adjustable rate mortgage

Why You Should Call Your Mortgage Lender Every Year

Dan Rafter — Mon, 30 Apr 2018 08:30:17 +0000

Most of us don't think too much about our mortgage lender once we've moved into our new home. We might complain about how much interest we're paying on our mortgage each month, but that's about as deep as it gets. This attitude, though, could be costing you money.

Your mortgage payment probably ranks as your biggest monthly expense. So why wouldn't you reach out to your lender, at least occasionally, to see if you can somehow reduce it?

It makes sense to contact your mortgage lender at least once a year to ask about lowering your interest rate, adjusting the term of your loan, or maybe even refinancing into a different loan type. Doing so could save you a significant amount of money each year.

Here are five questions you should call and ask your mortgage lender each year.

1. Is there a way to lower your monthly payment?

Mortgage interest rates have been rising since the middle of 2017. But this doesn't mean that the rate you have with your mortgage loan now is as low as it can ever be.

If you applied for your mortgage five or more years ago, was it at a time when you were saddled with thousands of dollars of credit card debt? Did you have late or missed payments on your credit reports? If your financial situation has improved since then, you might now qualify for a lower interest rate. And that lower rate will save you money on your monthly payment.

Consider this math: Say you are paying off a $200,000 30-year, fixed-rate mortgage with an interest rate of 5.25 percent. Your monthly payment, not including taxes and homeowners' insurance, will be about $1,104. If you now owe $180,000 on that same loan, moving to an interest rate of 4.25 percent would knock your monthly payment — again, not including taxes and insurance — down to about $885 a month. That's a savings of about $219 a month.

To get to that savings, you will have to refinance, replacing your existing loan with a new one with a lower interest rate. That will cost you some money upfront — often as much as $3,000 or more. But it's worth it to call your mortgage lender. First, ask if you might now qualify for a lower interest rate. Then ask yourself if the monthly savings from the new rate will be high enough to justify the cost of paying for a refinance. (See also: How Long Does it Take Break Even With a Home ReFi?)

2. Can you refinance to a shorter loan?

Refinancing isn't just a way to lower your monthly mortgage payment. You can also reduce the amount of interest you will pay over the life of your loan.

It's no secret that a good chunk of your monthly mortgage payment goes toward interest. If you are paying off a $200,000 30-year, fixed-rate mortgage with an interest rate of 4.25 percent, you'll pay more than $154,000 in interest if you take the full three decades to pay off that loan.

But if you refinance to a shorter-term loan, you can dramatically reduce the interest you pay over the life of your loan. Say you owe $185,000 on that same loan. If you refinance to a 15-year, fixed-rate loan with an interest rate of 3.8 percent, you'll now pay just more than $57,000 if you take the full 15 years to pay off the loan. Just be aware that because your loan term is shorter, your monthly payment will be higher.

Again, it's worth a call to your lender to determine how much you could save in interest by refinancing to a shorter-term loan. If your budget can handle the higher monthly payment, this move can save you plenty of money in the long run. (See also: Is a 15-Year Mortgage a Good Idea?)

3. Can you pay more toward the principal?

Refinancing does come with financial rewards. But it's also costly and time-consuming. If you can't drop your interest rate by enough, you won't reap enough monthly savings anyway.

But there is a way to reduce the amount of interest you'll pay over the life of your loan and shorten the number of years it will take you to pay it off: You can pay a bit extra with each mortgage payment.

Say you have 25 years remaining on a 30-year, fixed-rate mortgage loan of $200,000 with an interest rate of 4.5 percent. If you pay an extra $100 toward your loan's principal balance each month, you can reduce the time it takes you to pay off that loan by three years and nine months. You can also save nearly $21,000 in interest payments over the life of the mortgage.

If your budget can handle the extra $100 a month, this could be a smart financial move. Ask your lender how paying a bit extra each month can shorten the term of your loan and lower the amount of interest you pay. You might be surprised at the difference these small payments can make. (See also: Should You Pay Your Mortgage Off Early?)

4. Is it time to move to a steadier mortgage type?

You might be paying off an adjustable-rate mortgage. As the name suggests, the interest rate with such mortgages doesn't remain fixed, but instead adjusts according to whatever economic index your loan is tied to on a regular schedule.

Most adjustable-rate mortgages, better known as ARMs, start with a fixed period of five to seven years during which your rate won't change. After that fixed period ends, your rate will adjust on a regular schedule, usually once every year or once every two or five years, depending on the type of ARM you are paying off.

