sudden jumps in monthly mortgage payments. If you find yourself in this situation it may be time to take a serious look at refinancing your mortgage to ensure that you are able to keep the house you are in without having to worry about increasing payments.
No doubt, for some people, often those who plan to live in the house they are in for five years or less, adjustable rate mortgages have their benefits. Payments are often lower up front for the first few years and then adjust later in the life of the loan. Unfortunately, some people decide they want to stay in their house for longer periods of time, or they may be facing a tough market where they just cannot sell their home. For these people, ARM’s become a major financial drain. Refinancing is often the answer that most of these folks need in order to lock in a low interest rate and have manageable monthly payments with no surprises.
Many people who refinance their mortgage often find out that they can lower their monthly payment while at the same time saving thousands of pounds in interest over the life of the loan. If you have a 200,000 house and refinance to shave 1% off your interest rate you could potentially save upwards of 15,000 over the life of the loan. That is a considerable chunk of money that can be put to better use – such as setting up a college education fund for your children or performing a remodel of part of your home.
Of course, the best benefit of refinancing your mortgage is that you can turn your ARM into a traditional mortgage with a set interest rate for the life of loan with fixed monthly payments. Of course, nothing stays the same for long, so you may very well find out that in a few years you are refinancing again to take advantage of another drop in interest payments.
There are costs involved in refinancing – typically you will pay for a home inspection, document preparation fees, and other similar costs that parallel those you paid when you first closed on your home. It is important that you weigh the cost of a refinance against the total savings you will get from refinancing. Many people find that the benefits far outweigh the costs. Considering that they will be locking in your mortgage payment and, in many cases, lowering your interest rate, they don’t mind paying a little up front!
Refinancing can help you get your financial life back under control when facing uncertainty with your home mortgage payments. It’s the perfect tool to use for home owners of all backgrounds no matter how much they might owe on their home.
In this modern economy, lenders provide loans tailored to just about any situation. Balloon loans are one such loan, but carry a serious downside if youre not careful.
Balloon Loans
A balloon loan has nothing to do with hot air or floating around the world in 80 days. Fail to plan very carefully when using one of these loans, however, and your financial world will definitely go down in flame like the Hindenburg.
A balloon loan is a mortgage with a fixed interest rate for a set period of years. Unlike traditional fixed rate home loans, the interest rates on balloon loans are nearly as low as those found on adjustable rate mortgages. The problem with balloon loans, however, is the term.
While balloon loans provide a low fixed interest rate for a set period of years, those years are not in abundance. Instead of a fifteen or thirty year repayment term, a balloon loan typically has a term of seven to ten years, depending upon what the lender was willing to give you. At the end of the term, you must repay the balloon loan in full. Yes, in full. Lets take a look at how this can play out.
In 2005, you find a home you love but cant qualify for a loan. You are so engrossed with the loan that you eventually locate a lender willing to write you a balloon loan. The loan is for 400,000 and has a 7 year term. At the end of the seven years, youve paid the loan down by 50,000, but still owe 350,000. Somehow and someway, you must come up with that 350,000 to pay off the loan. If you dont, the lender will foreclose on the home.
Every borrower that goes with a balloon loan fully intends to refinance the property before the balloon blows. While this makes sense, you have to keep in mind that refinancing is no sure thing. Maybe you can, but maybe you cant. Also, we are experiencing some of the lowest loan rates every seen. Chances are very strong that in seven years, rates are going to be much higher. Are you really going to be able to afford those rates?
Balloon home loans are all about seeing the future. In essence, you are pulling out the tea leaves and betting on rates in 2012 or so. If you get it wrong, your financial life can become a nightmare.
Over the last few years, many people squeezed into new homes using adjustable rate mortgages. With interest rates going up, you now need a new interest rate strategy
Adjustable Rate Mortgages ARMs
Adjustable rate mortgages carry a bit of a gamble for home owners. Essentially, you trade smaller interest rates and lower initial payments on the gamble rates will not increase over time. If rates stay low, you make out like a bandit. If rates increase, you need to consider your options to avoid getting stuck with a high interest rate loan and resulting cash flow problems from increased monthly mortgage payments.
For the last three or four years, adjustable rate mortgages have been offered with incredibly low interest rates. Many people used these low, low, low rates to buy homes that would otherwise be beyond their means. Starting in 2004, Federal Reserve Chairman Alan Greenspan started making noises about increasing money borrowing rates. He has followed through on these hints. Although mortgage rates arent tied directly to the Federal Reserve Bank, they are heavily influenced by it. As a result, many people are now facing tight finances.
