Working Around Your ARM
No, I don’t mean the arm that is attached to your shoulder. ARM refers to Adjustable Rate Mortgage, and often this type of mortgage seems like a saving grace to many home buyers. It is often the one option to someone with a modest financial income 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. 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.
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.
However, not all lenders can or will participate with this program and there are numerous restrictions and qualifying guidelines that 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.
So, get to know your credit score. Credit scores carry much more weight in the current market than ever before. 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.
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.
If the option to sell is not in your capability, try contacting your current lender directly to find out if you can complete a loan modification package. 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.
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.
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