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The thing that is really going to suck for you-especially if you are in a Blown Mortgage-is that if you are in an adjustable rate mortgage and your rate and your house payment start to go up is that there is an excellent chance that you won’t be able to refinance in to a lower payment.
Dan Green in his blog says this about the sub-prime market crash; he puts it nicely:
There will be more than a few tales of homeowners that couldn’t remortgage out of their adjusting mortgages because their individual credit profile is no longer served by Wall Street.
What he means is this. Up until recently if you had poor credit and an adjustable rate mortgage and your rate started to adjust you could go out and refinance back in to another loan with some fixed term, keeping your payments from skyrocketing. Now, if you are in a short term fixed rate loan that is about to adjust, or you are in some type of teaser rate program your rate can skyrocket and there’s nothing you’ll be able to do about it. Zero.
When Dan says "no longer served by Wall Street" he means that no one will give you a loan to get you out of the blown one you are currently in. You’ll be stuck. The banks have tightened their credit guidelines, eliminated risky poor-credit loans, and have upped their rates to a point where any new loans are profitable despite the increased risk.
This will have dire consequences for so many homeowners that I cringe thinking about it. So what can you do? Here are a few ideas:
- Look at your mortgage and see when it is going to adjust. Specifically dig out your mortgage note (you have it, right?) and look on the Adjustable Rate Rider or Note page for the term "first adjustment cap". This is the amount that your rate can jump when it becomes adjustable.
- Go to bankrate.com and calculate your new monthly payment at the adjusted rate. If it is high, and will be unaffordable. Talk to someone you trust now to see what your options are.
- If you have poor credit (below 600) do the above very soon.
- Then - and this is important - weigh the benefits of refinancing now in to a longer term fixed mortgage (make sure to include the cost of any current prepayment penalty you may have) versus crossing your fingers that you will qualify for a loan in 6 months to a year.
- Remember, the better your credit score the more flexibility you have. If you’ve had a tough year or two in terms of keeping up with your debt talk to someone before you’re trapped in a blown mortgage.
