Many homeowners are still stuck in an adjustable rate mortgage (ARM) loan. These loans can be extremely risky because they can go up at any time. Families that have budgeted for a specific loan amount could find themselves strapped for cash if their interest rate and monthly payment goes up. An FHA Streamline Refinance can fix your interest rate so that your monthly payments stay the same, no matter what the market is doing.
How Does an ARM Loan Work?
An adjustable rate mortgage loan assigns each borrower a margin over the index. For example, when your loan is approved the margin is the specific interest rate that is assigned to you. In our scenario,we will use the rate of 3 percent. Your rate will be tied to an index such as the Cost of Funds Index (COFI). As we write,this post COFI is at 0.783. A year ago it was at 1.00. In this scenario,the borrower’s interest rate would be 3.783 and a year ago it would have been 4 percent.
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With an ARM loan,your interest rate can go up or down based on the changes to the index. How often your interest rate changes is based on how your loan was initially set up. The problem is that ARM loans are typically uncapped. If the market shifts drastically, you could be stuck with a loan you have no way of making the payments on. These variable rate mortgages can be disastrous for families on a tight budget.
Fixed Rate Mortgage Loans
When you have fixed rate mortgage loan,your interest rate is set for the duration of your loan. If your loan is for fifteen years, the interest rate and payment will be the same every month for fifteen years. With a fixed rate loan,the only thing that can change your monthly mortgage payment is your taxes or insurance cost going up or down. This will change your escrow payment, which is typically added on top of your principal and interest payment to create your total payment (PITI).Since taxes and insurance rates do not frequently adjust this enables homeowners to set a budget and stick with it. A fixed rate mortgage loan helps families to plan for their financial future by taking the guess work out of the monthly mortgage payment.
FHA Streamline Refinance
If you have an existing FHA home loan that is an ARM, you can use the FHA Streamline Refinance program to fix your interest rate. The FHA makes it extremely easy to fix your interest rate using this program. They don’t require verification of your income, employment, or even credit score. As long as you are making your loan payments on time you can turn your adjustable interest rate into a fixed one in a few short weeks. The FHA offers this loan program because by fixing the borrowers interest rate, the FHA increases the chances of their being able to make their loan payment long term.
For more information on ARMs, Fixed Rate Mortgages, and FHA Streamline Refinances contact an FHA approved mortgage lender. Interest rates are projected to rise in 2014 so fix your rate now before your loan payment increases.
