I have a fixed rate mortgage and after 3 years it becomes variable?

Question

I've seen a tv show about a neighborhood that had financing with a fixed rate and then it changes to variable and they can't afford their house payment. Almost everyone in the neighborhood had their house taken away. We plan on refinancing when our 3 years is up (2 years left). Was there any reason why those people didn't refinance??? If there is I want to know what went wrong so we don't make the same mistakes.

Answer 1

If your 'fixed rate' mortgage becomes variable after 3 years, you don't have a fixed rate mortgage, you likely have what is known as a 3/1 ARM or a hybrid ARM.

Planning on refinancing, without having a backup plan, can result in the loss of your house. You should understand what your payment could increase to, and be prepared to pay that payment if you cannot refinance, or be prepared to sell the house before the payment increases.

There are many reasons that they may not have been able to refinance, including some that you can do nothing about:
- Interest rates may have increased, resulting in higher payments than they qualified for
- They may have had a loss in income (lay-off, cutback in hours, etc.) since they purchased the house
- They may have purchased the home using income from two spouses and since divorced, and the spouse left with the house may not have qualified on their own for financing
- Their credit scores may have gotten worse (or been bad and stayed bad)
- Values in their area may have decreased, so they were not able to borrow as much money as they owed
- They may have had what are known as 'option' ARMs where they have the option of 4 different payments, and chosen to pay the minimum payment, which doesn't pay the mortgage company even as much as is owed in interest each month. If this occurs, the principal balance goes up each time, not down. By doing this every month, they end up owing more than the house is worth and cannot refinance for as much as is owed on the loan.

Answer 2

If it becomes variable in three years, it's not a fixed rate mortgate - it's an adjustable rate mortgage with three years guaranteed.

The reason sometimes people don't refinance to a fixed rate mortgage is that they can't qualify, either because their credit is not good enough, or because their income can't support the payments.

Good luck.

Answer 3

could be their credit rating, or possibly they owed more on the house than it was appraised at, a danger with 100% financing.