The attraction of ARMs is that you often start with an interest rate that is lower than what you'd get with a more traditional fixed-rate mortgage. The risk is that when that rate adjusts, it could rise far higher, bumping your monthly mortgage payments up with it.

A way to avoid the adjustment is to refinance to a fixed-rate mortgage with a rate that stays in place throughout the life of your new loan. If you are nearing the end of your ARM's fixed period, give your lender a call. You might qualify for a refinance to a fixed-rate loan that comes with an interest rate that while higher than your current rate, will be lower than the new rate you'd soon face with your current ARM. (See also: Fixed or Adjustable? Choosing the Right Mortgage Loan)

5. Can you make your monthly loan payments less of a burden?

Are you struggling to make your monthly mortgage payments on time? Are you worried that you won't be able to make your payment next month? Then it's definitely time to call your lender.

Your lender, for instance, might be willing to reduce your interest rate temporarily or lengthen the term of your loan so that your monthly payment is lower. Be prepared to prove to your lender that you can no longer afford your monthly mortgage payments. If you've lost your job, show the paperwork proving it. If you've taken a pay cut, send your new paystubs.

There's no guarantee that your lender will help you. But you'll never know if you don't call. And ignoring the problem won't help. (See also: 8 Signs You're Paying Too Much for Your Mortgage)

Like this article? Pin it!

This article is from Dan Rafter of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

The 7-Year Mortgage: Take It or Leave It?

Julie Rains — Thu, 04 Aug 2011 10:24:15 +0000

My credit union has been promoting a seven-year mortgage. This type of loan could be perfect for someone who needs to pay off a mortgage quickly, or so I thought. But then I found out that there are many types of seven-year mortgages. Oddly, many have 30-year terms, and at least one type could easily put homeownership at risk.

You’ll have to read the fine print of your mortgage contract to scrutinize its terms, but most fall into the following categories.

1. The 7-Year, Fully Amortizing Loan (Paid Off in 7 Years!)

This type of loan is just what I imagined it to be. The schedule of payments is compressed so that the loan balance is paid within seven years. My credit union offers this home loan as a first mortgage only.

It seems perfect for the borrower who wants to 1) get a low rate and 2) match the loan payoff with the timing of a major lifestyle change, such as the start of a new business or retirement. (See also: What's faster for mortgage payoff: $100/month extra or 1 payment/year extra?)

2. Interest-Only for 7 Years, Then Fully Amortizing Loan (Paid Off in 30 Years)

The payments are relatively low for starters, as you will pay only interest during the first seven years. But your loan balance remains the same during this time, even if you make all the payments according to schedule.

After seven years, your payment will be adjusted to amortize the loan over the remaining term (typically 23 years). If you signed up for an adjustable rate mortgage (ARM), then your interest rate will reset also. The result could be a hefty monthly increase.

This type of loan could be the most expensive in terms of interest paid.

3. 7/2 — Fixed Rate for 7 Years, Adjustable Rates for Subsequent Years (23-30)

This ARM starts with a fixed rate with a stable monthly payment for seven years. After the initial term, the interest rate resets at regular intervals (every two years) and the monthly payment is recalculated.

4. 7/23 — Balloon/Reset Mortgage

The balloon/reset mortgage is the kind that could be dangerous.

The first seven years are uneventful, as the interest rate is fixed and monthly payments stay the same.

But at the end of seven years, the entire balance is due unless certain provisions are met. According to Freddie Mac, these requirements usually include:

You're still the owner and occupant of the home.

You've paid your mortgage on time for at least a year prior to the balloon note maturity date.

You have no other liens against the property.

You've satisfied any other conditions of the reset.

If you qualify for the reset, then a new monthly payment is calculated and the loan balance is amortized over the remaining term. (A borrower could also refinance the loan but this scenario is not represented in the downloadable amortization schedule).

If you don't qualify for the reset (and are unable to refinance the mortgage), then you will need to pay the outstanding balance (that is, make a balloon payment) at the end of seven years. Failure to make this payment can trigger foreclosure, so be careful with this type of mortgage.

Downloadable Spreadsheet

I built a spreadsheet to illustrate how these mortgages work. You can see how payments are calculated and how borrowed amounts and outstanding loan balances are amortized over the term of the loan. The total interest paid is calculated for each loan type so that you can see the impact of various loan structures on total cost.

To customize the spreadsheet, download the file, then enter your loan balance, starting interest rate and interest rate caps (these cells are in orange). Note that I have established rate caps and time frames that seem reasonable; you may need to refine the spreadsheet for your own mortgage.

