Homeowners across the country who secured home financing during the booming real estate market of the early 2000s may be opening some shocking mail soon. As mortgage companies recalculate monthly payments for their ARM home loans, some Americans are discovering that their income isnt keeping up with their rising debt.
According to the head of one non-profit credit counseling organization, approximately two-thirds of the calls placed to credit help hotlines in the past year were from homeowners with adjustable rate mortgages. Home buyers that anticipated large raises or a quick appreciation on a home purchase often face foreclosure when those windfalls fail to materialize.
Early Warning Signs from the Mortgage Markets
Some borrowers try to stave off disaster by refinancing delinquent ARM mortgages. However, that strategy can put homeowners at risk of foreclosure if they experience a job loss or a medical crisis. In the Midwest, for example, foreclosures following factory closings have been rampant in small manufacturing towns.
The monthly cost-of-funds index (CFI) for the 11th District (consisting of AZ, CA, and NV) has increased from 2.757 a year ago to 4.177 for September 2006. The increase can cause many loans' interest rates pinned to this index to go up accordingly and further put the pinch on homeowners.
Private analysts note that problems in the subprime mortgage market leave an echo effect in the broader home financing markets about a year or two later. One large lender recently alerted the Securities and Exchange Commission to a problem in its internal credit scoring system. The glitch caused many applicants to appear to have better credit and income than they actually did. This admission worries market watchers, who believe that the impending echo of foreclosures may impact more otherwise credit-worthy borrowers than originally expected.
What to Do If Your Mortgage Rate Increases
First, run some numbers. An online mortgage calculator can tell you whether a fixed rate mortgage or an ARM is the better option for you right now.
Next, if your mortgage lender sends you a foreclosure notice, start communicating. Ignoring foreclosure warnings is a common problem. In most cases, mortgage lenders have no real desire to go through with foreclosure, but they often have no other recourse when a customer doesnt respond to mail or phone calls.
What to Consider When Refinancing
Even though the interest rates on fixed rate mortgages hover at a four-year high, analysts note that locking in a lower interest rate today is still preferable to risking future interest rate increases. The promise of low monthly payments might have lured you to an adjustable rate mortgage in the first place, but after refinancing, you may still have to postpone vacations and major purchases to prevent foreclosure.
Avoid These Refinancing Pitfalls
According to most mortgage and foreclosure experts, the worst thing you can do when refinancing your mortgage is to act hastily. Unless you have been consistently and seriously delinquent with your payments, your home financing company will want to keep your business. Often, your current lender can offer you refinancing at a lower interest rate without an additional credit check.
Mortgage experts advise against opening any new credit card accounts, making big ticket purchases, or changing jobs until you complete your home financing deal. All of those life events could trigger changes in your credit score that could prevent you from getting a lower interest rate. With the right refinancing package, you can safe guard your home and your finances.