Avoid Rising Rates
There are really only two solutions for avoiding the increase in interest rates on adjustable rate mortgages. The first strategy is to immediately convert to a fixed rate mortgage product. Fixed rates are still at historic lows when compared to rates offered over the last 50 years. By flipping to a fixed rate, you will be able to solidify your budget and finances since you will know exactly what you have to pay each month. If rates decrease in the future, you can always try to flip back to an adjustable mortgage loan.
Unfortunately, some home owners are simply going to have to face the fact they lost one the interest rate gamble. Typically, this will occur when you realize you simply cant afford to make the monthly payments required by getting a fixed rate loan. In such a situation, you are going to have to sell your home and downsize. In most situations, it is better to do this now since youve probably built up a sizeable chunk of equity over the last few years and want to avoid a loss of that equity as the market cools down. While this may sound like a disaster, it really isnt. Yes, you have to downsize, but you should still have built up a chunk of equity.
Interest rates are going up whether you want to acknowledge it or not. The time to deal with your adjustable rate mortgage is now, not when you straining to make payments.
An effective tool used by home buyers, ARM or Adjustable Rate Mortgages, offers a lower interest rate at the beginning of the loan and the risk of a hike in rates is shared by the borrower and lender.
ARM, is ideal if you are certain about rising income expectations and short-term home ownership. There are four basic aspects. One is that the initial interest rate is fixed 1-3 percentage points lower than fixed rate mortgages. Second there is what is known as adjustment interval, when after the initial period has elapsed the rate is modified in keeping with prevalent rates. Third, an index against which lenders can measure the difference between the interest earned on the loan and what would be earned in actuality in other investments. And, fourth, the component added by the lender to the index, usually 1.5-2.5 percent.
An ARM has in addition, safeguards like interest rate caps. This limits the amount of interest rate that can be applied to the payment during adjustment. Normally this cap would be about 2% point cap over the life of the loan.
ARM is ideal when it lends you buying power. You can opt to buy a property with a higher value and still pay a lower initial monthly payment. If you know for certain that you will reside in the house you are buying for a maximum of 5-7 years then ARM is the mortgage that will save you money. If you are prepared to take risks then ARM offers the greatest possible savings especially if the rate stays steady or declines over the years.
ARM is a calculated risk as there are no certainties. However if at the end of five years your plans change and you are about to continue in the same home for another 10 years then it is prudent for you to switch from ARM to a fixed rate mortgage.
Getting a mortgage can be a very confusing process. There is a lot of paperwork to sign, documents to read and procedures to be followed. You’d think you were applying to go to Harvard or Yale, except they don’t require that much paperwork for you to be admitted! Although getting a mortgage can be a confusing process, there are three terms that every mortgage holder should know to better understand what he is she is getting into.
Going into a mortgage knowing just a few facts will help you immensely in understanding what type of commitment you are getting into.
The first term you should understand is, amazingly, the word “term”. Term refers to the length of the mortgage you are taking out – or the amount of time you are making payments.
Many mortgages run the gauntlet of between ten and thirty years. The longer the mortgage, typically the lower your monthly payment will be (and the more interest the mortgage company makes). Generally speaking, you should go for the shortest term you can comfortable afford – you’ll save potentially tens of thousands (and in some cases potentially over a hundred thousand) pounds in interest by keeping the length of the mortgage as short as you can.
Next, understand the interest rate on your mortgage and how it is calculated. The interest rate refers to the amount of interest charges you will pay for the money you are borrowing, expressed as a decimal – such as 5.2 for 5.2%. Is it fixed or adjustable? In other words, is it the same through the life of the loan or does it change at specified periods in time? Most home buyers should try and steer clear of adjustable rate mortgages even though they can look better up front. They can often reset to higher interest rates and come back to bite you if you aren’t ready for a jump in your monthly payments!
Finally, understand what closing costs are and how they are going to affect your purchase price. Often times, you are going to be responsible for coming up with these closing costs out of your own pocket. Closing costs consists of things such as appraisals done on the house, attorney fees, notary fee, deed fee – if there is a fee they can think of it usually falls under the term closing costs! Be a smart and savvy consumer, if you see a fee that you don’t understand or doesn’t seem right – speak up! Some mortgage lenders try to sneak in any fee they can think of to make a few extra pounds profit.
Understanding these three terms can help make you a more informed home buyer and help you find the mortgage that is right for you. As with any product, it is important to shop around for a mortgage when you are considering buying a house. Even a small change in the interest rate between two lenders can often to amount to thousands of pounds in savings. Don’t be afraid to comparison shop – it’s your money after all!