Have you considered a seven-year mortgage loan? What made you decide to take it or leave it?

This article is from Julie Rains of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

How to Afford Payments on Your Adjustable Rate Mortgage

Silicon Valley Blogger — Wed, 19 May 2010 12:00:10 +0000

So you’ve managed to keep your house, your job, and even your credit report clean during the economic meltdown. But, the storm’s not over just yet. The second wave of foreclosures and economic instability is gearing up to wreak havoc. And what’s worse, you’ve just realized that you are in the middle. Your adjustable rate mortgage is getting ready to adjust and you might not be able to afford the payment.

So what can you do?

There are several things you can do that can help you survive your adjustable rate mortgage. You can achieve this without having to resort to a second or third job or without having to start a home business, although if it's practical, earning extra income sure can go a long way as well. The options available to you will depend on your current situation, but in most cases you can avoid foreclosure and ultimately get a mortgage with better terms.

Step One: Batten down the hatches and save money!

1. Evaluate new car payments vs old car maintenance costs.

I often wonder why people choose to get new cars as often as they do. If you already own a gas guzzling SUV, it may still be a better move to keep it under certain circumstances: while driving such a car may not seem like the politically correct thing to do right now, paying a little more at the pump at each fill up is still way less than a new car payment. Of course, you may have to weather a few condescending looks from those smart car drivers, but at least you know that you won’t have to call a taxi the next time the ball team needs a ride to the field. Here's more on how to cut car ownership costs.

2. Cut down on credit card use.

This one is a no-brainer. Stop using credit cards unless you can pay them off completely every month. But for many, the temptation to let one's balance roll over into next month is simply too great. You need to keep a credit card around for emergency purposes, but it should take an act of Congress to get to it.

3. Pay your bills on time and stay out of the red.

Do you have any idea how much money you pay out in late fees? Probably not. I know I didn’t until I started adding them up on my bank statement. On average, we pay $350 or more in combined late fees, bank fees and other “stupid tax” that could instead be chucked away into a high interest savings account. So create a workable budget and stick to it.

Step Two: Get better terms on your loans and mortgage.

1. Consolidate your debts.

People often forget that they may have some leeway with the loans they carry. If you've got good credit and have been managing your debt load well, you can possibly negotiate better terms for your existing loans. Using balance transfer credit cards to get lower card interest rates has worked for me. You can also also consider joining a peer to peer lending network to secure better interest rates. You may also want to explore the possibility of debt consolidation as an option.

2. Refinance.

Now it's time to take a look at your adjustable rate mortgage. The best case scenario is to refinance it into a fixed rate mortgage as soon as possible. With an FRM, you'll know what your payment is going to be each month and if you choose to leave any equity you’ve built up in your home, you might actually be able to reduce your payback period from 30 years to 15 or less, saving you a ton in interest. Depending on the amount of equity you have in your house, you may also be able to draw out some cash to place into a savings account or pay off more expensive debt as well (e.g. credit cards and auto loans), although this is something you'd want to weigh carefully. The drawbacks are that not everyone will qualify for refinancing. If you’ve had some hits on your credit, if your house value has significantly decreased or if you lack sufficient funds to cover a down payment and closing costs, then odds are that you won’t qualify.

3. Modify your existing loan.

While not quite as desirable as refinancing your loan, you may qualify for a loan modification. In a loan modification scenario, your lender will adjust the terms of your mortgage — usually by reducing fees and interest — so that the payment remains affordable for you. In exchange for this consideration, the lender will receive a cash incentive from the government and avoid a costly foreclosure. The drawbacks for this process are that not everyone will qualify for a loan modification. In most cases, the borrower has to already be severely delinquent and the reduced interest/fees/principal may be due as a balloon payment at the end of the mortgage.

4. Sell your home.

As a last resort, you may have to consider unloading your house. This is probably the least desirable outcome, but selling your home is much better for your financial standing and credit, than going through a foreclosure. This way, you keep your credit intact and will increase your chances of being able to obtain financing in the future. In certain situations, it may be advisable to sell the house for what you owe (if the balance of your mortgage is less than the value of the home) in order to sell it quickly. The drawback is that this process won’t help if you owe more than your home is worth.

If you find that you are at the verge of getting into financial trouble with your mortgage or you're already in a tight situation and don’t know what to do, call your lender. Do it now because every minute you wait may mean fewer options you have for getting back on course. You may be surprised that there are still many lenders who are willing to work with you and help you get on a path that will keep you in your home and out of foreclosure.

Like this article? Pin it!

This article is from Silicon Valley Blogger of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: