The SKY hasn’t fallen YET
According to BlackRock’s CEO:
Laurence Fink, who helped create the market for mortgage-backed securities, said the credit losses that have already cost banks and securities firms $45 billion are about to get worse.
Read the full article: BlackRock CEO sees no ebb in credit storm
What does this mean? If you have good credit and equity in your home and a fixed rate mortgage, NOTHING. If you have mediocre credit, zero equity, and your mortgage is about to refinance you’ll need to do the following:
- Get your credit in order. By in order I mean it needs to be above 680.
- Start reading your mortgage documents. Your note, your riders, everything that you bypassed at closing.
- Call your existing mortgage company first. See if they’re willing to work with you on your rate when it adjusts.
Apathy and Ignorance
“Is it ignorance or apathy? Hey, I don’t know and I don’t care.” – Jimmy Buffet
Apathy: the trait of lacking enthusiasm for or interest in things generally
Ignorance: the lack of knowledge or education
According to a Bankrate survey 34% of homeowners don’t know the type of mortgage they have.
These were the key findings of the survey:
Homeowners:
- 36% who now have an Adjustable Rate Mortgage (ARM), plan to refinance to a fixed-rate loan when their ARM changes
- 28% of those surveyed worry either regularly or sometimes about how they will afford their payments next year
- 57% of homeowners polled have a fixed-rate mortgage
Your home is your biggest asset/liability depending on how you view your home. Most people either have one of three kinds of mortgages because there are only three kinds:
- fixed rate mortgage which means it’s fixed for 10, 15, 20, 30, 40, 45, or 50 years
- an adjustable rate mortgage which means it’s not fixed, it will adjust at some point
- a amortization »”>negative amortization mortgage which means if you don’t know what kind of mortgage you have then this loan is not for you
If you don’t know the mortgage interest rate and the mortgage loan program you’re in, simply find your mortgage documents and find your NOTE and read it!
Adjustable Rate Mortgage Holders Prepare for Increase in Interest Rates
Interest rates are on the rise and many home owners who have adjustable rate mortgages may see increases in their forthcoming annual adjustments.
Federal Reserve Chairman Alan Greenspan made it clear in 2004 that the Federal Reserve would be increasing short-term interest rates at a measured pace. With the US Dollar at its weakest point in seven years, oil prices unstable and the evaluation of other economic indicators, the Fed Funds Rate was hiked seven times from 1.0% to 2.75% since June 2004 in an effort to curb inflation. Some economists believe it won’t stop until the Fed Fund Rate hits 4.0%.
Consumers with revolving debt accounts tied to the prime rate have seen the effect through rising interest rate charges, as the prime rate always rides 3% above the current Fed Funds Rate.
Mortgage interest rates are affected indirectly by these changes. An increase in the Fed Funds Rate has an impact on financial markets as a whole, but mortgage rates may go up or down based on the perception investors have of current economic statistics and their reaction to the Federal Reserve’s after-meeting statements.
In general, when economic data indicates we have a slow-down occurring in our economy, investors tend to sell off stocks and reallocate that money to the safe haven of bonds and mortgage-backed securities. The purchase of mortgage-backed securities drives interest rates down. When economic data says there is growth in the economy, the stock market typically rallies and mortgage-backed securities sell off to fuel that stock market rally. This drives mortgage interest rates up.
Our current market reflects the reaction of investors reading between the lines on comments made by the Fed, and mortgage interest rates are going up. This will have an affect on home owners with adjustable rate mortgages (ARMs) tied to indexes that are based on short-term interest rates. This includes the 11th District Cost of Funds, 12-Month Treasury Average (MTA), London Inter Bank Offering Rates (LIBOR) and others.
This doesn’t mean that everyone with an adjustable mortgage is in trouble right away. Some indexes are more volatile than others. COFI moves much slower than other adjustable rate indexes, while the LIBOR fluctuates with more volatility. But remember, when an ARM adjusts, the new interest rate is a sum of the borrower’s fixed margin plus the current rate of the index the mortgage is tied to.
Consumers who foresee paying an interest rate that is significantly higher may want to consider refinancing to take advantage of the stability of a fixed rate mortgage.
This is also a good time for borrowers who started out in an adjustable rate loan due to a poor credit score to transition into a fixed rate loan if they can. Once a track record of making mortgage payments on time and in full has been established, this should have a positive effect on the credit score and there is a good chance the borrower may now qualify for a loan with a lower interest rate.
As with any decision to refinance, it is important to take the terms of the existing loan, the cost of the new loan, and the borrower’s long-term needs into consideration. A qualified mortgage professional should help weigh out the options by providing a clear assessment of available loan programs for the consumer.
15 Year Fixed Rate Mortgage
A type of mortgage where the interest rate never changes for the duration of the loan. Unless the mortgage has an interest only or other payment option features, payments are amortized over 15 years, that is, the homeowner makes equal monthly payments and the entire loan would be paid off in 15 years.
If you are unsure whether you will be able to continue making payments on a 15 year mortgage at some point down the road, consider a longer-term mortgage, where you pay less each month. Your mortgage professional should be able to tell you how much extra to pay each month if you still want to pay off the loan in 15 years.
Since a 15 year fixed rate mortgage comes with a considerably higher monthly payment than its 30 year counterpart, this loan would be best suited for borrowers who have good monthly cash flow. Also borrowers who have high balances on other consumer type debt would be advised to avoid this loan at least until the other debt is paid down. It usually would not make sense to accelerate the payment of low interest, tax deductible mortgage debt while slowly servicing high interest, non-tax deductible consumer debt.
Amidst all the various newly introduced home financing options, Fixed Rate mortgages remain a popular loan program, mostly due to the fact the some homeowners are uncomfortable with the thought that their mortgage payments can fluctuate.
It is also possible to pay the equivalent of what would be a 15 year amortized payment, even on an actual 30 year amortized loan. Doing this will give the borrower a huge interest savings by paying the loan off earlier, and at the same time, give them the option to make a lower monthly payment, or revert back to their 30 year payments all together, should they need to.
Interest rates are typically lower on a 15 year fixed rate mortgage, depending on the lender and the loan program. You will build equity faster with a 15 year loan, than what you will with a 30 year loan. The reason is that more of your payments are being applied to the principal, at an earlier point than that of the 30 year fixed rate mortgage.
People are amazed at how much money they save on a 15 year mortgage versus a 30 year mortgage. Anytime you are over 80% LTV and you are required to pay PMI and you obtain a 15 year fixed rate mortgage, the percentage of coverage required for PMI is significantly lower than the percentage required for a 30 year mortgage. An example would be on a 100,000, 30 year loan at 90% LTV you might be required to have 25% coverage for your PMI (which would basically equal a PMI monthly payment of around $43.33). Now on a 100,000 loan on a 15 year term at 90% LTV you might be required to have 12% coverage for your PMI (which would equal a PMI payment of $19.17 per month). Therefore, by using a 15 year term vs. a 30 year term you may be able to cut your PMI by less than half.
When an investor purchases bonds or invest in bank CD’s, the longer he commits his money for, the higher his interest rate, or yield, will be. The same is true in the mortgage industry, loans with longer terms have higher interest rates. The 15 Year Fixed Rate Mortgage usually carries interest rates that are 0.5% lower than the 30-Year Fixed.
2/28 Adjustable Rate Mortgage
Editors Note: Due to the mortgage and credit crunch, 2/28 adjustable rate mortgages are more difficult to get. If you’re in need of a Denver home mortgage contact us to discuss your mortgage options.
Highlights of the 2/28 adjustable rate mortgage, it’s fixed for two years before it adjusts:
A 2/28 arm is a mortgage that has a fixed rate for the first two years, and then the interest rate adjusts for the next 28 years. This completes the full 30 year term of the loan.
2/28 ARMS will have a ceiling rate that is often times upwards of 13%. This means that your rate could potentially go as high as the ceiling rate over time if you do not refinance out of the mortgage.
Verify the pre-payment penalty term when closing.
The 2/28 is used quite often as a “band-aid”, or 2 step type of loan. What is meant by this is, many people who are put on a 2/28, are put on the loan as a temporary thing with the intention of refinancing in the next 2 years. These types of loans are used quite often by sub-prime lenders to get borrowers into a home at a lower rate and payment up front for the first 2 years, and then once a borrower has had a chance to establish more credit or repair their credit they can look into qualifying for a mortgage with a great fixed rate.
These type of mortgages help make the payment lower than a traditional 30 year fixed. You will want to make sure you understand the cap limits and margin so that you are prepared for the first adjustment. Your fully adjusted rate will be the current index plus the margin which was set at the closing of your loan.
