Pros and cons of an adjustable rate mortgage

Many people have heard bad things about ARM, or adjustable rate mortgages, but there are just as many advantages to refinancing your home with an ARM as there are disadvantages. If you are considering refinancing your current home loan, and have a fixed rate home loan at the moment, an ARM loan is definitely worth looking at, as far as saving money on your repayments, and getting a better interest rate goes.

What Is An Adjustable Rate Mortgage?

An adjustable rate mortgage is a home loan that has significantly lower interest rates than any offered fixed rate mortgage at any given time. These adjustable rates on an ARM can change over the life of the loan in accordance with current markets and trends, unlike a fixed rate mortgage where the rates are never subject to change over the life of the loan.

What Are The Benefits?

By far the greatest benefit of refinancing, using the adjustable rate mortgage option is the savings gained by having a lower interest rate. It is hard to believe, but a small difference in interest rates, such as half a percent, over the course of a year can equate thousands of dollars.

What Are The Risks?

There are risks involved when you refinance with an adjustable rate mortgage loan. The riskiest type of ARM loan is the type that has no fixed term attached to it. Although the interest rates will be even lower than the average rates offered on a fixed term ARM loan, the rates on an ARM loan that isn't fixed are subject to change monthly, or yearly. An ARM loan that is fixed for a particular period, such as 5 years, is much safer, because you are getting a very low interest rate, locked in over a period of five years.

Who Will Benefit From An Adjustable Rate Mortgage?

Almost anyone can benefit from a fixed rate ARM mortgage. According to financial statistics many American families either sell their homes, or refinance after four years. If you are like many others, having a 5-year fixed ARM loan there is very little risk, with a much lower interest rate on offer.

The only risk is that after the 5 years is over on a fixed rate, if you can't refinance, or choose not to sell, and interest rates do get higher, you will have to pay more on your repayments. The ARM rate is especially helpful to lower income bracket families, or for those who want to pay their home off quicker than they are already.
By keeping your monthly repayments the same, and refinancing to an adjustable rate mortgage with a much lower interest rate, the money that you are saving because of the lowered interest rates can be coming directly off your principal each month. This can mean you are shaving years off your mortgage, without paying anything more than you were before you refinanced.

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The Mortgage Modification Option

This is a very difficult time for many homeowners. With high housing prices a few years ago, many people chose adjustable rate mortgages in order to be able to qualify for a house they wanted to purchase. Low interest rates made it possible for these higher-priced homes to be affordable for many people who may not have been able to afford them otherwise. At the time, house prices were rising quickly, so it was common that people who purchased a house found that the value of their home increased substantially over the course of just a few months. Mortgage companies also came out with additional programs that allowed even more people to qualify for loans that they may not otherwise be able to afford.

All of these factors combined to create what was called a housing bubble, which eventually popped. Interest rates rose. House prices dropped. Many people who had opted for two- and three-year ARMs saw their mortgage payments go up, often so much that they could no longer afford them. Foreclosures increased and are continuing to do so. Many mortgage companies have ceased operations or had to lay people off, leaving thousands of people jobless.

For people who have equity in their homes, and have been in their homes long enough, refinancing is an option that many people have been able to take advantage of.

If, however, you purchased your home at a time when prices were at their peak and now owe more on your home than it's currently worth, or if you haven't been in your home long enough, you may not qualify for refinancing. In this case, you may think you don't have any options. Some people in this position think that their only option is to sell their home for much less than it's worth or lose it through foreclosure.

There is an option that many people in these desperate financial circumstances don't realize exists. It's called a mortgage modification.

A mortgage modification is an option that you can request through your current mortgage company. You aren't refinancing to a whole new loan. You are asking for a modification of your existing loan. Not all mortgages can be modified, so you will need to discuss this with your mortgage company.

One way that some mortgage companies will modify your mortgage is to arrange what is called a forbearance, which means they will allow you to skip a payment or two. This is something that some mortgage companies will agree to if you're having temporary financial difficulties, but can get back on your feet quickly.

Another way that some mortgage companies will modify your mortgage is to extend the loan for another five years. This will help to lower your monthly payments.
You can also ask if they would be willing to adjust the interest rate if your adjustable rate mortgage is getting ready to reset.

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Signs That Refinancing Your Home Is A Good Idea

People across the nation are trying to determine whether now is a good time to try to refinance their home or if they should wait for a more favorable financial climate. Refinancing your home at the right time could result in great financial gains and more financial freedom for you at a time where a global credit crunch is making it much harder for some individuals to receive alternative financing options to purchase the items that they desire. On the other hand, refinancing your home at the wrong time and in the wrong financial climate could result in the individual getting in over their heads on their mortgage and could ultimately end in financial devastation, as many homeowners across the nation are now discovering as their homes face foreclosure.

So how do you know whether now is the right time to refinance your home? There are a several signs that the homeowner can look for to determine whether or not the financial climate in their area will make it worth their while to devote the time and energy to refinancing their home. These signs are easy to spot if you know what you are looking for and keeping an eye out for the signs will ensure that you refinance your home in the best financial climate possible.

