The Adjustable Rate Mortgage

THE ADJUSTABLE RATE MORTGAGE

I cannot tell you how many times I have heard people make a blanket statement regarding ARM’s, or Adjustable Rate Mortgages, and how they are in no way appropriate for borrowers when interest rates are likely to move up.

First of all who knows when rates will move up? Just a few years back everyone was going on and on about rates being the lowest in forty years, and now look where we are; money is almost free. That is free in terms of borrowing, not in terms of it growing on trees. Let’s just assume that mortgage rates are trending up. Does this automatically mean refinancing into a 2yr ARM is a bad idea?

What may be a horrendous idea for one investor could be a life saver for another. Each person’s situation is unique and should be treated as such. Here is a check list for you and if you can answer yes to several of the questions you may want to consider a refinance with a 2yr ARM.

· Credit score 500 or better, but well below 600

· Existing mortgage is about to reset

· Inability to keep up with revolving debt

· Inability to keep up with mortgage payments

· Bankruptcy a real possibility

· Refinance would reduce overall output enough for borrower to keep up with

So there you have it in black and white. If half or most of those apply, or a bankruptcy applies I would be calling my broker, or mortgage consultant to see what my alternatives are. The number of people who find themselves within those criteria just seems to increase every day. Unfortunately because of the number of bad loans out there, a lot of these people are upside down in their mortgage and do not have the option of refinancing or even selling the home. For them a bankruptcy may be the only option still available to them.

If you have found yourself sitting on a FICO in the low five hundreds you will not be able to do anything other than a 2 or 3 year ARM. Because of the low score, any fixed rate loan you may qualify for is going to probably be almost two percent above a fixed rate loan. Because of the very high rate you may not even qualify, income wise. More than likely you will have to entertain a two year ARM.

If your current mortgage is about to reset and go up you may want to see what kind of a deal you can get if you just started over with a debt consolidation loan. There is a lot of lee-way with non prime loans so you may be surprised what a motivated loan officer can put together for you.

If you are a borrower whose minimum overall revolving debt payments are higher than your house note, you need to talk to a broker. You may be thinking that is impossible to have your credit card payments higher than your mortgage but I have seen it many times. It’s pretty easy to save those folks money. If you are a borrower who has a $1,200 house note and fifteen hundred dollars in monthly revolving debt chances are you can consolidate your house note and bills and make your new payment two thousand dollars or lower. It’s pretty tempting to refinance when you are looking at an overall monthly savings of eight hundred to a thousand dollars a month.

If you cannot keep up with your mortgage payments it means you are trashing your credit score and may want to look into it while your score hopefully is above five hundred. If that score dips below five hundred there is nothing anyone can do to help you refinance.

In a perfect world here is how the refinance would go down. You would refinance your home, pay off all your debt, and save yourself eight hundred dollars a month. You would take a two year arm because it would give you the lowest monthly payment by quite a bit. Over the next two years you would keep up with that new house note and not have any late payments on the mortgage. Hopefully you will not have run up those credit cards again and ruin your credit once more.

In two years your score will have gone from a dismal 520 to a respectable 708, and you will qualify for a prime loan at a rate that may save you more money. Best part of all, it is fixed for the life of the loan and you never have to go through this mess again.

That is in a perfect world of course. Unfortunately many non-prime borrowers run their cards up to the max yet again and find themselves in the same situation or worse than they were in two years previously.

As you can see, for some people, regardless of where the rates are going in the future, a two year ARM can be a life saver if done right. Have a plan of action for after you refi, as to what you want to do with all the money you will save so you don’t just go and blow it. Same with the credit cards that lenders will be calling you about to increase your credit line. Don’t take the bait. Stick with the program and you will be welcomed to the prime promise land in the very near future.

Good luck and happy refinancing.