Because the initial interest rate of a 2/28 is often lower than a 30-Year Fixed Rate Mortgage (FRM), many property investors who look to sell the house within the next years usually prefer the 2/28 ARM. These type of home buyers often know that they would not keep the mortgages beyond the 2-year fixed rate periods.
Some lenders will offer the broker a rebate if the prepay is longer then the 2 year term. Make sure you work with an honest mortgage professional.
When you are purchasing a home, the 2/28 is often times used as an 80/20. The 2 year ARM is the 80%, and the 20% is often times a 15 year fixed with a 30 year amortization (balloon payment). The 2/28 is great for 100% purchase transactions.
30 Year Fixed Rate Mortgage
Random thoughts on the 30 Year Fixed Rate Mortgage:
A mortgage in which the interest rate remains the same for the life of the loan. Payments are amortized for 30 years. In other words, payment is calculated in such a way that the borrower makes equal monthly payments and pays off the home loan in 30 years.
A hybrid of sorts to the standard thirty year fixed, is the thirty year fixed, with an Interest Only payment option. For the first ten years of this loan, the borrower has the option to make an interest only option, which offers a lower monthly payment. The interest rate on this loan does not change for the entire thirty years term.
If you plan on staying in your home for the rest of your life, a 30 year mortgage may be your best option. While the monthly payment may not be as low as with an ARM, you have the security of knowing you will never have to refinance and worry about being stuck with a higher monthly payment down the road.
With rising interest rates looming in the horizon, many home buyers are now seeking the payment stability the 30 Years Fixed Rate Mortgages (FRM) offer. The 30-Year Fixed has again become a popularly demanded loan.
The 30 year fixed rate mortgage is probably still the most popular mortgage option. When deciding between mortgage programs, you need to consider different variables such as the length of time you will be in the home. Sometimes you may be better off with an adjustable rate mortgage (ARM), if you only see yourself being in the home for a few years.
A 30 year mortgage is the most common because many people can not afford to go to a lower term. Also, a 30 year mortgage comes highly recommended for the tax benefits it provides along with a low monthly payment. Remember, it is always better to have the cheaper monthly payment that you can afford that gives you a little flexibility each month, and then you can always pay extra when it is convenient so you can pay your loan off quicker.
While the most popular mortgage, before going with a 30 year fixed, consider how long you plan to be in the home. If not more than 5 years or so, take a look at what rates you can get on a 5/1 ARM and compare the two.
In the investment world, the longer the capital is committed for, the higher the return. This is true with corporate bonds, T-bills, bank certificates of deposit, etc. This is also true with mortgage loans. Although the 30 Year Fixed Rate Mortgage have payments lower than that of the 15 Year Fixed, the 30 Years Fixed interest rates are often one half percent higher than that of 15-Year Fixed Rate Mortgages.
While most borrowers feel that a thirty year fixed mortgage is the best option, it is not always the case. The average homeowner lives in their home for 5-7 years and may be better off with a mortgage that is fixed for 5 to 7 years and adjustable afterward. This gives the stability of a fixed rate mortgage with the lower rates that are available with an ARM.
5 Year Fixed Rate Hybrid Mortgage
A mortgage program in which the interest rate remains the same for the initial 5 years. At the end of the fifth year, the mortgage turns into an Adjustable Rate Mortgage for the remainder of the loan term. Payments of most 5-Year Fixed Rate Hybrids are amortized for 30 years.
This loan program is named “5/1 Hybrid” because it starts out as a Fixed Rate Mortgage (FRM), then changes to an Adjustable Rate Mortgage (ARM). For this reason, it is also commonly refereed to as the “5/1 ARM”.
This is also called a 5/1 ARM meaning that the rat is fixed for the first 5 years and adjusts 1 a year every year after that. When the adjustment period begins there is a cap for how much the rate can adjust in the first year, and each year after that. These loans also have a cap for the life of the loan as well as a floor rate, which is the lowest rate the loan could ever have.
The hybrid or ARM loans are a great option to save money on your monthly payment especially when used in the right situations. If you plan on moving within the next 5 years, there is no reason to obtain a higher rate mortgage that is fixed for the life of the loan instead of a 5 year fixed rate loan.
In most cases, mortgage rates are higher when the “fixed” period is longer. In other words, a 30-Year Fixed Rate mortgage usually carries an interest rate higher than a 5-Year Fixed Hybrid (5/1 ARM). For home buyers who do not intend to keep their mortgages for more than 5 years, a 5/1 ARM is usually a smarter choice because of its lower initial interest rate.
