For loan advice. Is fix or adjust. rate better for me?

Question

My loan penalty will be over in Feb.2008, from fix at 10% for $5292 a month, after that it will be adjustiable rate. I can't refinance for lower rate because of self employed and low credit score. wonder if adjust. will be ok for me? how does adjust. work? We are in Contra Costa, california.

Answer 1

Adjustable rates are fine when interest rates are low like they are not. In fact borrowing money is a gift because with 10 percent or higher inflation the interest doesn't even cover inflation.

However, this will not last. Lenders are going to start demanding rates to cover inflation plus 5 to ten percent. So when interest rates for short term loans goes to 21 percent like they did in the eighties, you are going to like your fixed rate.

Answer 2

Usually an ARM uses the following adjustment scale (please note "usually" - take a look at your specific mortgage note for the most accurate info):

They use a 3/1/6 percent adjustment. That means your initial adjustment could (or in this market, will) be 3%. After that, it adjusts 1% every year, with a 6% lifetime adjustment cap. So if you were at 7% for the initial "fixed" period of two years, year three could be 10%, year four could be 11%, five could be 12%, and year six would lock your rate at 13% for the remainder of your loan.

Again, I want to be very clear here: that's standard, but your loan may be different.

You still have options. Even as a self-employed borrower you may be able to use 12 or 24 months of bank statements to prove income and qualify for a "full doc" rate. There are still some great programs in the market, and in your case a good, trustworthy broker may be your best bet. Most true banks are reall tightening down mortgage options for SE people. You need a broker to get your whole story (including history and future goals) and help you make the best educated decision. I've had to tell some of my own SE clients that even though their mortgage starts adjusting soon, it might not be the best time to refi. My duty to them is to get the best current info I can and help construct a long-term plan that benefits their situation and goals.

If you don't have a relationship with a broker right now (or a relationship you feel comfortable with, I should say) meet with a few. Just remember that YOU are interviewing THEM and if you don't feel good about the information you are getting, there are plenty of brokers around who are willing to really help you out.

Good luck!

Answer 3

As I understand, your pre-payment penalty is ending in Feb. at the same time you mortgage turns into the adjustable. You are going to refinance, but are wondering if to go with another ARM (adjustable rate mortage) or try to get a fixed. You don't have the best credit.

I would suggest that you get an adjustable rate mortgage, but not for the 2 or 3 years that normally offered but try to get the ARM at around 5 to 7 years, this way your credit has a chance to get repaired so not to have to go through this again.

OR

depending on how much the home has increased in value you may be able to get a fixed, because if the appraised value is high enough and the LTV (loan to value) percentage is low enough you could very well get a good enough rate to justifiy getting a fixed mortgage.

If you go for the fixed you also can pay some extra money, usually a percentage point of the loan amount to reduce the rate of the mortgage as well. So look into all your options and make a choice based on what you think is best for you.

Good luck

Answer 4

An adjustable interest rate is one that flows with the market. That means the bank can make your interest rate whatever the going rate is. This month it could be 5%, two months from now it could go up to 25 %, or go done to 3%. An adjustable rate is not a very good one to get. This is the same all over the country, so being in Cali will not change the way adjustable rates work. Try your darndest to get a fixed rate, even if it is a little on the high side.

Answer 5

Check your loan documents. The terms of your adjustable rate loan will be explained in them. Most ARM's have annual and lifetime rate caps. This means that the rate can increase no more than the annual cap rate per year and can only increase to the maximum cap rate over the life of the loan.

An ARM consists of 2 components, a margin and an index. The Margin is a constant. The index adjusts monthly. There are a number of different indicies. On your conversion from fixed to ARM your lender will add the margin to the current index and then round to the nearest 1/8th. Then they will apply the annual cap to ensure you don't exceed the annual allowable percetage.

Call your loan officer (who helped you get into this pickle in the first place) and have him/her compute what the rate would be if you adjusted today. Tha'll give you some kind of idea. If you can't find them or if they can't help you, pull out your loan documents and email me. I'll try to figure it out for you.

I'm so sorry you ended up in this situation.

Answer 6

Stacey,

I would be more than happy to help you answer this question. I am a mortgage planner with over 10 years experience helping my clients select the correct program. I believe each client has short and long term financial plans that must be incorporated with your mortgage. Many clients do not understand that your house is an investment and as such financing should be taken seriously into account by a trained professional. A loan officer will just shop around and get you a rate but a mortgage planner will listen to your goals and incorporate them into suggesting the best possible solution. I compare it to buying a Geo Metro vs Mercedes Benz. In the sake of your home and families future who would you like to give you advice?

If you have any questions let me know

Answer 7

Sorry with the market as it is if you took 100% financing your house is most likely worth less than what you owe on it, and will be stuck with the ARM that is going to be rising. CA being one of the hardest hit states, I would say hold on and hope you have the income to support a big increase in your mortgage. Not what you want to hear, but is the truth. Add a poor credit score, and basically financing has disappeared without at least 20% equity, and even then will be at a high rate.

Answer 8

If you plan to pay back the money , you can ask for a loan at Prosper. More information at http://www.acreditlibrary.com/prosper.html . You can also try your luck at online charities, people may send donations. More information at http://www.laodn.org/

Answer 9

FIXED FIXED FIXED FIXED FIXED RATE ONLY!!!!

people are losing their shirts to adjustable rates.

Answer 10

go to www.suprememortgage.com
they have a lot of programs that will probably work for you. Bill in Austin