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
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.