The Mortgage Man

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LIBOR Index In For A Bumpy Ride

If you currently have an adjustable rate mortgage tied to the LIBOR, you may be in for a shock at the next adjustment.

The LIBOR (or London InterBank Offering Rate) is the rate at which banks loan each other money.  The reason this type of loan became so popular a few years ago was that the index was typically lower than other prevailing indecies used for calculating rates such as Prime or Treasuries.  Unfortunately, because of so much uncertainty in the financial markets regarding the ability of one bank to come through on their paybale obligations, banks are pushing this LIBOR much higher to justify the risk associated with the uncertainty.

Because the LIBOR is on the rise, the next time you have an adjustment coming due (many LIBOR loans were done on a 6 month adjustment), you may be in for a real sticker shock.  Combine that with the strength in long term fixed rates, and you may be looking at the perfect scenario to refinance your loan into a long term fixed rate and stop worrying about the news on a daily basis.

There are a few snags in this plan to be aware of.  First, the value of your home is likely not what it was at the time of your last refinance, so unless your loan was done at a reasonably low loan to value ratio, you may not qualify for a refinance.  Get an estimate of the value of your home for free at www.Zillow.com.  When using Zillow, be aware that the acuracy of the information is somewhere around + or – 10% (based on my own experience).  If you are unsure, I may be able to help you sort through it.  Also, Zillow is notoriously innaccurate on waterfront homes, or homes where a significant portion of the value is based on the location.  All of those disclosures out of the way, Zillow can be useful and fun to use.

The second snag in the plan is the verification of income.  During the same time that LIBOR loans were so popular, stated income loans were “all the rage”.  As long as you had good credit and the right asset profile, you could state your income on the application without the need to verify it in writing.  In the industry these are referred to as “liar loans” because historically, the number given as an income figure more acurately would be filed in the fiction section of the book store.  The days of stated income loans are officially dead.  While there are still a few loan programs out there that offer the option to not verify income in exchange for an increase in your rate, what is not widely advertised (and many inexperienced loan officers don’t even know) is that when your file goes to underwriting, they will pull an IRS form 4506 tax transcript.  This means that the underwriter is going to see the income that you file taxes on whether you provide them or not.

Even hard money lenders, notorious for turning a blind eye on income in exchange for asset based lending, are now turning heavily towards verifying “the ability to repay”.  Contact me to find out if a refinance on your LIBOR adjustable rate loan is the right thing for you and your family.

www.SteveRussellOnline.com

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