Credit & Money Management
Live Debt-Free
How five people got on top of their debts, and how you can, too.
By Kimberly Lankford, Contributing Editor
From Kiplinger's Personal Finance magazine, November 2007
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PROBLEM: Your adjustable-rate mortgage is about to go up
Four years ago, Janet Richard switched from a 7% fixed-rate mortgage on her Fort Lauderdale, Fla., townhouse, which she bought in 1999, to an ARM at 3.25%. That low rate lasted for four years, then rose to 5.5%. It was about to jump to 7.5%.
Richard, 64, would have had a tough time paying an extra $300 per month, and she didn't want to worry about her rate continuing to rise. "My mother is 93, so I need to prepare to be around for a while," says Richard.
Despite the turmoil in the mortgage market, Richard had a big advantage: a good credit record. Shopping with a mortgage broker, she qualified for fixed-rate loans at about 6.5%. Her current mortgage company offered a competitive rate, which saved her more than $1,000 in closing costs.
If you have an ARM, monitor what may happen to your rate at the next adjustment and compare the new payments with those you can qualify for on a fixed-rate loan. Then calculate how long it would take for your monthly savings to make up for closing costs and any prepayment penalties. "If the break-even point is one year, that's great," says Mari Adam, a financial planner in Boca Raton, Fla. "Two years is good, too. And if refinancing gets you out of an insecure loan, it may be worthwhile to switch to a fixed rate even if you won't break even for three or four years."
If you have good credit and you're borrowing $417,000 or less, "it's really quite easy to get a fixed-rate loan," says Chris Smith, president of Capstone Mortgage, in Lexington, Mass. You can still lock in a fixed rate of about 6.4%.
But expect to pay rates in the high-7% range if you have a jumbo mortgage larger than the $417,000 cutoff at which Fannie Mae and Freddie Mac are willing to purchase loans from lenders. It's tough for banks to resell jumbo loans to investors at the moment, so Smith recommends either breaking the mortgage into two smaller loans or taking out a longer-term ARM. You can lock in a rate of 6.75% on a seven-year jumbo ARM, says Smith.
And in the current climate, you may not be able to refinance at all if you don't have good credit. In that case, talk with your lender before missing any payments. The lender may be willing to lower your interest rate or otherwise modify the terms of the loan. Depending on your mortgage balance and the housing market in your area, it might be best to try to sell.
WHAT TO DO: Fixing adjustable-rate mortgages
Refinance into a fixed-rate loan if you have good credit.
Ask your lender for help if you have trouble refinancing. If you've already missed payments, see if you can strike a deal with your lender that brings your account up to date. For instance, the lender may be willing to reduce your payments for a few months or to work out an arrangement for making the payments you've missed (for other options, see Voices From the Home-Loan Bust).
Seek help from a counseling agency approved by the Department of Housing and Urban Development (find links at www.hud.gov). If you're worried about foreclosure, contact the Homeownership Preservation Foundation (www.995hope.org, or call 888-995-4673).