Is Your ARM Broken…Or Is Your ARM Making You Broke?

Is Your ARM Broken…Or Is Your ARM Making You Broke?

Since the Federal Reserve recently stopped it’s three year crusade to increase the Prime Rate every six weeks, most people with adjustable rate mortgages (ARMs) expected their already high rate to stabilize. Unfortunately, it takes up to 18 months for the indicators linked to some ARMs to “catch up” to a stable Prime Rate. This means many homeowners have seen their rate continue to creep upward in the last few months, despite the lack of change in the Prime Rate. The increasing interest rates, which means ever increasing payments, have left many homeowners scrambling to make their next mortgage payment, and its also a major factor in the nationwide increase in foreclosures. In many states in the southeast, large increases in property taxes and homeowners insurance hit at the same time, making the situation even worse. The combined effect in some cases has resulted in total payments that are 50-60% higher than they were only 1 or 2 years ago, which is a change that few consumers can handle. Fortunately, due to circumstances in the long term bond market, interest rates on Fixed Rate Mortgages have lagged behind the huge jumps in ARMs, and this offers a solution for homeowners that find themselves unable to afford to continue to live in their own homes. But whether or not this is a good solution for you depends on a variety of factors, and hopefully you can use the information in this article as a starting point to figure out whether switching to a Fixed Rate Mortgage will help you. First of all, if you’re “stuck” in an ARM that was highly recommended to you two or three years ago by a Licensed Mortgage Broker or other mortgage professional, don’t feel too bad, or blame the Mortgage Broker for giving you bad advice. Historically, ARMs are a much better deal than fixed rate mortgages, and can save you tens of thousands of dollars in the long term. Plus, no one could have predicted the changes in the economy, and the Federal Reserve’s reaction to those changes, which caused rates to skyrocket in just three years. The advice they gave you three years ago was sound, and may still be valid in the long run. But if you find yourself unable to pay your mortgage now, a change in plans may be in order. To find out if changing your current ARM over to a Fixed Rate Mortgage is a good idea, just answer the questions below, and they should lead you towards a solution.

1. Can you possibly afford your current mortgage payments without getting behind in your payments? Yes - Go to the next question No - Contact a Licensed Mortgage Broker to discuss options You need to make some kind of change now, before you get behind on your payments or even lose your home.

2. Are your credit scores worse or basically the same as when you got your current mortgage? Yes - Go to the next question No - Contact a Licensed Mortgage Broker to discuss options If your scores are significantly better, you may be paying an ARM rate that is 3% or more higher than the best fixed rate available to you now.

3. Is your current interest rate on your ARM less than 7.5%? Yes - Go to the next question No - Contact a Licensed Mortgage Broker to discuss options Current fixed rates could save you 1-1.5% or more on your ARM if it’s rate is over 7.5% now.

4. Do you have only one mortgage on your home? (no second mortgage or Heloc) Yes - Go to the next question No - Contact a Licensed Mortgage Broker to discuss options It may be possible to combine your mortgages into one lower rate first mortgage, and you could save hundreds of dollars each month.

5. Do you no longer pay (or never have paid) mortgage insurance (PMI)? Yes - Go to the next question No - Contact a Licensed Mortgage Broker to discuss options You may be able to refinance your mortgage to a fixed rate and eliminate your mortgage insurance at the same time.

6. Is the total amount of your mortgage more than 75% of your homes value? Yes - Go to the next question No - Contact a Licensed Mortgage Broker to discuss options If your loan to value (LTV) is less than 75%, you have equity available to get the best rates on a refinance with little or no out of pocket costs. 7. Do you plan on staying in your current home less than 2 years? Yes - Go to the next question No - Contact a Licensed Mortgage Broker to discuss options For most re-fis, the break even point (where costs of the re-fi equal the savings in payments) is 1-2 years. 8. Do you plan on staying in your home more than 7 years? Yes - Go to the next question No - Contact a Licensed Mortgage Broker to discuss options In the long term, rates on ARMs should come back down to a point below current fixed rates, but short term you could still save thousands of dollars.

