Good morning all: I received a phone call from a borrower the other day as their Adjustable Rate Mortgage (ARM) was set to change later on this year. Two years ago, they were first time homebuyers so they were able to get 100% financing with a first and a second mortgage. My, how times have changed!
The first thing I encouraged the borrower to do was call the company who presently held their mortgage. Sometimes that lender will want to refinance you, often with a better loan than you received the first time. In this case, it didn't sound like it to me. In fact, it appeared that the lender was licking its proverbial chops about making a bunch of money at the customer's expense. When I proceeded to call around, it became apparent that there might be better options out there.
So what should you do? First of all, don't panic. Although it's probably not ideal to keep your ARM, especially after it starts adjusting, you need to weigh both sides of the coin and then make a rational decision. If you want to refinance before your mortgage adjusts, know what kind of loan you have. Some loans came with prepayment penalties. And these can be steep. Often, prepayment penalties are 6 months worth of interest or thousands of dollars. And the lenders often will not waive these although it never hurts to ask.
On top of the prepayment penalty are the costs to refinance. Typically, these are going to run up to 3% of the loan amount when you factor in closing costs and prepaid taxes, etc. Once you've done your homework, talk to more than one lender and get a feel for what rates and fees they charge and how they do business. It's important that you take your time on this. Don't wait until the last minute-that's where the sharks prey!
If you've decided you definitely need to refinance because you're concerned about affording your new payment, consider FHA. In fact, President Bush just signed into law a program called FHA Secure that is designed to help you. It's worth checking into although keep in mind this program was formulated for people who are caught up on their payments and can prove there would be payment shock when their ARM adjusts. In other words, it's not going to help everyone. If FHA secure doesn't work, consider a regular FHA loan or even a My Community program.
In closing, good luck in your search. Again, don't panic and take your time. Although I would recommend refinancing before your rate adjusts, be realistic. If you're struggling now, ask yourself what is going to change. Although no one wants to move, if you got yourself in a situation that isn't improving, your best option might be to sell and wait until you can afford to buy again. Have a great day!
Paul
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