The Mortgage Man

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What Do You Do If You Have An Adjustable Rate Mortgage Coming Due?

Hundreds of thousands of adjustable rate 3/1 ARMs were originated in 2005, and will be resetting this year. So what do you do if you are faced with this?

Adjustable rate mortgage ARM

Millions of home owners nationwide are concerned about the economy, the real estate market, and the rising energy costs. As if that weren’t enough, many of them have a ticking clock on their mortgage rate that will be adjusting soon. Like sands through the hourglass, that day will eventually come and you can bury your head in the sand and hope that it goes away, or you can be proactive.

So, what are your options if your ARM is coming due?

  1. You can allow the rate to adjust if the difference in the new payment is negligible and you can still afford the payment after the adjustment. this will depend largely on the index that your loan is based on. If you have a treasury index loan, it is likely that you will have a larger adjustment than if you had a LIBOR index loan. This of course was just the luck of the draw at the time you got your loan as to which one had the better rate at the time. But, the LIBOR loan is more likely if you were in a non conforming type underwriting scenario such as “stated income” or “interest only” or both. If this is not a problem, you can sleep better at night knowing that your payment adjustment will not be the end of the world.
  2. If you can not afford the new payment, you may need to refinance into a fixed rate loan. Fixed rate loans are still very competitive right now, and as I write this, the national average is 6.05% for a conventional 30 year fixed rate mortgage (there is a lot of fine print with that quote that includes primary residence, 20% equity, no cash out at closing, etc.). If you have an adjustable rate, and you have equity in your home that will allow you to refinance, it may very well be worth it even if you take a higher rate than you have currently. For example, if your current rate is 5.5% and it will adjust this year with a maximum adjustment cap of 1%, you may consider refinancing at 6% for the long term security of knowing that the rate will never adjust again, rather than wait for the adjustable rate to move to 6.5%.
  3. If your overall financial situation has changed, and you can no longer afford the payment regardless whether you refinance or not, you have to sell. The government is not going to step in and save you, and neither will your mortgage company. All of the consumer protection discussions going on have nothing to do with changes in lifestyle, they directly address mortgage practices that took place at the time your loan was originated. So be aware, you have to be proactive, particularly if you are past due on your payment already.
  4. If you have no equity in your home, and you can no longer afford the payment, you have 2 choices: 1) Foreclosure, or 2) a Short Sale. A short sale is no easy task, and not everyone qualifies, but it is worth the hassle to not have a foreclosure on your record. A short sale, simply put, is getting a buyer to pay less than what you owe on the property, and convincing the lender to accept that as payment in full. This is not a new program, but it has exploded in popularity in the last year. This option will affect your credit in about the same way that a credit card account would where they agreed to settle for less than the amount owed. it is not a glowing recommendation on your credit, but it is significantly better than a foreclosure.

There are obviously more details involved in your situation than what I have covered here, but hopefully this helps to put your options out on the table.


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