Refinance Home Mortgage Guide

If you purchased your home with an option adjustable rate mortgage because you needed the lowest payment possible you should be very concerned about all the trouble brewing in the mortgage industry. When your option ARM begins resetting coupled with the declining values of homes across the country it could become extremely difficult for you to keep up with rising mortgage payments. Here are several tips to help you decide if refinancing your option adjustable rate mortgage is right for you.

Payment Option Adjustable Rate Mortgages

Pay option mortgage loans are relatively new and offer a great deal of flexibility for the savvy homeowner or Real Estate investor. The problem is that many people who purchased homes with these loans don’t understand how they work and blindly go on paying the minimum amount due each month until the lender recasts their loan and find out that foreclosure is a short 120 days away.

If you’re reading this and are unfamiliar with payment option mortgages, they are a very flexible mortgage with several different payment options. Homeowners with these loans can make payments on any given month based on the following options:

15 year or 30 year amortization
Interest Only
Optional Minimum Payment

The first option is a fully-amortized payment meaning that portion is applied to your loan balance after the interest is paid. If you choose to make the interest only payment you will only pay the finance charges due each month without paying down your loan balance. The “optional minimum payment” is what gets homeowners in trouble. This payment does not cover all of the interest due in a month. The unpaid portion is added to the loan balance every month. This means that your mortgage is actually growing over time and when it reaches a certain threshold, usually 125% of your loan amount, the lender will “recast” your loan.

Recasting means that the mortgage is converted to a standard adjustable rate mortgage amortized for the time remaining in your loan contract. For many homeowners this results in payment shock that they are unable to recover from and ultimately lose their homes.

Are You Running Out of Options?

If you are a homeowner who has been making the minimum payment month in and month out you should refinance your loan immediately. Your option mortgage is a ticking time bomb that could cost your home. The payment option mortgage problem is not limited to homeowners with poor credit; industry analysts estimate that there are 580 billion dollars in outstanding option loans from 2005 and 2006 alone. Analysts expect many of these loans to end in foreclosure due to declining home values.

Protect Your Home

How can you protect yourself from mortgage payment shock with your option mortgage? Use a mortgage calculator to predict your monthly payment when your loan resets. Read your mortgage contract and find out what the lender’s margin is when calculating your future payment amounts. If you find that you will not be able to afford the payments after the reset consider refinancing with a hybrid adjustable rate mortgage to keep your payments low and lock in your mortgage rate for the time being.

You can learn more about your mortgage refinancing options; including costly pitfalls to avoid when dealing with mortgage brokers with a free mortgage DVD. Request yours today.

If you are considering refinancing your mortgage with an interest only mortgage there are several things you need to know to minimize your risk and avoid paying too much. When used correctly interest only mortgages can give you a lower monthly payment; however, with any Adjustable Rate Mortgage there is always the risk of payment shock. Here are several tips to help you decide if interest only refinancing is right for your situation.

What Are Interest Only Mortgage Loans?

Interest only loans are a special type of Adjustable Rate Mortgage where your payment is based only on the interest due for a given month. This interest only payment doesn’t last forever; your mortgage lender is going to want their money back eventually. The duration of your interest only period will be specified in your loan contact and typically lasts for five years. At the end of this interest only period your lender will convert your interest only mortgage to a standard Adjustable Rate Mortgage with a payment based on the time remaining in your loan. When this happens your mortgage payments will go up significantly to include loan principal.

Limiting Your Risk With Interest Only Mortgages

There are safety features built into Adjustable Rate Mortgages to protect you from payment shock. Payment shock occurs when an adjustment to your mortgage rate by the lender raises the payment to an amount you can no longer afford. There two types of caps that protect you from a financial crisis. Periodic caps limit the amount your mortgage rate can go up during an adjustment period or over the lifetime of your loan. Payment caps limit the amount your monthly payment can go up or down following an adjustment to your mortgage rate. Your payment cap can also have a lifetime limit.

Beware Negative Amortization

When you borrow with any type of Adjustable Rate Mortgage you have to make sure that you have both types of caps to protect yourself against negative amortization. Mortgage loans that are negatively amortized are actually growing over time as you make your payments. The goal for any type of mortgage is of course to pay the balance off completely so negative amortization is something you should avoid at all costs. You can prevent negative amortization by ensuring your Adjustable Rate Mortgage includes both payment and periodic (interest rate) caps and by avoiding the ultra-risky option Adjustable Rate Mortgage loan.

You can learn more about your interest only mortgage refinancing options, including expensive pitfalls to avoid with a free video tutorial.

If you’re concerned about your mortgage payment amount when the lender resets your Adjustable Rate Mortgage, there are several ways to protect yourself from payment shock. What is payment shock? Imagine waking up one day to a statement from your mortgage lender showing that your payment amount has gone up $650 and you can no longer afford the payments. For many homeowners living paycheck to paycheck this would be a financial disaster that would result in losing their homes. Here are several tips to help protect you from payment shock with your Adjustable Rate Mortgage.

