By: Ilyce Glink and Samuel Tamkin
Q: I owe more on my mortgage than what my house is worth. And, unfortunately, my loan isn’t owned by Freddie Mac or Fannie Mae, and it is an adjustable rate mortgage.
What are my options to refinance my loan into a fixed-rate loan? Also, I had a Veterans Administration (VA) loan at one time and I sold the house. Would I be able to get another VA loan? I’ve made all of my payments on time.
A: If your current lender does not participate in any of the loan modification and refinance programs, you might be out of luck if you need a refinance and you’re underwater.
While you didn’t mention your interest rate, you did indicate that your interest rate is adjustable. Recently, people with adjustable rate mortgages have found that they are getting a phenomenal deal. Some of them have rates that are lower than 3 percent.
On the plus side, if your current interest rate is that low, your ARM mortgage payment should be rock bottom. If you refinanced now it would only increase your interest rate and payment. For some people in your situation, you might be better off keeping your current loan and paying it down while you can than locking in at a higher interest rate, even if it is fixed-rate loan.
While mortgage interest rates are and have drifted higher, interest rates today are still quite low and many people believe that any rise in interest rates, if they do indeed go up, might be moderate.
We believe interest rates could go up a couple of percentage points (to maybe 5 or 6 percent for a 30-year fixed-rate loan) but even with that rise, interest rates will still be historically low, and home affordability will still be reasonable.
Take a look at your mortgage documents and try to figure out index your interest rate is tied to. Some adjustable rate mortgages are tied to the one year Treasury rate and others are tied to the London Interbank Offer Rate (LIBOR). In either case, you can look up that interest rate and see how your lender calculates the rate on your loan.
Usually, loan products have a cushion or differential (also known as the “margin”) between the Treasury or the LIBOR rate of anywhere between 2 and 3 percent. For example if the LIBOR rate is 1 percent and differential is 3 percent, your interest rate would be 4 percent.
Your loan documents should indicate whether your loan can increase or decrease and by how much. Some loan documents limit a lender from increasing the interest rate on a loan by more than 2 percentage points in a single 12-month period. So if your loan currently is at 3 percent, you can rely on your interest rate not going higher than 5 percent on the next rate change date.
That might give you some additional comfort. Also, if you’ve been paying on the same loan for 5 or 7 years, you’re now far enough into your loan term that you’re paying down your mortgage quite a bit faster, reducing the amount you’re underwater.
Being underwater is the biggest problem you face in terms of refinance mortgage. If you don’t qualify for the government’s Home Affordable Refinance Program (HARP) and if your lender won’t help you out, you’re stuck.
But over the next 20 years, you might not matter that much. Mortgage interest rates have stayed at or below 6 percent for the past twenty years. If history repeats itself (and there is no guarantee of that), then you’d do better by sticking with your original loan than refinancing into a fixed-rate loan.
Finally, if you’re thinking about selling your home in a couple of years, the difference in interest rates isn’t going to matter if you still owe your lender more than your home is worth. Then, you’ll have to list your the home as a short sale and get the lender’s permission to sell, or come up with the money you owe the lender, or negotiate with the lender to pay the difference after the sale, or lose the home through foreclosure.
In terms of a VA loan, you should check out the eligibility requirements for VA borrowers to see if you qualify. If you qualified at one time, you might still qualify. As a veteran, you can still obtain a VA loan subsequent to having sold a home that previously had a VA loan. For more information go to www.benefits.va.gov.