Financial Advice

Buy & Own a Home

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Handling ARM Rate Increases

Adjustable-rate mortgages (ARMs) have a comparatively low initial interest rate and an affordable monthly payment when compared to a fixed-rate mortgage. However, the name says it all — the interest rate is adjustable — and when the period of fixed interest ends, your payment will change with whatever index the loan is based on.

If you, like many others, are struggling with monthly payments on an Adjustable Rate Mortgage that has re-set to a higher rate, there are options you can take to alleviate the pain.

Manage Your Payment Wisely

Do not allow your mortgage payments to fall behind.
The worst tactic is to ignore the problem, or hope that you will be able to make up the late payments, together with late penalties and interest, at some later date.

Beware of foreclosure rescue schemes.
Unfortunately, there are always fraudsters who immediately develop schemes to defraud those in trouble. If your property has been posted for foreclosure, it is a matter of public record and anyone can have access to the information.

Beware of the following:

  • Receiving numerous high-pressure solicitations
  • “Foreclosure Rescue Specialists” promise to save your home from foreclosure, immediate action is required, and you are steered away from seeking independent advice.
  • Requests to sign over your property to a third party, as a part of the “rescue,” in order to repair your credit

Advice:

  • Never sign any documents related to your home without consulting an independent entity
  • Never agree to sign over your deed or add a co-signer
  • Never deal with someone who solicits you during the foreclosure process
  • Read ALL documents related to a refinance before the closing. If the company is not forthcoming with documents, or if the terms of the refinance change right before closing, STOP!

Preserve your credit rating.
If you allow your mortgage payments to fall behind, this will further reduce your options. The possibility of a refinance or a loan work-out could be eliminated based on damaged credit. Most lenders, including UFCU, cannot make new loans to people who have mortgage late payments.

Call your lender and talk to the Loss Mitigation Department.
The folks in the collection department are generally focused on one thing: getting you to bring your account current. In the Loss Mitigation area, they are trying to manage the losses for the lender, and have a different focus. Be patient and persistent, since these people are inundated with people who are having trouble paying their mortgages.

Ask for forbearance.
This is an agreement that allows a borrower to pay less, or skip payments for a certain amount of time. You may have to pay more later, but forbearance gives you the time to work on the problem.

Try to get a modification.
It is possible that your loan can be modified, either through refinance or a note and term modification (which costs less). A term extension to lower payments or an interest rate modification to lower the rate might be a solution as well.

Discuss a short sale.
If your home is worth less than the mortgage balance, your lender might agree to a short sale that will allow you to sell your home at a market price that may be below the loan balance. In this case, the lender agrees to accept a lower loan payoff, and they then make arrangements with you to pay off the additional balance over time.

Remember: your lender does not want to own your home.
If you begin this process early, and before your payments are late, your lender will, in most cases, try to work with you. Foreclosure, while very damaging to you and your financial future, is very expensive for the lender and usually not their preferred path.

Consider selling your home.
This option may be very painful to consider, but if you can sell and start over in a less expensive home, or by renting for a period of time, this is often the best solution. It costs about 7% of the purchase price to list your home with a REALTOR® and pay for a title insurance policy, but if you have enough equity to do this, seriously consider it! Selling by Owner is really not a good option, since immediate exposure of your home to as many potential buyers as possible is critical, and only a REALTOR® and the Austin Multiple Listing Service can do this for you.

Refinance Your ARM.
This is an option available to those who have good credit, a stable income and at least a small amount of equity in their home. Be careful about your choice of lender, the closing costs and interest rate being offered since a refinance could be costly and not solve your affordability problem.

Texas statistics show that the average credit score for a sub prime loan originated in Texas last year was 660, a score that is considered acceptable for a conventional loan. This indicates that many sub-prime lenders were placing borrowers in loans that were good for only one side of the transaction: the mortgage lender!

Do not stop making your payments during a refinance. Closings do not always occur on time, or may not occur at all, and then you have late mortgage payments on your credit record.

Refinancing can take two forms.

  1. You can add the closing costs for the loan into your new loan balance, provided you have sufficient equity. This approach will have a lower interest rate, but usually is not the best plan if you only plan to stay in your home for 3-7 years.
  2. You can finance your closing costs into the interest rate. In this situation, the lender charges a higher interest rate (usually about .5% above the rate with the closing costs added to the balance or paid out of pocket) and covers all of the closing costs for you. Your loan balance remains the same, and you preserve the equity in your home. While the monthly payment is slightly higher, this is a good plan if you plan to sell within the next 3-5 years.

How UFCU Can Help

If you are already behind on your payments, we can offer two services to help you.

  1. UFCU pays for a member financial counseling service, Balance. While they have no quick fixes, they can offer financial counsel and evaluation of your credit picture.
  2. If you are in a position to sell your home, our real estate department, Members Home Advisor®, can refer you to an experienced REALTOR®. They will consult with you on the value of your home and provide full services to list and market your home to potential buyers. We charge a $200 fee for this referral service, but you do not pay the fee until you close.

Note we are unable to offer refinancing if your credit and mortgage record have already been compromised through late payments.

Taxes are due, and you have no Escrow Account.
Unfortunately, many of the ARM products sold over the past few years were “piggy back” loans, with a first and second lien. Saving for taxes and insurance through an escrow account were not required. If you are facing a tax payment in December, and do not have the money, call us. We may be able to access equity in a vehicle you own and make a car loan to help you pay the taxes.

If you have the equity and can refinance, the tax payment for 2007 could be included in the new loan amount, and a new escrow account established so you won’t find yourself in this position next year.

Do not allow your taxes to go unpaid! Borrow from friends or family if necessary, sell some other possessions, or borrow from a 401K or retirement account if you can. Like falling behind on your payments, this is very hard to fix once the taxes are late.

If you are current on your payments, but are starting to feel the pain of the higher monthly payments, we can offer the option of refinancing your loan. We have two, fixed rate mortgages available, one with closing costs and the with a “No Closing Cost” option. We will be happy to discuss both options with you and help you determine which option is the best for your particular situation. Call Members Home Advisor, the UFCU Real Estate Department, at 997-HOME (4663), and we can discuss your options.