The Pros And Cons Of Adjustable Rate Mortgage Mortgage Calculator Hopes The American Dream Mortgage Refinancing Below 500 Fico
An adjustable rate mortgage, commonly referred to as an ARM, is a mortgage where the interest rate on the mortgage changes periodically, on a schedule, according to an index. The most common indexes used to determine the interest rates are:
One-year constant maturity treasury securities (CMT)
Cost of Funds Index (COFI)
London Interbank Offered Rate (LIBOR)
A lending institution’s own costs of funds.
The mortgage payment that you pay will thusly change, either up or down, to ensure a steady margin for the lending institution.
For many people who are looking at mortgages, the adjustable rate mortgage can seem like a great idea, however there are many pros and cons to an adjustable rate mortgage – items that need to be weighed over the short and long term to decide whether an adjustable rate mortgage is right for you or not.
The Pros of an Adjustable Rate Mortgage
The initial interest rate on an adjustable rate mortgage looks great on paper. Most often, the adjustable rate mortgage inserts rate is much lower than a fixed rate mortgage, which also means that the payment is lower. As a borrower, this lower interest rate can also mean that they can qualify for a higher loan amount if the lender is willing to base their ability to pay on the initial monthly payment amount. It’s important to do some research on the interest rates and see where they are sitting at in comparison to the six months to a year prior.
An adjustable rate mortgage is a good idea for people who only plan on staying in a house for a few years – from three to five years. Taking advantage of the lower interest rate that accompanies an adjustable rate mortgage is a good idea in this case. It means that you will ‘pay less’ for the home that you will be living in over the period of the three to five years, and gain more in equity in your home.
The Cons of an Adjustable Rate Mortgage
The biggest issue with an adjustable rate mortgage is that the interest rate will rise and thusly, so will your monthly mortgage payments. You have to decide whether the gamble is worth it or not. If you are looking at getting a raise in the next year from your job, then you may be able to handle an increase in your mortgage payments.
Some of the adjustable rate mortgages that are offered by lending institutions have a prepayment penalty, which you incur if you pay the mortgage off early. By having this prepayment penalty, you could be opening yourself up to a lot of strife – having a prepayment penalty on your mortgage contract is never a good idea because you simply just do not know what the future will bring.
You must also consider the payment cap. A payment cap sounds great – your mortgage payment can not go above “x” amount of dollars, however, that doesn’t mean that the interest charge is capped. If the interest rate raises high enough that you go over your payment cap, the lender adds the interest to your mortgage debt, which then finds you in the position of paying interest on the interest. This can translate to you paying much more for your home than you did when you bought it – this is called negative amortization. Many lenders have a cap on negative amortization that you can have, and if you reach that point, your payment cap goes out the window and your mortgage’s monthly payments are adjusted to begin repaying the negative amortization debt.
Factors that can go either way
There are a few factors of adjustable rate mortgages that can fall on either side of the pro/con debate. Due to the fact that there are many different types of adjustable rate mortgages available from different lenders, it’s important that you research the adjustable rate mortgage and find out whether it is right for you. Some of the ‘ambiguous’ factors that you have to consider can make or break the decision to go with an adjustable rate mortgage.
One of the first things you need to consider is the lifetime interest rate cap on the mortgage. This is the maximum amount that the interest rate can raise through the period of the mortgage. There are also the periodic adjustment caps that limit the amount that your mortgage interest rate can raise from one adjustment period to the next. The law states that adjustable rate mortgages have some type of lifetime cap.
Most lenders use one of the index rates to base their interest rates on. The index rates change and fluctuate with the movement of the economy. To determine the interest rate that you will be charged, the lender adds a margin (profit percentage) to the index rate. The margin that the lender will add is also important – it determines your future interest rates with an adjustable rate mortgage. The margin is different from lender to lender, so it’s important to find out what the margin is.
A family and a home of my own. These are the dreams of millions of little girls. The harsh reality of adulthood can push those dreams done. Many times it’s just because there seems no way. A mortgage calculator can crunch the numbers fast and show what it really takes to into a home. Savings, time and planning can make it happen.
A mortgage calculator is simple to use. You just fill in the right bits of information, and then ask it to calculate the end result. You already have the information, such as the selling price of that house you’ve fallen in love with, and the interest rates that a variety of mortgage lenders are offering. Then you input different variables into the mortgage calculator to see what kinds of payments you would need to come up with each month.
Use different mortgage calculators to find out whether a fixed rate, or adjustable rate mortgage would be better in your financial situation. Use a comparative mortgage calculator to see a clearer picture of what each would mean in the terms of real money each month. Perhaps you need steadier control over your expenditures now. A fixed rate mortgage would be best to start with the expectation of switching to an adjustable mortgage when your finances are more settled.
Take a look at the length of time you want to be paying your mortgage. Have the mortgage calculator give you the monthly payments for a variety of different options. It’s possible that a slight increase in monthly payment could substantially reduce the amount of time you’re paying for your home. This is as ideal use for a mortgage calculator as you consider options.
In conjunction with a mortgage calculator, use a home budget calculator to work out the kind of budget you realistically have to work with. Although it might seem that you can afford this home of your dreams, the reality might be very different. It sounds okay to think that you’ll go without a vacation this year. Or you could make gifts for Christmas and switch to cheaper brands of groceries in order to be able to live in this house.
But this isn’t just for one year; this is going to quite a long term commitment. You must seriously think about emergency situations. What would happen to your home if you suddenly became ill and couldn’t work, for example? Do the figures you’re using with the mortgage calculator allow for homeowner’s insurance? What about property taxes?
While you are using the home budget calculator, input a few figures that would be an rough estimate of monthly utilities for the new home. If it is substantially larger than the one you live in now, you might expect your monthly payments higher than your current ones. By using this total together with the mortgage calculator total, you can get a fairly accurate picture of what your monthly expenses would be on the new home – and whether or not you are able to afford it without putting it at risk if your finances suddenly decrease!
