Adjustable Rate Mortgage? It's Not too Late to "Fix" the Problem
In March, 2006, the Federal Reserve raised interest rates for the 15th time since June 2004. This is a scary trend for borrowers who opted in to an adjustable rate mortgage, selecting options like interest-only or 1% interest rate loans, to purchase homes they might not have otherwise been able to afford. Over the last several years, the US has enjoyed a real estate boom, carried partly by these low-rate loans. But the market is starting to cool, and with interest rates rising, some consumers are beginning to have trouble paying their mortgages.Nearly 25% of mortgages - 10 million - carry adjustable rates, and most of them went to people with below-average credit ratings who accepted higher interest rates, according to the Mortgage Bankers Association. In 2007 and 2008, the majority of these loans will reset to higher rates, according to First American Real Estate Solutions, a real estate data provider, as reported on USAToday.com (Some homeowners struggle to keep up with adjustable rates http://www.usatoday.com/money/perfi/housing/2006-04-03-arms-cover-usat_x.htm).
For some ARM holders, this can mean a hefty increase in their monthly mortgage payments, and can lead to the inability to make their payments on time. Once a mortgage is 90 days past due, the foreclosure clock starts ticking.
So, if you’re a homeowner who currently carries an adjustable rate mortgage, what can you do? Well, it’s not too late to “fix” the problem. While short term rates, which include adjustable rate mortgages, have gone up considerably, long term rates have gone up at a much slower pace. Although fixed rate loans are higher than they were over the last three years, they are still low, and many ARM holders are facing fully adjusted rates that are higher than today’s fixed rate loans.
Depending on your situation, you may be able to refinance your mortgage now, and still come out ahead. If your ARM is scheduled to reset with the next year, calculate where your new rate will take your monthly payments, and then compare that with how much you might pay if you refinance to a fixed interest rate mortgage now interest rate mortgage now. The time and effort you expend to “fix” the problem now could very well save you significant money in the future.
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