Twisting Your ARM: Your Loan, Your Credit Score and Your Options
When you purchased your home, it may have seemed like an adjustable-rate mortgage, commonly referred to as an ARM, was your saving grace. It was the one option that enabled someone in your modest financial situation to actually become a homeowner. By enabling you to pay small mortgage payments in the early years of home ownership, that ARM also bought you some time to get to where you wanted to be financially so you could
When you purchased your home, it may have seemed like an adjustable-rate mortgage, commonly referred to as an ARM, was your saving grace. It was the one option that enabled someone in your modest financial situation to actually become a homeowner. By enabling you to pay small mortgage payments in the early years of home ownership, that ARM also bought you some time to get to where you wanted to be financially so you could sell your home and move up the real estate ladder.
But the market tanked, your home's value continues to drop, and suddenly, the day of reckoning has arrived -- your ARM is coming due. This wasn't the paradise scenario you had envisioned for yourself. In this flat-line real estate market, the options for wiggling out of your ARM and into a desirable refinance option are limited. But whether your credit is stellar or terrible, experts say you do have options.
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In the past, even with zero equity, the mortgage industry created programs that could complete a refinance for homeowners for up to 100 percent of their property value, says Scott Cole, president of Prestige Home Mortgage, LLC, a licensed mortgage brokerage firm in Maryland. That's no longer the case. Cole explains that, to refinance your mortgage, most banks require homeowners to show that they have built up equity representing at least 20 percent of the home's value.
However, the Obama administration recently implemented the Home Affordable Refinance Program (HARP), which provides options for homeowners with good credit to refinance out of adjustable or high-rate mortgages into a fixed-rate mortgage without that 20 percent in equity.
If this sounds too good to be true, says Cole, that's because it is. Not all lenders can or will participate with this program and there are numerous restrictions and qualifying guidelines which must be met. "Your loan must be serviced by Fannie Mae or Freddie Mac and cannot currently require a monthly mortgage insurance premium. This alone greatly reduces the potential customers that would be eligible for this financing," he explains. (To find out if your property qualifies for HARP, visit the web sites of both agencies and type in your address.)Giving Credit Where Credit is Due
What if you're someone who has worked diligently to maintain a high credit score -- can that be of any help to you at all in this dire situation? In a word, yes. "Credit scores carry much more weight in the current market than ever before," Cole says.
"A good credit score is a necessary requirement to gain access to today's low interest rates. It can easily make the difference of getting a loan approved at the right rate and at the right loan to value or not getting a loan at all," says David Adamo, CEO of Luxury Mortgage Corp, a national mortgage-banking firm in Connecticut.
"Whether you have an ARM or a fixed rate, with or without equity, your credit scores will now have a much more noticeable impact for the final interest rate you receive. Risk-based pricing has always been factored into the interest rate borrowers receive, but lenders are now penalizing those same borrowers in the form of pricing hits for scores below 720," says Cole.
While he explains that low credit scores will not always preclude someone from obtaining financing, anyone with serious credit issues may find it difficult to obtain any type of competitive financing. Those with low credit should be prepared to pay higher interest rates should refinancing actually prove to be an option.What Are the Options?
So you have no equity in your home, your ARM is due, and/or your credit is a mess. You're worried about how long your savings might keep you afloat on an adjustable mortgage or, worse, that foreclosure could become a reality if you have no savings or expendable income to juggle.
If you are ineligible to refinance an existing ARM, the obvious answer is to sell and downsize to a less expensive home, Cole says. Naturally, selling a home with no equity means taking an even bigger financial hit and making no profit on the sale, which still leaves you in the red.
For those who simply don't have the option to sell, Cole suggests first contacting your current lender directly to find out if you can complete a loan modification package. "Currently, many lenders are offering modification programs to make home ownership more affordable for homeowners that are unable to refinance. Many times a modification can actually be a better program than a new refinance loan," says Adamo.
"If you can prove either financial hardship or the inability to sell or refinance your home due to current market conditions, your lender may offer any one of a number of loan modifications to help," Cole says. What is needed most during a process like this is patience and persistence; there is a heavy volume of customers seeking the exact same type of help and the modification can often take 30 to 90 days to complete.
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If you know your ARM is coming due, don't wait any longer thinking the market is going to turn around. Cole advises that you start exploring the refinance process or loan modification option several months before your loan adjustment date. "A review of your note is important to see what the fixed margin is on your current loan and what index it is tied to. In today's market, not all adjustable rate mortgages will increase at the time of adjustment," Cole says. "Some interest rates could actually go down which could buy you another six months to one year depending on what index your loan was sold under." For those who have the ability, Adamo adds, "Now is the best time to lock in today's historically low interest rates for 30-year fixed-rate loans."
This isn't a time to rest on the hope of low interest rates or the laurels of your credit score though. Financial hardship isn't where you want to be in this volatile economy. Monitor your credit score on an annual basis. Pay attention to your mortgage particulars, and leave no refinancing option unturned.