Home Mortgage Refinancing Guide

For many homeowners Adjustable Rate Mortgages have a bad name and are overlooked completely when refinancing. While it’s true that Adjustable Rate Mortgages are riskier than their Fixed Rate counterparts, when used properly they can save you thousands of dollars. Here are several tips about the pros and cons of Adjustable Rate Mortgages to help you decide if a variable rate mortgage is right from you.

What Are The Risks of Adjustable Rate Mortgage Refinancing?

The risk with this type of mortgage refinancing comes from the potential of experiencing payment shock. Payment shock occurs when the lender adjusts your payment amount or recasts the loan and you can no longer afford to make your mortgage payment. This typically happens with Adjustable Rate Mortgages that do not have their caps structured properly or with homeowners that abuse the so called “Payment Option” loans.

When Use Properly Adjustable Rate Mortgages Have Very Little Risk

Adjustable Rate Mortgages typically come with a low, fixed introductory interest rate. This rate is often much lower than the actual contract rate, and in the case of Hybrid Adjustable Rate mortgages this introductory period can last as long as five to seven years. If you plan on selling home within five to seven years you could take advantage of this introductory period to lower your payment amount with little or no risk.

Adjustable Rate Mortgages Come With Safety Features

Caps protect homeowners from abrupt changes in their adjustable mortgage rate and payment amounts. There are two types of caps you need to be concerned with; periodic caps that limit the amount your interest rate can go up or down and payment caps that limit how much your mortgage payment can change. Both have the option of lifetime caps which limits the change over the duration of your loan. When you refinance your mortgage with an Adjustable Rate Mortgage make sure your loan has both payment and periodic caps. Loans that have only payment caps are prone to negative amortization when the cap prevents the payment going up enough to cover an increase in the mortgage interest rate.

Be Careful Refinancing With Payment Option Mortgage Loans

Option Adjustable Rate Mortgages have become extremely popular due to their flexibility and the “optional” minimum payment amount. The option mortgage gives you the choice of making a payment based on a 15 or 30 year amortization schedule, an interest only payment, or the “optional” minimum payment.

When you make the minimum payment you are not paying enough to cover the mortgage interest due that month and the outstanding amount is added to your loan balance. This is called “negative amortization” and it means your loan is actually growing over time. Homeowners who abuse the minimum payment will find that the lender automatically recasts the loan when they reach a certain threshold of what they owe. When this happens the loan is converted to a standard Adjustable Rate Mortgage amortized for the time remaining on the contract.

Many homeowners who abuse Option Adjustable Rate Mortgage loans can barely afford the minimum payment; when the lender recasts their loans they are one step away from foreclosure and frequently lose their homes. You can learn more about your Adjustable Rate Mortgage refinancing options, including expensive pitfalls to avoid with my free mortgage toolkit. You can register for the free toolkit with no obligation now or ever using the links at the top of this page.

If you are in the market to refinance your mortgage the type of interest rate you should choose depends on your situation. If you can afford a higher monthly payment and plan on keeping your home for at least seven years or if you have little tolerance for financial risk, consider a fixed interest rate mortgage.

If you cannot afford your mortgage payments for now but expect your income to increase in the near future consider an Adjustable Rate Mortgage as a short-term solution. Many homeowners get themselves into trouble because they do not foresee their income going up and purchase more home than they can afford. It’s better to have a solid plan in place today and save yourself the sleepless nights and financial hardship of losing a home you never should have purchased in the first place.

If you expect to be moving within seven years you could save yourself some money with an Adjustable Rate Mortgage or even a hybrid ARM. You could structure the Adjustable Rate Mortgage so it will not reset until after you’ve sold your home. This essentially eliminates all of the risk associated with Adjustable Rate Mortgages. If you take this approach when refinancing make sure the points you’re required to pay do not offset your savings; also, make sure the loan does not include a prepayment penalty that will be enforced when you are ready to sell your home.

When evaluating Adjustable Rate Mortgages for a home you plan on keeping for longer than seven years there are several factors you need to consider before refinancing. The index, margin, and caps all affect your payment and the amount of risk associated with your loan. The index your Adjustable Rate Mortgage is tied to plus the lender’s margin determines what your interest rate will be when the lender makes adjustments.

Caps are safety features that protect you from sudden increases in your interest rate and payment amount. Periodic caps limit how much your mortgage rate can go up or down during an adjustment or over the lifetime of your loan. Payment caps limit how much your monthly payment can go up or down during any single adjustment or over the lifetime of your loan. It is important to structure your loan with both periodic and payment caps; improperly structured Adjustable Rate Mortgages are prone to negative amortization (a loan that grows over time) when the change in your payment amount does not allow for all of the interest due in a given month.

