FHA Refinance - Bad Credit Score Mortgage Relief For ARM Borrowers
The date is creeping closer and closer. You can feel the anxiety and the "urge" to procrastinate is overwhelming.
What can it be?
Your ARM is resetting and your monthly mortgage payment may be going through the roof draining your already fragile "monthly budget".
When your mortgage resets your interest rate will be recalculated, and probably higher than the teaser rate you signed up for.
You may be one of the bad credit borrowers who locked into an Adjustable rate loan that required little or no money down. You may have not totally understood the mechanics of the "adjustable rate mortgage".
Terms like "Index" and "Margin" or "Libor" may not have been explained by your broker at the time you signed - but it sure sounded like a good deal at the time. Just look how much house you bought!
By doing nothing and just letting the mortgage "reset " as scheduled you may very well experience a scenario like this below…
Effect of ARM Reset
Say your original loan was a 5.5%, 3 year ARM on a $250,000 loan. Your monthly payment to PI will be $1419.
After 3 years you owe $239,716 because you've made all your payments on time whittling the balance down slightly, so this is the amount you must refinance.
But what's the new interest rate I will pay on the balance?
"How" your new interest rate was to be calculated was laid out in the original mortgage documents but few borrowers actually track this. You see, the new interest rate is based on the "index" stated in your original loan agreement. The other component of your "new" interest rate is the "margin" which should have also been stated in the original mortgage agreement.
The index could be based on one of several indexes - ) for example, the Cost of Funds Index (COFI), and the London Interbank Offered Rate (LIBOR). A few lenders use their own cost of funds as an index, rather than using other indexes.
What ever the index happens to be at the end of 3 years is used. Say it's 3.5%.
Your "margin" is really a "%" markup your broker chooses. For example he chose... 4%. Margin can vary depending on your credit score however. You probably didn't realize that either
If you had bad credit when you signed the original loan the broker may have deemed 4% as a margin. If your credit is still sub prime at the time the loan is resetting expect the margin to remain as agreed.
Index plus Margin = New Interest Rate
In our example…
3.5% index + 4% margin = 7.5% …your new interest rate!
Ouch!
So $239,716 at 7.5% for 30 years puts your monthly payment at $1673.
This is an increase of $254 per month... to get out of that ARM and into a 30 year fixed rate mortgage! No wonder foreclosures are on the rise.
This is an increase of $254 per month to get out of that ARM and into a 30 year fixed rate mortgage! No wonder foreclosures are on the rise.
Why not consider an FHA 30 year fixed?
There is a better way!
FHA loans can help borrowers with resetting ARM for a few reasons:
- Interest rates are very competitive
- FICO score is not important
- Responsibly managing credit going forward is more important to FHA
- Only need 3% down payment - can use built up equity
- Foreclosure and bankruptcy will not disqualify you