We survived the real estate crash of 2006, but we’re struggling with an ARM 5/1 – where do we get mortgage refinancing?
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Q. Dear Credible Money Coach,
We have been in our house for 16 years as the original owners. We got through the disaster of 2006 and were able to keep our mortgage. However, we are trying to refinance our mortgage – an ARM 5/1 that adjusts every six months. I am a nurse and my husband has recovered from COVID. We are trying to refinance, but seem to have no help. Our FICOs are 629, our LTV is 76%, and we make $ 115,000 a year, but we still don’t seem to be getting any help. We are a family of 8 and take care of our 86 year old stepfather. Where can we get the help we need to keep our house? – Valarie
A. Hello Valarie. Thanks for your question – and for being a frontline hero! There is a lot to unpack in your question, but let’s start with the aspect that concerns me the most – what type of ARM you have.
You say you have an ARM 5/1 (variable rate mortgage) that adjusts every six months. The “5” in the name of the mortgage product indicates that your introductory period – with its low interest rate – was five years. The “1” is meant to mean that after the five-year introductory period is over, your rate will only adjust once a year.
If your lender adjusts your rate every six months, you might not have an ARM 5/1. It could be an ARM 5/6 – these adjust every six months.
Your first step should be to check out exactly what type of loan you have. You should confirm this with your lender. A 5/6 loan can be very risky because the rate can go up to the point where it becomes difficult to make your monthly mortgage payment.
But if you do have an ARM 5/1 and your lender treats it like an ARM 5/6, you should contact them immediately to rectify the situation. If you don’t get quick satisfaction, you can file a complaint with the Consumer Financial Protection Bureau.
Things that can get in the way of refinancing
Valarie, you are not saying whether you have already applied for refinancing and have been refused. But there are some common obstacles that can prevent you from getting mortgage refinance.
- A high LTV – Your LTV, or loan-to-value ratio, compares the amount you want to borrow and the appraised value of your home. A high LTV (usually 80% or more) can cause a lender to perceive you as a riskier borrower because you don’t have a lot of equity in your home. They think you might be more likely to walk away if you can’t make your mortgage payments later. But with an LTV of 76%, that may not be a problem for you.
- Bad or no credit – If you have a bad credit or little credit history, it can be difficult to qualify for certain types of credit. At 629, your score might be considered fair, but most lenders want to see a score of 620 or better for a conventional loan. Having said that, there is mortgage options for people with a lower credit score.
- A high DTI – The DTI, or debt-to-income ratio, compares your gross monthly income to your total monthly expenses to get an idea of how much of your monthly income has already been used. If your DTI is too high, lenders may fear that you will have to face the additional expense of a mortgage payment.
- The amount you want to borrow – Whether you want to borrow a lot or a little, the loan amount can be a barrier. If you have to borrow a very large amount, lenders might want you to have a higher credit score. If you have to borrow a smaller amount, lenders may think that they cannot get enough profit from the loan.
Possible refinancing options
Even if one or more of these obstacles stand in your way, you may still have options for refinancing.
If your credit rating is affecting your ability to get a conventional loan, you may want to consider FHA refinancing. There are different types of FHA refinance loans available, and not all of them require that your original loan be FHA backed in order to qualify for the refinanced loan. Under certain circumstances, you can get an FHA loan with a credit score in the 500s.
If the loan amount you need to borrow is too small to be attractive to lenders, you may want to consider a loan refinancing of collection, where you take out a new mortgage for more than you owe on the old one and pocket the difference in cash. But be careful. Increasing your loan amount could result in a higher monthly payment, although you may get a significantly lower interest rate.
One way to reduce the interest costs of a refinance withdrawal would be to put the extra money in a savings account and use it to double your monthly payments. This will allow you to pay off the new loan more quickly, thus reducing the total interest charges over the life of the loan.
One last word…
Right now, lenders don’t hurt business, so it’s no surprise that you have a hard time finding one who is willing to work with you. Shopping around to compare rates and options from different lenders could help point you in the right direction.
You can check your prequalified rates for free, without affecting your credit, when you use Credible to compare rates from multiple lenders.
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About the Author: Dan Roccato is a Clinical Professor of Finance, School of Business, University of San Diego, Credible Money Coach personal finance expert, published author and entrepreneur. He has held leadership positions with Merrill Lynch and Morgan Stanley. He is a recognized expert in personal finance, global securities services and corporate stock options. You can find it on LinkedIn.