Fear Mongers and Adjustable Rate Mortgages
by Evan Vanderwey on 26/02/10 at 4:23 pm
This post is excellent advice if you are in an Adjustable Rate Mortgage.
I was recently contacted again by a gentleman who is in an Adjustable Rate Mortgage – he is getting concerned about the situation and what could happen if inflation rises and/or rates rise.
There seems to be a lot of fear about this in many households. If you have an ARM type loan and your current loan balance is higher than your home is worth, you may not qualify for any of the wealth redistribution programs out there – so what can you do?
This phone call was like many that I have – I wanted to share it in some detail:
This person has a mortgage balance of around $150,000. The homes on his street are selling at or around $115,000. His interest rate is currently around 3%. He does not qualify for ANY of the programs and his current lender is not willing to modify his loan. His mortgage has a “capped rate” of 11.95% – that’s as high as his rate could ever go.
Most importantly – he is fine. And likely, if this describes you, you can be too.
Over the past two years as I’ve been talking with this family, they have paid off a credit card, eliminated a car loan and paid off one student loan. They have also increased their emergency fund to around $10,000 – this represents almost 6 months of their household living expenses.
This was not easy for them. They did not get a big raise or get a second job. They are a one-income family. They have made a lot of sacrifices in the past number of months to get to this point.
As they eliminated other bills and reached their $10,000 emergency fund goal, they kept building up the payment they were making to the next debt account balance they were focusing on. They have two student loans left for a total of about $18,000. They are paying $1000 per month toward the two of them.
In 18 more months, they will have eliminated all of their debt, and a few months after that they will have saved enough to purchase their next used car with cash. It is likely they will reach this goal sooner as they have been able to push their tax refunds toward their goals in addition to their monthly payment.
Here is the good news. Even if their adjustable mortgage interest rate went up all the way to 12%, they would be able to afford the resulting payment.
They will not lose their home if they make their payments on time.
They will deduct a boat load of interest against their income making their effective interest rate 9%.
And, rates are not likely to go up soon and not likely to rise that high.
In 18 months, when the last student loan is paid off, they will start paying an extra $1000 per month on the mortgage eliminating the mortgage far sooner than the prescribed time period.
The moral of the story is:
Focus on what you can control. Stop worrying about what you cannot. Don’t be afraid of what has not happened yet. 99 times out of 100, if you do that, you will be more than fine. You will use the realities of this market to get ahead.
Many will try to scare you and tell you that “rates will be going out of control” and that “you will lose your home” and that “you should never have done the ARM loan”. Maybe you shouldn’t have done the ARM loan – but that is irrelevant at this point.
Those who are scaring you are more than likely speaking out of their fear and they do not know the facts about your situation.
Get the facts about your situation and get disciplined about paying off debt and saving. Call my office, I’m glad to help with a plan like the one in the above real life example.
So the simple advice is this: Use today’s low rates to your advantage – pay off other debt, build a reserve and then pay off the mortgage more quickly or invest prudently.
