Financial Utopia – Help with credit cards, debt savings and loans.

Refi Home Mortgage Loans How Soon Can You Refinance An Adjustable Rate Mortgage?

Homebuyers have several loan options. Hence, purchasing a new home has never been easier. Individuals who cannot afford a down payment or closing costs may take advantage of loan programs that offer assistance. Furthermore, those hoping to obtain a low rate mortgage may consider a loan with an adjustable rate. Because of the initial low cost of adjustable rate mortgages, monthly mortgage payments are also lower. However, low rate mortgages are short term. To avoid an interest rate hike, homeowners should refinance before rates begin to increase.

Advantages of Adjustable Rate Mortgages

There are several advantages to accepting an adjustable mortgage. For starters, a low rate mortgage allows buyers to purchase pricier homes, while maintaining an affordable monthly payment. Moreover, because of record low rates, homebuyers who obtain an adjustable rate mortgage can enjoy falling rates without refinancing their mortgage. Thus, they avoid closing costs and other fees.

Adjustable rate mortgages are also ideal for individuals who plan on moving in a few years. Some people enjoy the stability of living in one place for many years. In this case, refinancing for a fixed rate is a wise choice. However, if you prefer the flexibility of moving every three to five years, you will save money with an adjustable rate.

Pitfalls of Adjustable Rate Mortgages

While adjustable rates offer many attractive features, one major drawback is that low rates are temporary. If interest rates continue to fall, you will not be subjected to the dangers of these loans. However, if rates begin to climb, so will your mortgage payment. Homebuyers who cannot afford an increased mortgage are at risk of losing their home. Thus, if your goal is to remain in your current home for many years, refinancing for a fixed rate will offer predictable mortgage payments.

How Soon Can You Refinance a Mortgage?

Fortunately, home mortgage loans can be refinanced whenever you like. Some lenders suggest allowing the loan to mature at least 12 months. However, if you detect a change in market trends, refinancing shortly after purchasing your home is a smart maneuver. Those contemplating refinancing must be prepared to pay additional closing fees. Moreover, contact your current lender and inquire of prepayment penalties.

Adjustable Rate Mortgages: This Home Mortgage Loan May Not Be For The Weak At Heart

I heard the news about another interest rate hike and thought it was about time to look into refinancing my mortgage. I contacted my mortgage company first.

“I am interested in a fixed mortgage rate.” I said.

“May I ask why that is?” The broker asked politely.

“I don’t want to deal with the risk of rising interest rates. At my age, I cannot afford the risk.

“Looking at your last ten years of history, you have done pretty well with the adjustable rate. In fact, you had paid less in interest than most people with a fixed loan. May I suggest that we look at some adjustable rates, which are even less than the rate youre paying and with caps you dont have to worry about the interest rate hikes. I think we can save you a few hundred dollars off your monthly payment.”

At this point the broker took a breather so that I can say, “No thank you. I am only interested in a fixed rate mortgages.” “I don’t understand. Are you not interested in saving money?” He asked before launching into a lecture that had a mix of economy 101, budgeting 1, a dash of fortune telling and a healthy and totally unrealistic optimism of future trend in interest rates.

When he was done I explained to him that I recall the 18%-19% interest on mortgage loans in the early 1980’s that he seemed too young to remember. I pointed out that on a $100,000 loan, the 18% interest is $1,500 per month on the mortgage interest alone. If you have a $200,000 loan the interest alone would be a back-breaking payment of $3,000 per month.

I knew he thought I am out of my mind thinking about an 18% mortgage interest rate in todays environment. At the end we ended the phone conversation without any resolution. The gap in understanding wasnt about fixed rate mortgages vs adjustable rate mortgages (ARM). The gap was in age, experience, expectation, hopes and fears; a gap too wide to bridge.

To understand this gap, lets look at the adjustable rate mortgages. This type of mortgage loan is usually lower than the fixed rate and the lower rate means lower payment that in turn means easier qualification.

When lenders are considering your mortgage loan application, they look at what percentage of your income is available for repaying their loan. With an income of $5,000 per month, a $2,000 loan payment is 40% of your income and a $1,000 payment is 20% of your income. The closer you get to $1,000 or 20% of your income, the easier it is to qualify for the loan. This easier qualification appeals to younger people who are just starting and those with income limitation.

Adjustable mortgage rates appeal to young people with an innate optimism, hopes of increased income and the high possibility of moving to a different home in a short period of time. They need to look at what they can afford to pay and cannot worry too much about the distant future. To them anything is better than renting which is absolute waste of money.

There are also those older individuals who have suffered from some set back in life and do not enjoy a high credit score or do not have a very high income. Since a poor credit score increases the interest rate a bank offers to potential borrowers, a fixed rate may be too high for these individuals to consider.

Lets take a look at some terms that help you understand ARM better.

Margin – This is the lender’s markup and where they make their profits. The margin is added to the index rate to determine your total interest rate.

ARM Indexes – These are benchmarks that lenders use to determine how much the mortgage should be adjusted. The more stable the index is the more stable your adjustable loan remains. Consider both the index and the margin when you are shopping around.

Adjustment Period – Refers to the holding period in which your interest rate will not change. You will come across ARM figures like 5-1 that means your mortgage interest remains the same for five years and then it will adjust every year.

Interest Rate Caps – This is the maximum interest a lender can charge you.

Periodic caps – The lenders may limit how much they can increase your loan within an adjustment period. Not all ARMs have periodic rate caps.

Overall caps- Mortgage lenders may also limit how much the interest rate can increase over the life of the loan. Overall caps have been required by law since 1987. Payment Caps – The maximum amount your monthly payment can increase at each adjustment.

Negative Amortization – In most cases a portion of your payment goes toward paying down the principal and reducing your total debt. But when the payment is not enough to even cover the interest due, the unpaid amount is added back to the loan and your total mortgage loan obligation is increased. In short, if this continues you may owe more than you started with.

Negative amortization is the possible downside of the payment cap that keeps monthly payments from covering the cost of interest.

As you compare lenders, loans and rates remember Henry Moore who said, “What’s important is finding out what works for you.”