You need to make sure you understand the types of mortgages you have and the various types of notes that are available. The thought of losing your home can be cause for a good deal of anxiety.
If you are struggling with your bills or you or someone in your family has been added to the ranks of the unemployed, then you are entitled to feel a bit concerned. However, do not let these kinds of thoughts override common sense and practicality.
Understanding the types of mortgages available before you sign on the dotted line can help you avoid costly mistakes.
What Is A Fixed Rate Mortgage
A fixed rate mortgage, for example, is a note where the interest rate or APR is a fixed rate; therefore, your payment always remains the same. The only change in the loan would be due to any alterations in the amounts your pay for insurance or taxes that are escrowed upon receipt of the loan.
What Is An Adjustable Rate Mortgage
Another type of loan is an Adjustable Rate Mortgage (ARM). These kinds of mortgages permit you to pay a fixed rate of interest for several years until which time the rate becomes adjustable. Therefore, the payment you must make is contingent on the rate of interest.
There are a number of different types of ARMs which many consider hybrid ARMs that are an offshoot of the traditional Adjustable Rate Mortgage. A 3/1 and 5/1 hybrid ARMs allow you to enjoy a fixed rate for three years or five years respectively, and then the bank adjusts the rate each succeeding year.
A 2/28 hybrid ARMs designate a fixed rate for the first two years of the loan and an adjustable rate for the next 28 years. If you have a 3/27 hybrid ARM, then the lender will fix your loan’s rate for three years, and they will adjust the loan each year thereafter for 27 years.
Usually refinancing a loan will be of little benefit to you unless you plan to stay in your home for quite a while. If you currently have an ARM and you want to refinance to a fixed-rate loan, an ARM can be subject to prepayment penalties.
Therefore, if you are trying to refinance and you haven’t lived in your home for a long time, the bank may require you to pay a couple thousand dollars just to refinance your note. Make sure then that any assessed penalties are worth the expense for reducing your payments overall.
What To Do If You’re Struggling
If you are struggling to meet your mortgage payment, contact the lender ASAP. Your financing options consistently keep narrowing the longer you wait. In lieu of refinancing, you may be able to make modifications to your loan and negotiate some type of financing arrangement with your lender. Modifications that can be of benefit include:
- Lengthening the term of the loan
- Adding payments that you have missed to the total
- Reducing the interest on the loan
You can also modify loan terms with a cancellation of a portion of the debt owed. Under the guidelines of the 2007 Mortgage Forgiveness Debt Relief Act, you should subtract the modification or debt that the bank forgives from your income when calculating your Federal income taxes. However, you still need to list it on your return.
If your monthly payments have increased significantly on your adjustable rate mortgage or you have received a significant cut in pay, then the bank may modify your loan terms and provide the necessary financial relief.
The key is understanding the type of mortgage you are getting into. While Adjustable Rate Mortgages are not as popular as they once were, banks are still offering them to home buyers, and you should beware.
Photo Source: Flickr – kevinsaff
Hank says
atI hadn’t heard that. I find that hard to believe. I think that banks will see consumer backlash over a move like that. The 30 year fix rate mortgage is too ingrained in our collective psyche. A European style mortgage will go the way of Crystal Clear Pepsi and New Coke. I think that the 30 year is safe and will be here to stay.