Advantages of 100% financing
Editors Note: Due to the mortgage and credit crunch, 100% financing may no longer be available. If you’re in need of a mortgage in Denver, we can discuss your mortgage situation.
If you have money saved for a down payment it may not be needed. There are several advantages to taking the 100% financing, and saving your down payment. The 100% financing has become increasingly more popular and easier to obtain.
From a purely financial viewpoint, when you purchase a property with 100 per cent financing you are minimizing your financial risk and shifting almost all of the risk to the lender. This concept has become very popular, especially with investors who are always looking to minimize their exposure to risk.
As home prices have risen, and so have rents. Often, you can buy a home with 100% financing with a monthly payment that is the same or only slightly higher than your current rent. When you calculate your income tax savings from your mortgage interest deduction, buying can cost less than renting. In addition, if you get a fixed rate mortgage, your monthly principal and interest payment is locked in for the life of the loan. Your rent, however, will increase 3% to 5% annually based on national averages.
100% financing allows you to move into a home without the stress or difficulty of supplying the down payment. You also will begin to earn equity in your new home.
We don’t think that saving for a down payment should be the reason you put your dreams on hold. We can help you buy your dream home with a zero down mortgage loan. You’ll not only be able to afford a home sooner, you’ll probably be able to afford more homes. With a zero down mortgage, the amount of loan you can qualify for is determined by your ability to make your monthly payments rather than how large a down payment you’ve saved. And, for most buyers, this means qualifying for a larger loan.
If you plan on using 100% Financing you need to be absolutely certain your new home will hold its value or appreciate. Even a small decrease in value can leave you “under water”, or owning more than your home is worth.
By using 100% financing, you can keep your money earning interest in your savings account or money market fund. You can also gain a higher tax deduction for interest paid on the loan.
By financing your home with zero money down using 100 percent financing you will be able to hold onto your money instead of tying it up into the equity of your home. This way you will be able to hold onto your money and put it away in a savings account, investment account, or any other type of account to hold onto for a “rainy day”. Sometimes, unfortunate events arise and you are required to utilize some of your savings. If this money is tied up in the equity of your home, you may not be able to get it out very easily or you may have very unfavorable terms to access the money. However, if you were to keep this money in your savings account, the money would be accessible instantly. Therefore, always try to make sure that you have some savings put away somewhere and don’t tie up every penny you have into the equity of your home.
100 percent financing can be beneficial to any borrower no matter how much money they have in savings. Instead of putting your money towards your home, make an investment that has a higher rate of return than the amount of interest that you are paying on your home, this way you are creating positive cash flow. With 100% financing you gain the same amount of equity if your home appreciates in value as you would by purchasing a home with a 20% down payment
ARM Adjustable Rate Mortgage
Adjustable Rate Mortgage; a mortgage loan subject to changes in interest rates; when rates change, ARM monthly payments increase or decrease at intervals determined by the lender; the Change in monthly -payment amount, however, is usually subject to a Cap.
If you are currently in the tail end of the fixed period in your Adjustable rate loan, often 2 years, 3 years or 5 years after you took it out, this may be the best time to get a fixed rate mortgage refinance and lock in your rate while it is low. While mortgage rates rise and fall, the current market outlook is that they will continue to increase over the next couple of years, and you don’t want to be stuck paying a lot more money for a couple of years when you have the opportunity to refinance ARM into fixed rate mortgage today.
There are many Adjustable Rate Mortgage products available today. Some ARM products have rates that adjust immediately the following month after settlement, others have an initial fixed rate period of 1, 3, 5, 7, or 10 year. ARM that has an initial fixed interest rate period is also known as Hybrid Loans.
When choosing an ARM product, it is as important to consider the underlying indices and margins as picking the lowest teaser rates. Different indices have different sensitivity to the interest market. In other words, some indices such as Treasury bills and LIBOR are highly sensitive to market conditions and adjust rapidly. The 11th District Cost of Funds Index, also known as COFI, tends to move slower in comparison and therefore less volatile.
ARM products almost always have an initial interest rate that is lower than that of fixed rate products of the same loan term. These lower starting rates, also refereed to as Teaser Rates, are meant to induce/reward borrowers who are willing to bear some of the risks of future interest rate movements.
ARM’s are great for keeping your payment down for a fixed period of time while you work on your FICO score and aim for a better fixed rate down the road.
