If you are one of the millions of homeowners who have an Adjustable Rate Mortgage (ARM) to finance their homes, you need to know how to refinance your home for a lower rate. ARMs are very popular because they allow lower initial payments than traditional mortgages. What many buyers do not take into account is that they are called adjustable mortgages for a reason. The rates go up!
Your low-interest rate will go up. This is clear for anyone to see in their contract. Buyers tend to ignore the fact that the clock is running, however, given rising rates, it is time to take notice. The other contributing factor is that many buyers finance their home purchase with ARMs, but plan to refinance into a fixed rate mortgage before their ARM resets. Home values have risen, which gives the buyer a chance to refinance their ARM into a much lower rate and still maintain their equity.
Unfortunately, many buyers wait too long to refinance their homes, which leaves them with higher rates and less value. If your home value decreases, it makes it difficult to refinance your ARM because you do not have the equity necessary to get a new home loan.
Take for example a house bought 3 years ago using a $ 395,000 ARM. If the value were to drop to $325,000, the outstanding balance of the mortgage would still be $392,000. In this scenario the lender will not be able to provide a new loan that replaces the old loan at a fixed interest rate. The borrower must write a check for the difference between the value of the house and the outstanding balance on the existing mortgage.
Writing big checks like that is something that some homeowners cannot do. So, when the interest rate on their ARM rises, their payment increases and they are stuck with a high monthly home payment. High payment, combined with the increase in fuel prices and food, can put many homeowners on the edge
If you are stuck in this scenario it makes sense to try and look for refinance options at a lower interest rate. The better your credit and the more equity, the better options you will have to refinance your existing mortgage.
Here are ways to help yourself get low mortgage level financing:
Be proactive. Don’t wait until the loan reset and your mortgage payment goes through the roof for you to refinance. This is a big mistake for many reasons. If you wait until your home payment increases, your debt to income ratio will be impacted and that can affect your credit score or cause you to miss other payments. Don’t let it happen.
Do everything you can to increase your credit score before you apply for a refinance. The difference in just a few points in the FICO score can make a huge difference in the interest rate of your new mortgage. For example, if you have a credit score of 674 might get a mortgage rate much higher than someone with a FICO score of 675. It does not take a long time to raise your credit score by 1 point, but it can make a huge difference.
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