Rising interest rates, adjustable rate mortgages, bad credit, low home equity and debt
That is a long title, I know, but we actually should have made it longer. You see, all these factors - rising interest rates, adjustable rate mortgages, bad credit, low home equity and debt, plus more stringent lending criteria by the banks are going to hurt many. As I am typing this, the 10 Year Treasury bond is selling off and falling, pushing the yield over 5.2%. The conforming 30 year fixed rate mortgage - that is below $417,000 is hitting 7.0% and is likely to go higher for a foreseeable future. Many of you have adjustable rate mortgages that were reset or will be soon. All these 3/1 and 5/1 ARMs taken 3 to 5 years ago are due. Most are capped at 2.0%, meaning that your rate will increase by no more than that - 2.0%. So if you were lucky to score a home run in 2003 and got 3.5% for the first 3 years, you are looking at 5.5% already or soon enough. On the $200,000 mortgage it means a monthly increase of $237. On $250,000 mortgage, it is $297 more each month.
If you can refinance, you should do it now. If your loan is $150,000 or more, you can find a deal where you don't have to pay a dime in closing costs. Have your broker, banker or whoever you are dealing with to cover. You will get a slightly higher interest rate, but no more than .375%. So if you are quoted 6.625% and asked to pay the closing costs, then 7.0% rate should do away the closing costs. The reasoning is quite simple - the .375% rate increase on $250,000 loan means you will pay $63 more a month in mortgage payments. With today closing costs ranging from $1,600 to $1,900, it will take minimum 25 months to get it back. Get several quotes of course. If your loan is small, it will be hard or impossible for the mortgage broker to pay for the closing. Consider rolling the closing costs into your new mortgage, instead of paying from your pocket. Or if you have spare cash and don't want your home loan to increase, or just feel like it, than go ahead and pay. The bottom line, convert to the fixed rate mortgage now.
But if you have any of the following - bad credit, low home equity or high LTV and large debt, your refinancing can be harder to obtain and the interest rate will be higher. If you have all three factors, you can be in real troubles. As we wrote bad credit mortgages will get more difficult to obtain. The problem can get more aggravated with diminishing home sales. As more sellers are willing to sell their homes for less in your area, the appraised home values will decline as well. If one neighbor sold her house for $500,000 two years ago, you could appraise your similar house at the same $500,000 and cash out accordingly. Tomorrow, another neighbor will barely sell his home for $450,000. When you have to refinance, what value you going to get for your house? Much closer to $450,000 I'd say. In some regions house values have fallen by quite a lot. Those of you who have negative amortization loans must be particularly careful. The bottom line is you may have to sell your house. Make sure your net sale price will exceed the total mortgage debt. Consider the selling price, agent commissions, closing costs and property tax credit you must give to the buyer. If you have a condo association, you may also owe few hundreds in exit fees once you sell.
Fri Jun 23, 2006 09:06AM | Copyright: www.bad-credit-advisor.com | More in Mortgage | Comments (0)
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