Some ARM loans have an interest only option. These loans are very popular with people who do not plan on staying in the home for a long period, want to qualify for a larger home and investment properties to increase cash flow due to the lower payments.
Other ARM product features that need to be considered include the Period Adjustment Caps which limits the maximum rate change allowed at an given adjustment, the Floor, which is the lowest possible rate of the loan, regardless of the value of the underlying index, and the Life Time Cap, which sets a ceiling for the maximum rate of interest throughout the life of the loan.
An ARM, short for “adjustable rate mortgage”, is a mortgage on which the interest rate is not fixed for the entire life of the loan. The rate is fixed for a period at the beginning, called the “initial rate period”, but after that it may change based on movements in an interest rate index. The ARM rate quoted by a lender or broker is the initial rate. It holds until the end of the fixed-rate period, which can last from a month to 10 years. This rate is critically important if the initial rate period lasts for 10 years, but it is very unimportant if the period is only one month. On the most popular ARM program, the initial rate period is 12 months, and on more than half the period is 36 months or less. While you can always opt for an ARM with a longer initial rate period, the rate goes up as the period lengthens. If you need the rate on a one-year ARM to qualify, you must consider very carefully what happens after the fixed-rate period ends.
An adjustable-rate mortgage (ARM) with an initial fixed-rate period of pre-determined years, during which the borrower is may have an option to pay only the interest accrued on the loan. The interest rate then adjusts annually or bi-annually, based on the indexes such London Inter-Bank Offered Rate (LIBOR) index, and can move up or down as market conditions change.
ARMS have caps so the borrower is protected by a maximum adjustment the lender can make over the term of the loan. This information should be clearly identified in the Truth in Lending statement (TIL) which should be given with the Good Faith Estimate (GFE).
ARM loans come with different initial fixed rate periods such as 1 2 3 or 5 year fixed. After the initial period they will start to adjust according to the index they are tied to. What’s nice about ARM loans is it allows the borrower to have a lower payment initially. These type programs can be used for many reasons, one of them being for someone who won’t be living in a property for an extended period of time.
Is the ARM right for you? I can understand how the ARM can be confusing and I want to thank you for reading the information above. If you would like to continue this conversation than please contact me so you and I can discuss your financial situation. Please read more valuable information and when you feel comfortable I would like you to contact me.
The initial interest rate for an ARM is lower than that of a fixed rate mortgage, where the interest rate remains the same during the life of the loan. A lower rate means lower payments, which might help you qualify for a larger loan. There’s couple of questions that is very important when considering the ARM like; How long do you plan to own the house? The possibility of rate increases isn’t as much of a factor if you plan to sell the home within a few years. Do you expect your income to increase? If so, the extra funds might cover the higher payments that result from rate increases. Some ARMs can be converted to a fixed-rate mortgage. However, conversion fees could be high enough to take away all of the savings you saw with the initial lower rate.
An adjustable rate mortgage, called an ARM for short, is a mortgage with an interest rate that is linked to an economic index. The interest rate, and your payments, are periodically adjusted up or down as the index changes.
If you are considering an adjustable rate mortgage, make sure you do the research. Find out how often the rates can increase and by how much. Try to determine whether you can afford payments if the rates go up significantly over the next few years.
“American consumers might benefit if lenders provided greater mortgage-product alternatives to the traditional fixed-rate mortgage,…To the degree that households are driven by fears of payment shocks, but are willing to manage their own interest-rate risks, the traditional fixed-rate mortgage may be an expensive method of financing a home.”- Alan Greenspan, the Chairman of the Federal Reserve Board at the Credit Union National Association 2004 Governmental Affairs Conference
Most lenders tie ARM interest rate changes to changes in an “index rate.” These indexes usually go up and down with the general movement of interest rates. If the index rate moves up, so does your mortgage rate in most circumstances, and you will probably have to make higher monthly payments. On the other hand, if the index rate goes down your monthly payment may go down. Lenders base ARM rates on a variety of indexes. Among the most common are the rates on one-, three-, or five-year Treasury securities. Another common index is the national or regional average cost of funds to savings and loan associations. A few lenders use their own cost of funds, over which–unlike other indexes–they have some control. You should ask what index will be used and how often it changes. Also ask how it has behaved in the past and where it is published.