The risks associated with Adjustable Rate Mortgages come from the possibility of experiencing payment shock. When the lender stars adjusting your loan you could wake up with a double digit interest rate and a payment you can no longer afford. You can learn more about your mortgage refinancing options, including costly pitfalls to avoid with my free mortgage toolkit. Register today by clicking the DVD at the top of this page.

Interest only mortgage loans are as their name implies loans where the payment is based only on the interest due for a given month. This type of loan has payments that are interest only for a specified period of time, typically five to ten years. At the end of the interest only period your loan will be converted to a standard Adjustable Rate Mortgage with payments based on the remaining term length.

The catch with an interest only mortgage is that when you make interest only payments you are not paying down the balance of your mortgage. When your loan is converted to a standard Adjustable Rate Mortgage your payment will be based on the full amount you borrowed and the time remaining in your loan.

Suppose for example, that you’ve borrowed $100,000 with a 30 year interest only mortgage at 6.25 percent. Your payment for this loan will be approximately $520. Had you financed your home with a traditional, fully amortized loan the payment would be approximately $615. The difference between the lower, interest only payment and the fully amortized payment is the amount applied to your loan balance. In this example, 95 dollars paid towards the loan balance with the traditional mortgage.

Who Should Consider Interest Only Mortgage Refinancing?

Interest only mortgage loans are ideal for homeowners that require the lowest payment amount possible for a short period of time. Because interest only mortgages have significantly more risk than a traditional loan, you can minimize your risks by paying more than the required payment amount when able. Many homeowners get into trouble with interest only mortgages because they purchase more home than they could actually afford.

What Are The Dangers of Interest Only Mortgage Refinancing?

The biggest danger of refinancing your mortgage with an interest only mortgage is accepting a loan you will not be able to afford when the interest only period ends. If you are unable to refinance when happens, you could lose your home to foreclosure. You can learn more about your mortgage refinancing options, including costly pitfalls to avoid with my free mortgage toolkit. You can access the toolkit by clicking the DVD image at the top of this page.

Adjustable Rate Mortgages are as the name implies loans that have an interest rate that changes over time. You will often see these loans abbreviated as ARM loans. The interest rate you pay at any given time is based to two factors. The index your loan is tied to changes over time based on any number of factors in the economy. Common indexes are the Treasury Index and the LIBOR Index. There really isn’t any one index better than the others; when shopping for an Adjustable Rate Mortgage you should concern yourself with the lender’s margin over which index you loan based on.

Margin is the amount your lender marks up the index when adjusting your loan. The margin on your loan depends on a number of factors including your credit rating. The more risk you pose to the lender, the higher your margin will be. When comparing Adjustable Rate Mortgage offers pay close attention to the introductory rate, contract rate, and the lender’s margin.

During the introductory period of your Adjustable Rate Mortgage you will have a low fixed interest rate. Many homeowners make the mistake of thinking their payment will remain at this amount; however, at the end of the introductory period the lender will adjust your mortgage to the contract rate and your payment will go up. Introductory periods vary in length; depending on the lender and loan type yours could be anywhere from 6 months to five years.

Risk with an Adjustable Rate Mortgage comes from the chance that your interest rate and payment will go up and you will not be able to afford the payments. This is commonly referred to as “Payment Shock.” Many homeowners overlook Adjustable Rate Mortgages completely for fear of payment shock. There are safety features available for Adjustable Rate Mortgages known as caps. Caps limit the amount your interest rate and payment amount can go up when your lender makes an adjustment or over the lifetime of your loan.

You can learn more about refinancing your mortgage while avoiding costly mistakes with our free mortgage tutorial.

In recent years homeowners had little choice when refinancing their loans beyond the traditional 30 year fixed interest rate mortgage. Today, Adjustable Rate Mortgages offer a variety of choices for every financial situation. Personal finances in the United States are different today than in the past; homeowners move and change jobs much more frequently than before.

Traditional mortgage loans no longer meet the needs of many homeowners. In addition to offering greater flexibility, Adjustable Rate Mortgages offer lower interest rates than their fixed rate counterparts. Here are several reasons for choosing an Adjustable Rate Mortgage when refinancing your home loan.

1. You plan on moving soon.

2. The change in your financial situation is only temporary. Hybrid Adjustable Rate Mortgages offer the savings of and Adjustable Rate Mortgage plus the safety of a fixed rate loan.

3. You’re counting on higher income in the future. If you know a promotion or a better paying job is on the horizon, refinancing with an Adjustable Rate Mortgage could help you bridge your finances until that higher paying job arrives.

4. You’re a real estate investor that fully understands the risk of an Adjustable Rate Mortgage loan. Investors flipping houses benefit from the lower payments offered by Adjustable Rate Mortgages.

If your Adjustable Rate Mortgage is scheduled to reset soon you might consider refinancing before this happens. You have the option of choosing a fixed rate mortgage or another Adjustable Rate Mortgage. Refinancing with this type of loan allows you to take advantage of the introductory period while avoiding higher payments when your loan resets.