My adjustable-rate mortgage will be adjusting next month, and it looks like the new rate will be around 8%. What should I do? Is it impossible to refinance into a fixed-rate loan these days, even though I have a good credit score?
Despite all the dire reports, it can be surprisingly easy to refinance into a fixed mortgage. "It's not as hard as people think it is," says Chris Smith, president of Capstone Mortgage, a mortgage broker in Lexington, Mass. "If you have decent credit and you're borrowing $417,000 or less, it's really quite easy to get a fixed loan." In that case, you can get a 30-year fixed mortgage for about 6.375% if you pay no points, or 5.875% if you pay two points, she says.
But the situation gets a lot more difficult if you have a jumbo mortgage -- one that is larger than the $417,000 cut-off for Fannie Mae to purchase from lenders. In the past, banks would sell those large loans to investors, but "that came to a screeching halt" after all the subprime troubles, says Smith. It's tough for banks to resell jumbo loans at the moment, even if the borrower has stellar credit. Right now, they're charging jumbo borrowers in the high 7% range with no points, she says.
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If you have a jumbo ARM that is about to adjust to a high rate, Smith recommends either breaking it into two smaller loans -- each below $417,000 -- and locking in a fixed rate. Or you can take out a longer-term ARM at a decent rate right now and wait until the jumbo business settles down.
You can get a rate of about 6.75% with no points for a jumbo ARM that locks in the rate for seven years then adjusts after that, says Smith. That way, you can buy some time. If rates drop, you can always refinance again into a fixed loan. Be sure to include the cost of any prepayment penalties in your calculations.
If you do get a long-term ARM that you expect to refinance out of soon, however, Smith recommends doing it with no closing costs. Instead of paying those administrative fees up front, you have to pay a slightly higher rate. But that spreads the cost over the life of the loan, which will result in lower costs if you refinance again to a fixed loan soon.
Smith expects that investors will resume buying jumbo mortgages from buyers with good credit in the next few months, which should lower the rates on fixed loans for jumbo borrowers with good credit. You may also be able to lower your closing costs if you refinance with your current lender, but it's also a good idea to talk with a mortgage broker to make sure that that rate is competitive.
The big caveat, however, is that these options are only available for people with good credit. Those with credit problems will have a tough time refinancing. In that case, talk with your lender before you miss any payments. The lender may be able to modify the terms of the loan, which could lower the interest rate or tack on some of the costs to the end of the loan. And depending on your mortgage balance and the housing market in your area, it might be best to try to sell.
If you're in that situation, it's also a good idea to seek help from a housing counseling agency approved by the U.S. Department of Housing and Urban Development (HUD). See the map for links to agencies in your area.
If you're worried about foreclosure, contact the Homeownership Preservation Foundation (888-995-HOPE), which offers free urgent housing counseling 24 hours a day, either over the phone or through a live chat on the Web. This organization is a joint effort by government agencies, local nonprofits, mortgage banks and select credit-counseling agencies to help people avoid foreclosure. Todd Mark, director of consumer relations for the Consumer Credit Counseling Services of Greater Atlanta, which is a HUD-Approved housing counseling agency and provides counseling through the Homeownership Preservation Foundation, says they're currently providing 1,700 to 2,000 urgent housing consultations every month.
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