How to Handle the Shock of Sky-High Arm Loans

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How to Handle the Shock of Sky-High Arm Loans

The popularity of adjustable rate mortgages, or “ARM” loans as they are known for short, came about when customers were told there was no need to worry about the adjustment rate and that they could simply refinance their loans.

However, some borrowers discovered that refinancing wasn’t an option for them, especially in light of prepayment penalties on some loans that force a homeowner to pay a fee for early payoffs after the first rate adjustment.

Welcome to the complex world of mortgage loans, where the intricate and multiple terms involved in the variety of loan types can be quite confusing to patrons.

Never fear, though, because this article aims to break down the intricacies of ARM loans in a practical way.

High Arm Loans

THE 3 MAIN TYPES OF ADJUSTABLE RATE MORTGAGE LOANS

#1 – A so-called “5/1 ARM loan” means that for the first five years of the loan yourpayments remain fixed, and will adjust to a different payment amount for the remaining 25 years.

#2 – The “3/1 ARM loan” means that the period of fixed payments last for three years, therefore the adjustment period is comprised of the remaining 27 years.

#3 – A “2/1 ARM loan” requires payments to be fixed for two years and then adjust for the remaining 28 years of the life of the loan.

YOUR FIRST PAYMENT ADJUSTMENT FOR YOUR ARM LOAN

It’s helps to know that the initial “start rate” that you’re provided for your loan doesn’t have much to do with rate increases and is only a beginning rate. Typically this rate might be a “teaser” type of low introductory rate that’s not tied or related to an index. However, the index does come into play when your newly adjusted payment arrives – because that new payment equals the index plus margin.
By the time the first adjustments comes, lots of loans allow a bigger increase than for adjustments that follow. That means that a portion of ARM loans could increase all the way up to the maximum cap rate. That’s a large jump, which might mean as much as an additional 5 to 6 percent.

AN EXAMPLE OF AN ARM LOAN ADJUSTMENT WHERE THE PAYMENTS INCREASE DRASTICALLY

Let’s pretend you’ve found the house of your dreams and you borrow $300,000 via an ARM loan in order to buy the residence. If your starting rate is a nice, low 4%, you might find it comfortable enough to make your $1,432 per month payments for principal and interest.

Even if your interest rate increased to 6.5%, your payment would go up – an increase to $1,896, in fact – but you might still be able to find room in your budget to happily pay the increase of $464 more per month to your lender.

However, if your interest rate jumped all the way up to 9% — a huge jump of 5% more than your starting rate of 4% — your new monthly payments would skyrocket to $2,413.If you didn’t plan for such a drastic increase of the additional $982 per month, the experience of having your mortgage payment jump by nearly one grand per month could definitely be a shock to your system and pocketbook.

When borrowers are faced with unexpected situations like this, they may initially seek out new solutions to earn extra income to cover the increased payments – and this is a viable option.

HERE ARE A FEW OTHER WAYS TO ADDRESS THE INCREASED ARM PAYMENT SITUATION:

Options To Try When Your ARM Loan Payment Skyrockets

REFINANCE TO A FIXED-RATE MORTGAGE

If you have enough equity and can afford higher payments than you may have initially enjoyed under the low starter rate ARM loan, refinancing to a fixed-rate mortgage might work for you. However, in the case where the values of homes fall and the appreciated value of your home declines, there might not be any equity in existence.

Also, be warned of prepayment penalties levied against paying off your ARM loan early. Some of them equal as much as six months worth of unearned interest.

Lastly, be aware that additional costs for refinancing and more percentage points added to the loan further reduce equity. That’s because the loan balance increases.

However, if the above factors aren’t a problem, switching from an ARM loan to a fixed-rate mortgage loan could give you the peace of mind you need in knowing that your payments will remain the same.

GET ADVICE FROM A REPUTABLE CREDIT COUNSELOR

Other options include making payments that are lower than usual while deferring unpaid interest, but this choice will also increase your loan balance.

You could choose to have your debt reorganized under the laws of bankruptcy in order to pay less on your other debts to help you make your higher mortgage payments.

Work with your lender to discover any ways you can agree on forbearance or postponement of the payment increases based upon your future ability to pay the higher payments.

TRY AND SELL YOUR HOUSE

If you have enough equity to pay the costs associated with the sale and commissions, which might run anywhere from 7% to 10% of the sale price of the home, you can put your house up for sale with a real estate agent.

If not, you could also try and perform a “sale by owner” sell to put your house on the market without representation, but this process also includes costs for marketing and real estate lawyer advice.

Find out about a deed-in-lieu-of-foreclosure agreement where you deed your property to the lender in order to avoid a bad mark on your credit report in exchange for getting no money for your property.

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As a last resort, there’s always foreclosure, which isn’t the best option you might be faced with, but it is one of the available options out there. Now that you know a variety of options at your disposal, it helps to research further and determine which one is best for your situation.

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Tag : arm loans , arm loan , 5/1 arm loan , 3/1 arm loan , 2/1 arm loan

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How to Handle the Shock of Sky-High Arm Loans
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