ARM Vs Fixed Rate Mortgages; Why Your Home Payment Went Up
ARM Vs Fixed Rate Mortgages; Why Your Home Payment Went Up
What is an ARM Mortgage for a home loan? ARM stands for "Adjustable Rate Mortgage". To understand this term better, we need to know what the options are for mortgage loans and the interest rates that home Buyers are given in these loans.
For most home Buyers throughout modern history, home loans were written with a "Fixed Rate of Interest". This is known as a fixed rate mortgage loan. What this means is that, if a typical loan is written for you to pay it off over a 30 year period (30 year loan). This loan will have the same interest rate and the same monthly payment every month over the entire 30 years of the loan. This means that you will make 360 equal payments. This is very easy to understand. This is what most people would choose to do, if they were well informed.
However, during the last 10 years, many Mortgage Loan Officers advised Buyers to get ARM mortgages. Remember that this mean Adjustable Rate Mortgages. The interest rate on your loan can raise dependent on conditions and terms included in your loan. The way this type of adjustable has traditionally worked is that your loan would be rise and fall with prevailing interest rates in some way. Usually, in the United States this has meant that your mortgage interest rate would rise or fall with the Government 10 Year Treasury Bill. I, myself, have had such a "True Fixed Rate Mortgage Rate" since 2006. My interest rate has fallen or lowered two times in this period. My payment actually went down twice in this period. My ARM worked well for me.
So, why has your ARM payment gone up to a monthly payment you can't afford? Why has it gone up at all? If it was tied to interest rates and those rates have gone down, then your interest rate (and therefore your monthly payment) should have lowered. My interest rate did go lower, while your interest rate raised higher. The reason is: Unrestricted and Unregulated greed on the part of mortgage brokers and greed on part of the large banks who bought the loans from those brokers. If loans are written to go higher in the future, then everyone in this mortgage industry food chain gets LARGER COMMISSIONS.
In an unusual and little known twist on ARM loans, is that loans that should have been written to the recent past history of falling interest rates may not have been. Your loan was probably written to rise over a certain time frame.
Let's say you were buying a house that you thought you could never afford, but your loan officer showed you a way that you could. He offered you a payment of $1,000 per month for example. This was based on an interest rate 4% which was far below that rate that was the prevailing rate at the time. For example you received a payment based on 4%, but the true interest rate was 7% at the time. This would be great if it went on for 30 years, but in the fine print yours didn't. In fact, it probably adjusted, or raised your interest rate in increments of 3, 5 or 7 years. Or it could have raised with a combination of all 3. So, you've seen your payment go up 2 times. your payment may have gone from $1,000 per month to $1,500 per month for example, or even worse.
You see you were always going to be penalized for getting the low rate at the beginning. If you pay less than the market interest rate for 3 years, then you will pay a greater interest rate after that to make up for what you weren't charged at the beginning. If you find this hard to understand, don't feel bad. I have been in the real estate and mortgage business for 35 years and I didn't know it was even happening. But it was happening. It was happening to millions of people. It is the single biggest problem that triggered this awful recession we are in.
Here it is again more simply. Your mortgage was adjustable. If it had adjusted to real national interest rate changes, it would have gone down over the last 6 years. If the interest and payment originally written in your loan then adjusted from an artificial low interest rate to an artificial high interest rate, then yours went up. You were doomed when you started. It was in the fine print. But, no one told you. Not in clear terms anyway.
Is there anything you can do? Absolutely! Yes!
The Lenders have taken in too many foreclosures. With every house they take back, they lose lots of money. They can see that the error was in giving you a $1,000 payment that you could afford and then raising it to $1,500 (example) which you could not afford. The only answer is to make it affordable to you again. This is done through a Home Loan Modification and your Lender wants you to do it.
Some people try this on their own, which is very difficult and frustrating unless you really understand how things work at your Lender. Some people find a professional to help them to negotiate their loan from an ARM to a lower Fixed Rate. This is the business that I am in and I can tell you that you need to choose a Modification Counseling Company carefully. Make sure you understand what they will help you do, and what they charge and when. If you are in foreclosure, make sure they help you to stop this Foreclosure Sale Date, and help you arrange for the time to do a Home Loan Modification Application. It is most important to freeze or "suspend" your foreclosure. A Home Loan Modification is certain to fix your loan interest rate and lower your payment to an affordable monthly payment. Now that you know what happened to your payment and you know that you can fix the situation and save your home, I'm sure you are beginning to feel much better. We find that educating our clients to the facts of the problem is the first step toward fixing the problem.
You can visit our website at: www.mortgagepaymentmodifications.com
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