Financial Future

Many homebuyers choose adjustable rate mortgages for the initial financing on their home purchase. Rising interest rates and other terms can be confusing to the borrower.

Adjustable rate mortgages (ARMs) are loans in which the rate varies. Adjustable rate mortgages loans will follow how interest rates rise and fall. There are many reasons why a consumer might choose an ARM, but they can be risky loans.
One reason a consumer might choose an adjustable rate mortgage is the rates are generally lower in the beginning than a fixed rate loan. If you expect to be in your property for a short time, say for 5 years, then an ARM with the first 5 years fixed can be a good choice.

There are three main types of ARM loans offered by lenders. They include:
A 5/1 ARM loan is where the payment is fixed for 5 years adjusting for the remaining 25 years.
When you get a 3/1 loans payments are fixed for three years and adjust for 27 years.
The 2/1 ARM is fixed for two years and adjustable for 28 years.

An adjustable rate mortgage works like this. It is usually fixed for a certain amount of time initially, anywhere from 1 month, 5 years or something in between. After this period the loan then becomes adjustable according to the published “index”, such as LIBOR Prime rate, Cost of Funds Index, or other index plus a margin, which is the lender profit. If the index rises, your rate rises. If it lowers, your rates should fall. There is a lifetime cap on the amount interest can increase over the life of the loan.
What happens when there is a sudden higher mortgage rate?
You have some options when it comes to dealing with higher rates.

The most common is to refinance to a mixed rate mortgage. If you have enough equity built up and can afford the higher payments this is a good option. Watch out for prepayment penalties in your current mortgage. Be sure to know what the costs of refinancing are and how they will affect your loan.

Another option is the talk to a reputable credit counselor. They may be able to help you lower your payments, deferring the unpaid interest. This will increase your loan balance though. On other debts try to work out a lower payment plan to offset the higher mortgage payment. Or persuade your lender to agree to forbearance or have them postpone the increase to a future time when you will be able to pay.

You can also sell your home. List it with a real estate agent if you have the equity to pay commissions and costs of the sale. Or sell it yourself. Deed your house to the lender in a deed-in-lieu-of-foreclosure agreement. You will receive no money for your equity and your credit will be adversely affected.

Of course foreclosure is an option, but it’s not desirable. The worst thing to do is to do nothing.
When choosing an adjustable rate mortgage, be aware that rates could increase over the life of your loan. Your payments can rise and you may need to make adjustments in your other debt. If you plan on living in the home for only a short time, an ARM might be the best option in financing your new home.

If you’ve ever seen a commercial for a debt consolidation service, you probably know that many of these services encourage you to consolidate all of your debt in one loan usually by taking out a home equity loan or refinancing your home to consolidate your debt.

Debt consolidation can work well if you’re having trouble with a lot of high interest debt and qualify for a home equity loan or refinance. In fact, many consumers find that by consolidating their debts, they can get a handle on a financial situation that seemed completely unmanageable.

But when you start thinking about debt consolidation, you should be aware of what works well in a refinance or home equity, and what doesn’t. In short, you don’t want to put debts into a consolidation plan that will cost you more to pay off than if you had paid them separately.

One example of something that should not be included in debt refinancing is a medical bill, say to a hospital or doctor, that carrie s no interest. If you consolidate this debt, you will end up paying interest that you would not pay if you paid the debt separately.

Low-interest and no-interest debts like medical bills and student loans are easy to identify as items to leave out of a debt consolidation.

It may be more difficult to identify which items with high interest rates should be left out of your consolidation.

Why, you may wonder, would you ever leave a high-interest item out of a debt consolidation? Isn’t that the point, to pay off high-interest items by consolidating them?

That is part of the idea, but the overall idea is to consolidate debts so that you pay less in the long run. If you have high interest debt that will be paid off in less than a year, it’s definitely worth the effort to calculate the difference in cost, overall, of paying the debt separately and including it in a debt consolidation plan.

Financial difficulties are stressful, and you naturally want to get out from under as much of your existing debt as possible, especially the debt with high interest that seems to be eating you alive.

That is a good strategy, and a fixed-rate home refinance is a very good way to accomplish that goal of getting your debt under control. It’s important, though, to make sure that you are consolidating the right debts, and not making more difficulties for yourself by consolidating low-interest debts, or even no-interest debts, into a debt consolidation plan.

Knowing what kinds of debt to include in your debt consolidation can make paying off your debts easier because you’re not paying more on certain debts, in the long run, than you should. This makes your long-term debt payoff easier. And because you’re consolidating the debts with higher interest, you will be able to make your other debt payments more easily by rolling the high-maintenance debts into one loan with one payment.

The savings to you over time, when you consolidate the right debts the right way, will be enormous. The immediate peace of mind you gain may be even greater.

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