Adjustable rate mortgages or ARMs have Interest Rate Caps. Rate caps limit how much interest you can be charged over a period or over the life of a loan. – A Periodic rate cap limits the amount by which your interest rate may increase at the adjustment period(s). Only some ARMs have these period caps.- Overall or lifetime rate caps limit how much rate can change over the life of the loan. Lifetime or overall caps are required by law and have been required by law since 1987 on all Adjustable rate mortgages.
ADJUSTABLE-RATE MORTGAGE (ARM)A mortgage loan where the interest rate is not fixed for the entire term of the loan, and can change during the life of the loan in line with movements of an index rate.
If your ARM has started to adjust, it might be a good idea to refinance into a fixed rate loan.
2/28 ARM is a great product. Especially for 1st time home buyer or subprime borrower. Allows them to strengthen credit over the two year period.
An Adjustable Rate Mortgage (ARM), will carry a lower initial interest rate than a typical 30 year fixed rate mortgage. The lender is hoping that you will forget about the adjustment, and just continue to hold on to the loan. Be aware of when your loan is due to adjust, as well as by how much it will adjust.
If one or more of these situations describes you, an ARM might be a good fit: -You plan to stay in your home for a relatively short period of time -You want lower initial monthly payments and can handle potential payment increases in the future -You want to qualify for a larger mortgage amount, and you expect your income to go up over time
It has been shown, that home owners would have saved thousands of dollars if they had a ARM of a conventional 30 year fixed.
When should you take an ARM mortgage vs. a traditional 30 year fixed? Consider how long you plan on occupying the property. If it is for 10 years or more then a 30 year fixed may be the best bet when interest rates are low. However, if you plan on moving sooner then consider the extra savings you will achieve by choosing an ARM. For example, you plan moving when your child is old enough to go to school in three years. The best financial choice would to get a 3 year or possibly a 5 year ARM. When a 30 year fixed mortgage is around 5.875% a 5 year ARM is around 5.25% and a 3 year ARM would be about 5.00%. On a $200,000 loan the monthly payments would be $1183 for a 30 year, $1104 for a 5 year ARM, and $1073 for a 3 year ARM. Times that by 3 years, 36 months, and your savings for an ARM vs. a 30 year fixed would be between $2800 – $3900. Money better spent elsewhere.
If you only plan on living in your home for a few more years, it might not be worth it to move from a program like a low rate ARM or an Interest Only Program to a traditional Fixed Rate loan. There may be better things to put your money towards each month that putting a few extra dollars towards the principal of your home.
Bad Credit Refinancing
Pre-payment penalties may be one of the biggest obstacles to refinancing when you have bad credit. These penalties vary from state to state but the main purpose is to protect the lender from losing money when taking on higher risk mortgages.
When speaking with one of our mortgage professionals, please be sure to mention if your credit score is at or below 500, because we have very specialized programs which may be able to provide you with a unique opportunity to refinance and take cash out.
Subprime lenders are another great alternative. Because these lenders specialize in high risk loans, they have various loan programs for individuals with poor credit. Submitting an application online is the quickest and easiest method for obtaining a quote.
One of the biggest causes of bad credit is if you are making a habit of late credit card payments. Late credit card payments are like a huge red buzzer to lenders. It alerts them that you have been irresponsible in the past with making payments, and statistically speaking, you will be irresponsible again. That makes you a serious risk to their lending institution.
Depending on the lender you may be able to buy out or buy down the prepayment penalty. Your interest rate will usually increase when you buy out or buy down you prepayment penalty.
In addition to pre-payment penalties lenders often charge higher interest rates for borrowers with bad credit to offset the higher risk.
Bad credit, no credit or good credit. If you are thinking about refinancing you should check with your loan officer or mortgage broker to see what you qualify for. Never count yourself out of the game because you just might be surprised. With the new subprime lender programs that have hit the market in the last few years your chances have substantially increased to get qualified.
Because banks charge high interest rates on loans made to homeowners with bad credit, these homeowners often have no intention of keeping the loan for more than a year or two. They plan on refinancing their mortgages to a lower rate at least once more when they have repaired their credit profile. Therefore, homeowners with bad credit often opt for Adjustable Rate Mortgages or a Hybrid Loan with a fixed interest rate for the initial 2 years followed by an adjustable rate for the remainder 28 years. These ARM’s and Hybrids tend to have lower starting rates than the 30-year fixed rate mortgages.
Bad credit refinancing may help some borrowers improve their credit rating if the money from loan proceeds are used to pay off debts. This can improve monthly cash flow helping them make all monthly payments on time.
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