Sign #1 – You Qualify For A Much Lower Interest Rate
Individuals that purchased their home when their credit was less than stellar often received a higher interest rate than they wanted for their mortgage. If you have repaired your credit and raised your credit score by a significant amount, then you may be able to qualify for a lower interest rate on your mortgage if you refinance. It is important to make your choice carefully and only refinance if the interest rate on your mortgage will be lowered by a significant amount, generally more than 2% which will not make much of a difference in your monthly payments.

Sign #2 – You Signed Up For An Adjustable Rate Mortgage
Many individuals today are deeply regretting the fact that they signed up for an adjustable rate mortgage that seemed so attractive on paper, but is wreaking financial havoc on their lives now that their rates have begun to rise. In the beginning, exotic adjustable rate mortgages were much desired because they allowed people to purchase a bigger home than they could typically afford and had a lower monthly payment, but when the interest rate rose on the mortgage, many people found that their payments had reached an unmanageable level. If you can qualify to refinance your home with a fixed rate mortgage without being subjected to numerous fees and penalties, you may be able to save a great deal of money over time on your mortgage payments.

Sign #3 – You Intend To Improve Your Home
Refinancing your home to obtain equity to improve your home will pay off in the long run as the improvements increase the value of your home. Using the equity in your home to pay for vacations or plastic surgery is generally a waste of money because it will take such a long period of time to rebuild the equity in your home, much longer than if you just put a little money aside to pay for the item in the future. If you are unable to afford to put money away to save for the purchase because your finances are stretched thin, then you probably should not be making expensive additional purchases anyway and taking equity out of your home will only make the situation worse.

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Tax Benefits of Refinancing

The tax benefits of home ownership can potentially save you hundreds of dollars every month. With a little planning you can make sure the dollars you save in refinancing your mortgage stay in your pocket. You might just discover previously unknown tax deductions along the way.

Itemized Deductions
In the early years of the life of a loan, payments are mostly on the interest owed rather than on the principle. If you itemize your deductions instead of using the standard deduction, you might stand to benefit . If you and your spouse file jointly, you can deduct interest payments to a maximum of $1 million. For example, let's say your original mortgage was $300,000. You might take out a new $350,000 refinanced mortgage and pay two points, or $7,000. (A point is an interest charge equal to 1% of the total loan amount that is paid upfront on the close the loan.) As seen by the Internal Revenue Service, the first $300,000 of your new loan is treated as home-acquisition debt. The interest paid on this debt qualifies as an itemized deduction. The $50,000 balance of the new loan is treated as home-equity debt and also qualifies as an itemized deduction. You can amortize the home-acquisition-debt points over the life of the loan. The points related to the home-equity debt can be amortized in the same proportion as the interest, but make sure the home-equity debt is $100,000 or less and the value of the home isn't exceeded by the acquisition debt plus the home-equity debt.

Home Improvement
If your refinanced mortgage is more than your original loan, you can use the difference to improve your home and deduct a dollar amount equal to the percentage of points paid in the first year. Anything within reason that improves your property value, such as improving the back deck or repairing the driveway, can count towards the deductible interest. Interest taken out for expenses not related to home improvement can also be taken as a deduction, but only within certain guidelines. But remember, the maximum deduction in 2007 for the life of the loan is $100,000.

Amortization: Pros and Cons
The points you'll pay when you first purchase your home are deductible in the tax-year in which the property was purchased. For example, if you paid one point on the origination fee of your new $300,000 home, your tax deduction that year will be $3,000. When you refinance your mortgage, the deduction for the amount paid will be amortized over the course of the loan, but the savings will still add up. Returning to the example, if you pay two points on the $350,000 loan when you refinance, the tax deduction of $7,000 would be amortized over 30 years. But, if you decide to refinance again, or you sell the house, you can write-off the unclaimed portion of the deduction. Additionally, i f you have refinanced before, you might have unamortized points that would be allowed in full the year you refinance.

You can learn more about the tax benefits of mortgage refinancing from the IRS Publication 936,Home Mortgage Interest Deduction , and by c ontacting your local tax advisor.

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When is the best time to refinance home mortgage loans?

You may be wondering when the best time to refinance home mortgage loans. This can be tricky, as there are many factors surrounding refinancing that will have a bearing on whether now is the best time, or whether you should wait.

Economic Conditions

Interest rates are dictated by economic conditions. Often, the government may use higher interest rates to level out inflation, and dictate consumer spending. When consumers are overspending, causing prices to rise, interest rates will get higher to increase prices, which will slow down spending. However, when the economy slows down, interest rates will drop to encourage consumers to spend again, and take out low interest loans. So one of the best times to refinance your home loan will be when the economy is at a slow point, and interest rates are lower.

Your Credit History

Even though you have had a loan before, and are now thinking about refinancing it, you still need to have a good credit score to get the lowest possible interest rates and the best deal on your refinance. It is always better to get your credit report from the three major credit reporting bureaus before applying for your refinance to make sure that there are no errors in it, and to get an idea of what your credit score is likely to be.

