Winning the ARM’s Race

From a recent story “Bad Loans get Worse” at CNNMoney:

More than $1 trillion worth of adjustable rate mortgages (ARMs) will be hit with higher reset rates this year, and that could add up to big trouble for many homeowners.

It’s June, so the year is already half over, and many of the rates have probably already adjusted for many borrowers. However, there are still quite a few borrowers out there whose rates will be adjusting in the next 6 months. In this current climate, the most vulnerable borrower is one with low credit and low income. They somehow managed to jump into the housing market in 2005 when everybody believed the stratosphere wasn’t high enough!

The vulnerable borrowers is now in a 2/28 ARM with a hard pre-payment penalty for the first two years. This means that whether they re-finance or sell the home in the first year they have to cough up six months of interest. Also, as soon as their pre-payment penalty ends their rate starts to adjust, and this means they must refinance if they can’t afford the higher payment.

The 2/28 loan is a band-aid loan. Getting a loan like this means you have to start preparing for a re-finance the moment you move into your home. You need to work on your credit, your income, your savings and all the things that make you a stronger borrower. You can’t rest just because the ARM reset doesn’t happen for another two years!

For those borrowers who think their ARM’s will be resetting this year, here are two things you need to do well before your rate adjusts:

1. Pull your credit: Pulling your credit one month before a re-finance is too late. Since you are already entitled to a free credit report every twelve months, go to annualcreditreport.com and retrieve your report. The first thing you need to do is check for accuracy.

Then you need to work on improving your credit over the next six to eight months. I suggest working on lowering your balance to less then 30% of the credit limit on each account; paying all bills on time; and clearing any judgments and liens you may have. I do not recommend closing zero-balance accounts in good standing. You need these positive accounts open to help your score.

2. Contact a qualified mortgage planner: Once you have a working plan to improve your credit contact a qualified mortgager planner who can work with you over a period of time. I suggest obtaining referrals from friends, family or your trusting real estate agent who helped you buy your home. Ask the mortgage planner for information on what you can do to qualify for a better program. Then work on fulfilling these requirements.

If you do all this and feel that you will not be able to improve your credit on time, then you need to call your lender and see if you can work out a plan. Depending on your home and living situation you could also consider having others live with you and help pay the mortgage.

In the dire situation where none of these things work then you need to face the possibility of selling your home. It’s better to sell and get out of the loan on your own terms rather than be forced out. A foreclosure on your credit report will mean you’ll have bad credit for a long time and the American dream will keep slipping from you. It need not be that way because the dream is very reachable and maintainable.

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