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Adjustable Rate Mortgage Help

Should I get an adjustable rate mortgage (ARM) when buying an investment property?

No, in most cases it doesn't make sense to get an adjustable rate mortgage in the first place, especially if the loan has a short time frame for when it rises. You might think you have a good reason to get one - but it's just not worth the risk. You save money by accepting the ARM since most ARM's have a lower interest rate than fixed rate mortgages, but it also forces you to pay more on your loan when you might be in a different financial position in the future.

Perhaps you expected your income to increase or a bonus was supposed to come through that did not.  A number of things could have happened that were no fault of your own.

But really, what do you do if you have an Adjustable Rate Mortgage and are worried you want be able to make the payment?

Start investigating right now how you can switch to a fixed rate mortgage and not suffer the indignity of foreclosing on your home. What’s the phrase: prior proper planning prevents piss poor performance. The 7 p’s. If you’re planning on selling your home, then you might not have to take any steps to refinance—but still, you should have a plan just in case the sale doesn’t go through.

Things to take into account and questions to ask:

  • Are there pre-payment penalties if you refinance?
  • How much equity do you have in your home?
  • How long are you going to live in the home?
  • Is it a good time to sell?
  • Is there a baloon payment after a certain number of years?

In this crazy time right now a number of mortgage companies are going under, do to all of the risky mortgages that were handed out, as people rushed to get into the real estate market.  Most companies will help you if you get started early on salvaging your home, but you should have a backup plan before you agree to an ARM.

There are a few options, if you have equity in the home you might be able to take out a HELOC - Home Equity Line of Credit.  But there's a fine line to walk, banks may be worried that if you take out this line of credit they will lose this money if the home goes into foreclosure.  This equity is what they are counting on as part of the loan payment.

Your bank or lender may also give you a grace period, where they lower the mortgage rate or keep it at it's current rate for say a year.  Then you will have to pay the difference at the end of the year or when you sell the property.  This is called forbearance and the payment is an arrearage

They feel alone, but they're not. America's five-year real estate boom was fueled partly by a tempting array of cut-rate mortgages that helped millions of Americans qualify for home or refinance loans. To afford soaring home prices, many turned to adjustable-rate and other, riskier loans with low initial payments. The homeownership rate hit a record 70%.

There are few resources to help homeowners in dire financial straits, but there are some. The Homeownership Preservation Foundation offers free credit counseling and referrals, 24 hours a day, seven days a week (888-995-HOPE, or 888-995-4673). And NeighborWorks America, a national non-profit that supports homeownership and financial literacy, has member groups in every state. Source

First off, know in advance if you even have one. Believe it or not, some people don’t even know they have an ARM or that they have to make a balloon payment. If you’re mortgage rate is about to adjust, and you haven’t been saving money in advance of this contract, start doing your research.

To calculate the rate on your loan when it adjusts, you need to know the index your ARM is based on (such as the one-year Treasury, 11th District COFI or LIBOR), the current rate on the index and the margin that's added to get your full rate. The only information your contract won't contain is the latest index rate, but you can get it for the most popular ARM indexes from HSH Associates, Financial Publishers. One bright spot: Most ARMs have an annual cap, often two percentage points.  Source

Have a back up plan. This plan might entail having an emergency savings fund or someone you can go to, a family member, just to get buy for a few months if you loose your job for instance. But, usually, an adjustable rate mortgage isn't a good idea in the first place. While it will save you money early on, the interest rate change might come at a time when you can't afford or refinance a new rate.

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