If you have been turned down for a mortgage refinance, especially a cash out or debt consolidation refinance, because your lender says your credit score is under 500, there are a variety of new options and strategies available which can help you get the cash you need now to pay off your credit card debts, collection accounts, and other derogatory or poor credit accounts and improve your FICO credit score to the point where you can qualify for a low interest, fixed rate loan.
First, you may be wondering why the number 500 is such a big deal. A FICO credit score is a number from 300 to 850 which is meant to represent your reliability as a borrower, and takes into account how much credit has been extended to you, how much money you owe and whether or not you pay it on time. Banks like to tell us that 99% of people in the US have credit scores of 500 or higher, and use this as an excuse not to even bother lending to people with credit scores under the magic 500 FICO score. As far as they’re concerned, since only 1% of the population has a FICO below 500, they simply don’t have the time to design programs to help these people buy or refinance homes.
We’ve worked with dozens of people who have come to us with FICO scores below 500 over the years, and every one of them says the same thing. “I just need help right now, and everyone I talk to keeps saying NO”. This is because until very recently, it was extremely difficult to get a loan if your credit score was 499 or less, and even today, only a few mortgage lenders, whether they’re banks or brokers, have the time or attention required to focus on the needs of what they think are a few unfortunate people. So until very recently, if your credit score was under 500, the only chance you had at refinancing or obtaining a home loan was if you went to a “hard money” lender.
If you’ve ever come across these individuals, you might not have been able to tell the difference between hard money or private mortgage lenders and a loan shark, and while that comparison is not entirely fair, it is to a certain extent accurate. Hard money lenders are small investors who lend only against the “hard” equity in your home, generally not more than 60% or 70% of the property value, the loans are generally short term, very high interest rate (12% to 15% or more), command huge upfront fees and closing costs, often up to 10% of the loan amount, and rarely if ever do they report your timely payments to your credit bureaus, making it harder to improve your credit. Why would anyone borrow money from a lender like this? In the past and even today, banks and other mortgage lenders have said no to sub 500 credit score mortgages or home loan refinances, and sometimes you just need the money that badly.
Many people have touted the benefits of credit repair services to prospective borrowers with scores under 500. The proposal often reads like this, first, give them a thousand dollars out of your pocket to fix your credit, which they will accomplish in six months, and then once your scores are over 500, they get a loan done for you. Of course never mind that $1,000 is a lot of money for most people with 700 credit scores, and very often a heck of a lot for an individual seeking a mortgage / refinance to consolidate debts. Add to that the fact that conventional credit repair takes too long for most people to wait without the extra cash to pay off bills that you get with a refinance, and you can see that credit repair by itself is not a very efficient proposition if what you really need is a refinance loan today. That’s not to say credit repair doesn’t work, it’s just that it doesn’t work very well for most people who are under 500 FICO seeking a debt consolidation, refinance or home purchase loan.
Over the years we’ve taken a harder look at the numbers, and it turns out that the banks and credit reporting agencies may have drastically underestimated the number of people in this country whose credit ratings are actually under 500 FICO. There are literally millions of people nationwide who fit into this category, and we have spoken with our share. What do we know? That most people with credit scores below 500 are hardworking, honest people whose credit is suffering from the realities of living and working in America today. As tight as our budgets are stretched in this country today, it only takes a very short term disability or unemployment to severely damage our credit scores. And some of us might have gotten in a little over our heads when we were younger, but in the years since we’ve been trying to get back on the road to good credit, and we’re sick of getting charged sky high interest rates every time we get a new credit card, apply for a car loan, or get denied for a bank loan and wind up calling on the aforementioned hard money / private mortgage lenders. We knew the banks had missed something. Our friends below 500 were not only more numerous than they had previously estimated, they were also more than some credit score, they were good people.
So we developed a strategy which we are sharing in the hopes that other borrowers under 500 can reap some of the benefits that our own clients have. We’ve helped borrowers with no money in the bank, $50,000 of bad debt, and sky high monthly payments driving them into the poor house get out of debt, get some money in their pockets and eventually achieve major financial improvement in a very short amount of time.
And how does it work? First, there are a few major, institutional lenders which have programs that allow us to arrange and refinance real mortgage loans at competitive interest rates for borrowers with credit scores under 500. These are real, federally and state regulated lenders, not private investor groups who will take your last dollar and send you on your way. Ask your mortgage broker about these programs, and if he doesn’t know what you’re talking about, get a new broker.
The typical strategy is a credit improvement strategy, where the goal is to take enough cash out of your home to pay off as many of your past due, high interest, or high payment debts as possible. We recommend taking a little extra cash from closing if possible, or to use some of the savings from your lower overall payments so that you can enter stage two of the strategy, which is third party credit repair. A good quality credit repair agency should cost less than 300 dollars overall and can clean up your credit and remove a lot of delinquencies and other items which are negatively impacting your credit. Combined with all the truly harmful items which you’ve paid off with your debt consolidation refinance, you should be able to improve your credit score by 50, 100 points or even more. I have seen a client go from a 485 FICO and $65K in combined credit card and auto loan debt and a total monthly payment of over $2800 to a 610 credit score and a payment of $1900 per month in less than 4 months. How did that payment get so low? Once their credit score went over 600, we were able to qualify them for a new mortgage at a low interest rate, because now our friends had “good credit”, and paid off the few remaining debts which they had by consolidating through refinance. Before the process, their average interest rate across all debts including home, cards and cars was nearly 22%, and afterwards, the average rate was under 9%.
We hope you find this information useful in reshaping your own financial future, and hope that you tune in for the next in this series of articles..
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