Unless you've been vacationing on another planet for the last several months, you're no doubt aware of the crisis gripping the mortgage market. While most of the attention is being paid to the "sub-prime" and "Alt A" markets, the uncertainty within the secondary mortgage market is or will be felt throughout the entire real estate market. It's important to understand how all of this may affect you.
I won't attempt to explain how the secondary mortgage market works, and why it's in trouble. That subject has been amply covered elsewhere. Suffice to say that it is infinitely more difficult to obtain a mortgage today versus say December of 2006. The purpose of this article is to call attention to the fact that the conditions we're dealing with will affect almost everyone that owns a home, and accordingly, homeowners should assess their risk of loss and take appropriate steps to mitigage it.
If you're currently in an Adjustable Rate Mortgage set to recast within the next 12 to 18 months, you're at risk of not being able to refinance into an affordable fixed rate mortgage when your reset date comes up. This is because in many markets, property values are declining - in some cases, sharply. In addition, lenders are agressively tightening underwriting guidelines to address the diminishing confidence in mortgage backed securities on Wall Street. This will also lead to further interest rate increases to address the perceived higher risk associated with these investments. Taken together, they make for a tight and uncertain mortgage market in the near term, as lenders can be expected (and already have) to lower acceptable loan-to-value ratios, meaning refinancing may not be a viable alternative to a recasting Adjustable Rate Mortgage.
Another area of risk related to this confluence of events is liquidity. Many American homeowners have parked the majority of their wealth in their homes, considering home equity to be a safe place for their money. However, in a declining real estate market, home equity can disappear quickly. Relying on funds from future refinancing to pay for college, home improvement, retirement is very risky in the current environment because of the factors discussed previously. In addition, unless a homeowner has access to liquid assets sufficient to cover expenses for 6 months or so, there is significant risk to home equity if there's an interuption in income due to job loss, major illness, etc.
To summarize, if you are currently in an Adjustable Rate Mortgage with a low initial rate, it makes sense to seriously consider refinancing now rather than waiting until your re-cast date. Given the current uncertainty in the market, there's no guarantee that refinancing will be an option down the line. If you are depending on using home equity to finance any future endeavors, it makes sense to look at harvesting that equity now so that you have the cash in hand - if your property value declines significantly, that equity may not exist any longer when you plan on taking it.
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