How Long You Have Had Your Loan

The amount of time that you have had your loan is also an important factor; some lending institutions don't like it when borrowers refinance soon after getting a loan. As a rule of thumb, it is best to wait at least 4 to 7 years before considering refinancing.

Other reasons To Refinance

Often, an increase in the market value of housing can be a great time to refinance, especially if you plan to consolidate some debt, or get some equity from your home. If your income has increased, or if you have been repairing your credit, refinancing may also be a good option for you, as you may be able to get a much lower interest rate, or renegotiate the terms of your home loan when refinancing.

Make sure that interest rates are lower than 2% of what you are already paying, and calculate the costs of the new refinance carefully, as well as look into any penalties or charges that may be added by your lender. Before refinancing your existing mortgage, make sure that you shop around for the best deal, and compare the interest rates, as well as terms and conditions offered by these lending institutions.

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Why and How to Refinance with Bad Credit

Over half of Americans are buried in debt and desperate for some help in gaining control of their outgoing money, while finding ways to keep enough to pay the bills. What was once considered impossible, refinancing with bad credit can now be done without the overwhelming hassles.
A bad credit refinance could actually help your credit in a number of ways.

• With the many other default loans on your record, refinancing to deal with it will show that you have taken steps to take control of your situation. This proves to other lenders you are capable of making the right decisions with your money.
• Refinancing means that you are aware of your financial problem and would like to start putting some of your money, now going to interest, in places that will really raise your credit score.
• When exploring the options of refinancing with bad credit you will notice that most lenders are happy to consolidate, meaning you only make one payment a month. No more late payment penalties, miscalculated interest, and keeping up with too many statements; bad credit refinance and you will be taken care of.
• Some people can actually refinance and get a lower interest rate at the same time. This can be a blessing when it comes to having a little extra cash saved up at the end of the year.

Now that you know how refinancing could help you with your debt situation you need to know what it will involve. The truth is, you will be surprised at how easy it really is but don't expect it to be free. Bad credit refinancing usually costs a little, but getting your score up and under control will be well worth it. Here are a few of the things you may need to know before applying for bad credit refinancing.

• Interest rates when refinancing with bad credit are typically much higher. If you are looking into consolidating this may be worth it but otherwise you should make sure it won't be worst then your current interest rates.
• When refinancing with bad credit there will more than likely be fees to pay, along with penalties of paying loans off early or in one lump sum. You should explore all your options and investigate each loan thoroughly before heading to the bank.
• Loan application fees are standard whether doing a bad credit refinance or you have perfect credit. Check into several lenders before choosing the one that fits you best. You can easily explore your options further online.

The bottom-line is you never know what you may be able to do until you try. With the great competition between lenders, more are willing to assist you in refinancing with bad credit just to have another consumer on their side. Investigate all the possibilities and you will more than likely find the perfect lender to help you out.

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Watch Out For Refinancing Costs and Fees

Refinancing your home can often help ease the burdens of interest you currently pay but you must also be aware and recognize all of the refinancing costs that could put you out in the short-term. When working to refinance your home, it should be thought of as starting from square one meaning refinancing costs will be similar to those when first buying the home. All appraisals, inspections, and loan applications will still be required meaning you must pick up these as part of your refinance costs.
When preparing to refinance there are several things that will determine the overall refinancing cost. First you must take into consideration:

• The length of time you have spent in your home : This will be important when lenders view your past record of payment, ability to stay on time and up to date, and some lenders even place guidelines on how long you must be in the home before refinancing.
• The remaining balance on your original mortgage : The typical rule of thumb is the higher your remaining balance the higher the refinance cost will be. This is due to fees, penalties, and interest amounts.
• The value of your home in today's real estate market : This will be one of the key elements to determining your refinancing costs as it changes very quickly and could be much higher or much lower than the original price.

After going over your current loan status you will be required to pick up the costs that are involved in the initial home buying process. Some of these costs and fees include:

• Licensed Appraisal Fee: $250 - $600
• Loan Application Fee: $75 - $300
• Land Survey Fees: $124 - $300
• Attorneys Fees: $75.00 - $200.00
• Title Search & insurance $400.00 - $600.00
• House Inspector: $175.00 - $350.00

The final steps to determining the refinance costs will include the additional costs involved with most refinancing such as:

• Early Payoff Penalties and Fines : Many, if not most, mortgage companies set in a place fees for paying your mortgage off early. This will be your burden and will have to be paid before moving any further in the process.
• Remaining Balance Costs : Some mortgages will not pay your interest amount off for you, leaving it as another amount to add to your refinance cost.
• Homeowners Insurance : If your homeowners insurance will be added into your monthly payment it will typically not be a part of your refinancing costs but for those paying annually it will need to be taken care of.

One thing to keep in mind when exploring the option of refinancing is that the final refinancing costs will be determined by each individual situation with the list outlined above only serving as a general idea. Each area, lender, and market will represent different policies with unique fees. While refinancing costs are well worth it in the long run, some may find the refinancing costs due up front are not in their budget. Regardless, it is important that you investigate all of your options before signing any binding documents.

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