9. Is your other high interest rate debt (credit cards, finance company loans, etc.) small or non-existent? Yes - Go to the next question No - Contact a Licensed Mortgage Broker to discuss options Depending on your equity, credit scores and debt ratio, you may be able to combine all of your debts into one mortgage with a fixed rate and a much lower total monthly payment.

10. Do you have enough savings to cover any large expenditures that you know of that may be coming up in the near future? Yes - Go to the next question No - Contact a Licensed Mortgage Broker to discuss options It may be possible to actually get some cash out of your equity, get a low fixed rate, and use that cash to take care of other upcoming expenses.

11. Does your current mortgage still have a pre-pay penalty? (usually first 2-3 years) Yes - Go to the next question No - Contact a Licensed Mortgage Broker to discuss options Pre-pay penalties can be quite large and cut into the money available for closing costs or cash back. Plus if your ARM is more than 2-3 years old, your interest rate is probably higher than it needs to be.

12. Will you be retiring in less than 10 years? Do you have a well funded retirement account? Yes - Go to the next question No - Contact a Licensed Mortgage Broker to discuss options If you are still 15-20 years or more away from retirement, you may want to consider a plan that will allow you to pull money from your equity, and re-invest it at a higher rate of return than your mortgage interest rate, which can double or even triple the money available to you at retirement. 13. Are property values in your area flat or decreasing? Yes - Keep your ARM No - Contact a Licensed Mortgage Broker to discuss options The money you have invested in your home (your equity) does nothing to increase it’s value. Your down payment and payments towards principal are basically “mattress money”. It earns no interest and doesn’t make you any money, since your home’s value increases or decreases independent of your equity. If your home’s value is increasing rapidly, you may be able to refinance at a fixed rate, plus pull out some of your equity to re-invest at a higher rate of return. In a future article, I'll discuss a program utilizing this concept that can double or even triple the cash you have available at retirement.

Obviously, every individual situation is unique, and this series of questions is only a starting point to help you determine if getting together with a mortgage professional to discuss your options is a good idea. And, of course, if you have excellent credit, low debt ratios and a great relationship with your bank, you can always check with them to see what they have to offer. However, for most people with average credit and debt ratios, you will get a much better deal on your new mortgage through a competent mortgage broker. In fact, most large banks like BankAmerica, Suntrust, Washington Mutual, etc., have wholesale lending divisions that you can only access through Licensed Mortgage Brokers. These wholesale divisions have a wider variety of programs and lower rates than the bank’s retail offices! A reputable mortgage broker can usually get you a mortgage from your bank at a lower rate than you could get by going into the bank yourself. Plus, they have no obligation to use that bank’s program, and can research a whole network of lenders to find you the best deal, all with only one application. Do you think anyone at your bank would send you down the road to a competitor for your mortgage, because they know their rates are a half a point better? Of course not.

A broker will normally charge you a fee for finding you the best loan for your situation, but that means they work for you, and help you find the best mortgage available, without having to visit dozens of banks or websites, and without having to fill out numerous applications. You also avoid having your credit pulled dozens of times, which can lower your scores. Plus they have access to hundreds of other wholesale lenders that offer programs for just about any credit or situation. Some brokers charge an up-front application or consultation fee, but many will discuss your situation and options with you free of charge. Many specialize in different niches, such as first time home buyers or bankruptcies, while other local companies specialize in loans in specific states or geographic areas. These smaller companies have access to the same lenders as the large companies, and often offer better rates, lower fees, and much more personal service. I can recommend one local company that specializes in Florida mortgages, Star Mortgage. The contact phone number 813-882-8878, or visit the website at http://www.StarMortgageBroker.com. If you don’t live in Florida, try calling a few listings under “Mortgage Broker” in the online yellow pages, ask a few friends if they know a broker that they trust, or visit http://www.mortgagepages.com, and pick your state from the drop down list. Whatever you do, find someone local who can analyze your mortgage, and who will give you some advice on the best option for your particular situation. Good luck.

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