If you’re stuck with a high adjustable rate mortgage (ARM), you may worry about rising interest rates in the future. Rate caps can protect you from rates like those seen in the 1980’s, but that doesn’t mean your payment won’t go up significantly when rates inevitably rise. Read on to learn about your options.
Refinance to a lower rate
Refinancing to a low fixed-rate mortgage is an attractive option that can save you a bundle in the long run. It’s often your best bet when faced with a high ARM. However, there are several things to know if you’re considering refinancing. One of the most important details is how long you plan to stay in your home. It usually takes about 5 years to recoup closing costs, but a refinance calculator will give you a more accurate estimate for your situation.
To qualify for a refi from most lenders, you’ll generally need at least 20% equity in your home. Work with a lender to understand how much equity you have before starting the application process. If you have a Fannie Mae or Freddie Mac loan and you owe less than 105% of the home’s value, you may qualify for refinancing under the Making Home Affordable program.
Look forward to moving
Moving for the sole purpose of getting out of an ARM is never a good idea, because it creates a high-pressure situation without any guarantee the home will sell. However, moving can be a viable alternative to refinancing if it’s already in your plans. For example, if you have a scheduled job transfer coming up, or you plan to retire elsewhere soon, refinancing may not be worth what you’ll pay in closing costs.
The most important factor in determining whether your pending move will help you is when your ARM’s rate is scheduled to adjust – usually after 3, 5, 7, or 10 years. Compare this number to your result from the refinance calculator to evaluate your best option.
Modify or “recast” the loan
While rare in the world of home mortgages, some lenders will modify the terms of your existing loan. You’ll need a conventional loan (no FHA or VA loans), and you’ll also need to be current on your payments. Your bank will require an upfront payment to reduce the principal on the loan, which can be up to $10,000 or 10% of the remaining balance (whichever is greater). Mortgage recasting is most common for fixed-rate loans, but some lenders consider recasting ARM’s on a case-by-case basis.
Obtaining a loan modification – whether you seek a lower interest rate or lower monthly payments – is a difficult and time-consuming process. You should also know that loan modification damages your credit, so think carefully before pursuing this option.
Find ways to lessen the blow
It’s possible none of the above options will work for you. In this case, consider ways you can mitigate the impact of any future increase in your interest rates. Putting aside extra cash to be applied to future payments, making extra payments to reduce the principal, tightening down your household budget, or even renting out a portion of your home can all help you save money and allow you to stay in your home.
Mortgage Capital Associates (MCA)
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