When used correctly Adjustable Rate Mortgages can save you a lot of money. There are risks mainly that your lender will reset the loan and you will no longer be able to afford your payments. What happens when your introductory period ends is that the lender adjusts your interest rate to the index your loan is tied to plus margin. The margin is the markup your lender adds to make a profit. If your Adjustable Rate Mortgage started with a lower “teaser” rate, you could see your payment go up dramatically in a short period of time.

Hybrid Adjustable Rate Mortgages are especially vulnerable to payment shock because of their extended fixed rate period. This fixed introductory period can last as long as five to seven years and many homeowners forget their payments will be adjusted until the bill arrives. Some hybrids adjust every six to twelve months after the initial reset which could wreak havoc on your monthly budget. If your hybrid is due to reset you might consider refinancing before your payment goes up.

Here’s an example to illustrate how people get into trouble with the teaser mortgage rates you see advertised with Adjustable Rate Mortgages. Suppose you refinanced you mortgage using a $200,000 Adjustable Rate Mortgage for 30 years with a 4.0% teaser rate. The fully indexed rate in your loan contract is 6.0%. During the first year under the teaser rate your monthly payment would be $955. When your introductory period ends and the lender resets your mortgage to the contract rate of 6.0% your payment will jump to $1,193. This is assumes the index rate stays below the contract rate; what would happen if your index rate jumped to 7.0 percent? If the index that your mortgage is tied to rises just one percentage point your monthly payment would jump to $1,321. That’s almost $370 higher!

Beware Option Adjustable Rate Mortgages

There are a number of risks associated with the so called “payment option” mortgage if you’ve been making the minimum payment. The minimum payment amount does not cover all of the interest due for a given month; this unpaid interest is added to your loan balance. After a period of time specified in your loan contract, typically five years, or when you reach 125% of your original loan balance due to negative amortization, the lender will recast your loan. When this happens your mortgage is converted to a standard Adjustable Rate Mortgage amortized for the time remaining in your term length…your payments will go up sharply, doubly so if interest rates have risen.

If you have an Adjustable Rate Mortgage on your home it is extremely important to find out when your loan is scheduled to reset. Here are several steps you can take to protect yourself from payment shock when this reset happens:

Refinance Your Mortgage

Refinance with a fixed rate loan before your loan resets; your monthly payment amount may go up with a fixed mortgage rate; however, you will be protected from future interest rate hikes. Make sure your mortgage does not have a prepayment penalty and determine if the fees you will pay for the new loan make refinancing worthwhile. Refinancing is a good option for homeowners that plan to keep their homes for a long time.

Save for a Rainy Day

If you can make a large payment to your mortgage principal when your loan resets, this will lessen the effect of the higher mortgage rate. Make sure that your loan contract does not include a prepayment penalty that prevents your from making large principal payments.

Avoid Optional Minimum Payments

If you’ve been making the minimum payment on an option mortgage, start making a fully amortized payment. This will reduce your loan balance before the lender recasts your mortgage. If that’s not an option due to budget restraints try and make the interest only payment to prevent negative amortization on your loan.

You can learn more about your mortgage options including costly pitfalls to avoid by registering for this free Mortgage Refinancing Blueprint.

Option ARMS are mortgage loans with the flexibility of choosing how your payments are structured. This “twist” combines the lower introductory interest rate with the ability to pick your payment amount. These loans feature a minimum payment amount that could be as low as one percent, an interest only payment, a payment based on thirty year amortization, and a payment based 15 year amortization.

Option loans offer a great amount of flexibility for homeowners; however, there are risks for those that abuse the minimum payment amount. The interest rate on your option Adjustable Rate Mortgage is based on the index your loan is tied to and the lender’s margin. Margin is the amount your lender marks up the index when adjusting your payment amount. The margin is based on your credit and financial details; the less margin, the lower your payments will be after each adjustment. If you hear the term “fully indexed rate” this is referring to the current value of the index plus the margin.

The dangers from an Option Adjustable Rate Mortgage come for homeowners that abuse the minimum payment amount. This minimum payment does not cover the amount due in a given month; the unpaid amount is added to the loan principle, a phenomenon known as “negative amortization.” This term means that instead of paying your loan balance down over time your mortgage loan is actually growing. This is unfavorable condition that could lead to your lender recasting the loan as a standard Adjustable Rate Mortgage amortized for the remaining loan term. This happens automatically when your loan reaches $125% of the original loan balance.

Many homeowners experience payment shock when this happens because they are unprepared for the significantly higher monthly payment. This danger has led to a skyrocketing foreclosure rate among homes purchased with option loans. The dangers don’t mean that option mortgages should be avoided altogether; homeowners who fully understand the risks associated with these loans can leverage Option ARMS to their advantage.