You’re not alone. I’ve heard from hundreds of people about their interest rates coming up for adjustment on their 3, 5, 7 or 15 year interest only loans. The lower mortgage payments on these loans made them oh so tempting back when you were signing the note and deed on your home, but now the payment is about to, or already has, get or gotten really ugly. If you’ve tried to refinance in the past couple of years you’ve probably come across a problem or two, which leaves you unqualified for a much-needed refinance.
I’m sure a short sale or strategic foreclosure has crossed your mind but these should be done at an absolutely last resort. You may want to see if you can qualify for protection under the Housing and Mortgage Protection Act (HAMP). It’s a bit of a long shot but worth the try. If you qualify you could have a principle reduction or temporary lower mortgage payment applied to your mortgage. More than likely you are facing a lack of equity in your home or an ugly credit score.
Most of the recent legislation offering help to homeowners has applied to those with FHA home loans. With a conventional loan you are left out in the cold and facing a harder time qualifying for a refinance. You’re credit score as well as your credit history is two of the top few requirements to qualifying you for a refinance. Lenders are bumping their requirements on minimum credit scores thanks to incredibly low interest rates. It’s time to do everything you can to boost that score in the realm of the 700’s.
What to do:
1. Make all of your monthly mortgage payments on time - These types of late payments will not be received well by prospective lenders and are weighted more heavily than other types of late payments. If you are considering a short sale or foreclosure, WAIT! Let’s exhaust all other options first.
2. Save as much cash as possible – Hopefully you have equity in your home, but if not you may be required to pay down the principle on your current mortgage.
3. Have honest conversations – Sit down with a licensed mortgage professional and have an honest conversation about your situation. They know what the lenders are looking for and can help guide you to give lenders what they want to see.
What not to do:
1. Accumulate more debt – Try not to acquire more debt while you are shopping for a mortgage. This can be perceived as desperation for credit and that you may be in an unstable place for a refinance (which is likely the case but keep your poker face!).
2. Changes jobs - Try to stay at the same or simular style work for 2 years or more.
When refinancing, consider the various loan options available:
Fixed Rate Mortgages – The interest rate will never change no matter what
• 15 Year Mortgage – You will have a higher monthly mortgage payment but can save tens of thousands on interest.
• 30 Year Mortgage – The most widely used loan.
• 40 Year Mortgage – You’ll have a low monthly payment but will pay a lot more in interest in the long run.
Adjustable Rate Mortgages (ARM’s) – The interest rate will stay fixed for an established amount of time and then adjust to the interest rate available at the time of adjustment, typically every year
• 1 and 3 year loans – These are great for homeowners who know they will be able to pay a higher mortgage payment in 1 to 3 years; say someone about to graduate from college into a stable career field.
• 5 to 7 year loans – These will give you a bit more time to save up cash or qualify for a non-ARM loan. But there is no telling where interest rates will be 5 to 7 years down the road and can be a bit of a gamble.
Few last tips: Keep in mind; adjustable rate mortgages almost never build equity in a home. Also the credit score of each and every person on the current mortgage needs to be able to qualify for the refinance. Rules are rules.