You may have noticed on the evening news and the local papers all the bad press about mortgages lately. Specifically sub-prime, negative amortized ARMs a.k.a. payment option plans (which I am opposed to for 99% of the population), 100% financing and interest-only ARMs…to name a few. Many sub prime lenders are restating their earnings and are suffering losses. Some are closing their doors and the remaining are changing their underwriting guidelines. It use to be very easy to obtain 100% financing with a credit score of 600…some lenders would even consider 580. Now, the benchmark is 620. Throughout history, lenders change underwriting guidelines based on market conditions.
If you do have a subprime ARM (if it’s a purchase, this typically is a 2 or 3 year fixed with a prepayment penalty and sometimes is accompanied with a second mortgage), it is crucial that you take great care of your credit before your ARM or balloon adjusts. If your middle credit score is below 620, you may be left a mortgage payment that you cannot afford. Please take action now by contacting your Mortgage Planner to make sure your credit is on the right track…even if your mortgage is not due to adjust for 1-2 years. ACT NOW.
If you have an “a paper” or conforming fixed period ARM (such as a 3, 5, 7 or 10 year fixed)…you’re probably okay. Here are some factors to consider before you get caught up in the panic of the press:
- How long do you plan on retaining your home? If you plan on selling your home before the mortgage is due to adjust and your rate is lower than the current 30 year fixed, then you are probably fine.
- If your plans have changed since you’ve acquired your ARM and you now think you’re keeping the home longer than the fixed period term…you will need to look at the caps to your ARM. Caps limit how much your interest rate can adjust up or down. ARMs have different caps so do not assume that your first cap is 1, 2 or 5%. Please pull out your original loan documents and review this information.
- Whether or not you refinance now should be based on (1) how long you plan to stay in the home? (2) Will you break even on the closing costs? (3) What is the payment difference between the new mortgage and your payment after the ARM adjusts?
- Questions? Please contact your Mortgage Planner and ask them.
Bottom line, if you have a subprime mortgage (of any kind–ARM or fixed), do some elbow grease now to be in good shape for when your mortgage prepayment penalty is over. And contact your Mortgage Planner with any questions regarding your existing mortgage and current trends.
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