If You Need to Refinance, The Sooner You Do It, The Better

by Justin Weinger on January 6, 2008

Many Americans who have adjustable rate mortgages (ARMs) are facing the harsh reality that when their mortgage rate resets, they will have a higher monthly payment on a property that will likely be valued less than what it is today.

Unfortunately, some of these home owners with ARMs are too far upside down in the loan (meaning the value of the mortgage debt is greater than the value of the mortgaged property) to even begin the process of trying to refinance into a fixed rate mortgage. I know many people in this situation, and it’s really tough to come up with the best solution for this. I fear that the home loans in this situation will ultimately be a much larger drag on the real estate market than the current subprime fiasco. However, I’ll save that for another article.

For those of you who are currently in an adjustable rate mortgage and are fortunate enough to still have some equity in your property, I have this to say: IF YOU THINK THERE’S A CHANCE YOU MIGHT NOT BE ABLE TO AFFORD THE PAYMENT WHEN THE RATE RESETS, YOU NEED TO EXPLORE YOUR REFINANCING OPPORTUNITIES RIGHT NOW.

There are several reasons behind why I feel so strongly about this. Here they are in no particular order;

1) The housing market is likely to continue its slide through 2008 and probably well into 2009. That means the equity you have in your house is only going to last so long before you’re in the same boat as many “upside down” borrowers. Once the loan to value ratio gets too high (meaning you have less equity in your property) you may not be able to refinance your property.

2) There’s no point in trying to hold out for lower interest rates. This morning, the average rate on a 30 year fixed mortgage was roughly 5.5%. Historically, that is an absolutely incredible rate. Besides, what would holding out for 5.25% really save you? In the end, probably not a whole lot. Currently, I think there’s much more risk in waiting for rates to fall than there is in locking in now and being done with it.

3) If banks have to continue to have massive debt related write offs, the lending standards are going to become more and more strict. What you might be able to qualify for now (i.e. 95% financing) might be completely dried up in the coming months. That means you’re either going to have to pay a much higher interest rate, have a ton of equity, or put down loads of cash in order to secure financing. None of those three scenarios seem very appealing and/or likely.

Truth be told, I am in a very Chicken Little state of mind when it comes to real estate. I fully believe the sky is falling and it is going to take a very long time for this real estate depression (it’s well past a correction at this point) to work itself out. If you look at the many historical ratios regarding rent vs. mortgage payments and general affordability, we probably have another 15% or more until we hit a reasonable bottom in prices.

So, if you need to look into refinancing your existing mortgage into something fixed, there really is no time like the present. Even if you’re not sure, at the very least, explore your options and see what is currently available to you.



Kenneth January 6, 2008 at 11:26 pm

I agree, but for a completely different reason. To me, people who have ARM loans they can’t afford when the payment adjusts are the same kind of people who file bankruptcy, and coincidentally, I hate both of those types of people. Why? Because they’re the type of people who cost me more money in higher interest rates on my fixed rate loans. Yeah, because the jerks out there reckless with their finances are the ones who ruin it for all us responsible types. Go get your fixed rate loan, now, and pay it on time every month!

Matt Sullivan April 4, 2008 at 11:18 am

You could not be more correct. I am in the credit coaching industry and it is amazing how quickly the market continues to tighten.

The waters are going to get even rougher before the year is done.

Kathryn May 7, 2008 at 3:07 pm

The real estate market NEEDS to adjust. The loan industry has artificially increased the value of homes by creating insane products. Who NEEDS a sixty year mortgage?

The best way to stay out of hot water is to only borrow what one income in the family can pay and to keep mortgage payments around or below 25% of monthly expenses.

(for the record, I was one of those people who got a variable rate mortgage. The first few years it dropped until it was below anything that you can get today. We locked as soon as rates began to rise 😉 ).

Finance November 3, 2008 at 6:19 am

Yes refinancing can be a good option and lead to better returns, but subject to market conditions.

Automobile refinancing November 10, 2008 at 1:53 pm

Very interesting article!
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