Mortgage Loans: Broken ARM? Let's get it Fixed
With a wave of foreclosures and delinquencies sweeping across the nation, recent home owners are increasingly taken a second look at converting adjustable rate mortgage (ARM) loans in to a fixed rate mortgage. The simple reason is that an ARM is a fair weather friend. As soon as the national average increases, ARM interest rates go up.
The reason so many people are unable to meet ARM payments is because these mortgages offer very attractive starting rates, which are valid for periods of between 3 to 6 months. After that, a higher rate which includes a premium of around 3-5% on top of the national average kicks in. What mortgage lenders used to do was convince home buyers to go for an ARM, taking advantage of the low starting rates, and then refinance to another loan before the real rate gets triggered.
What happened recently was that when the subprime mortgage crisis pulled the rug from under the housing market in late 2007, the refinancing option was no longer available due to dropping equity values and more stringent credit requirements, and a large number of home owners are now stuck with ARM payments which they are unable to meet. If you fall in to this category, and you are looking to keep your house while making mortgage payments without additional borrowing, please consider the following options which lenders have to prevent foreclosure.
A lender can convert an ARM facing foreclosure in to a fixed rate loan with a long enough period to reduce monthly payments to a level which is acceptable, or possible, for the home owner. The lender also has the option of extending the introductory ARM offer rate for a longer period, as much as two years in some cases, while the client stabilizes his financial situation, or waits for home equity values to rise. In the case of delinquent borrowers, lenders can add the sum total of missed payments in to the loan amount, increase the loan period, thus reducing the monthly payments while bringing the borrower out of delinquency. And in case of a severely strained relation between borrower and lender, you could, provided the lender agrees, hand over the house and walk away from it, any additional debt or pending payments after calculating the value of the house being forgiven.
Please note that all these possibilities are sometimes explicitly mentioned, and forbidden, in your mortgage agreement, which makes it important for you to go through the entire document. If there is no mention of aforementioned solutions, you have the option of discussing one or more of these methods with your lender, and work out a way to prevent, or at least postpone an impending foreclosure. From a long term point of view, it is best to make a prepayment of an unsustainable ARM, and convert it in to a fixed rate mortgage.