Many people were trapped in an adjustable rate mortgage before and during the housing crisis of 2008. An adjustable rate mortgage was a way to get "more home" for your money; by getting an ARM, you could qualify for lower interest at the outset. But an ARM did not finish with a lower interest rate; the rate steadily creeps up over time until you're paying significantly more than you thought you would. Getting out of an ARM can be more complicated for many than they think, for a variety of reasons.
Refinancing to "Buy Yourself Out" of the Loan
Getting out of an ARM is difficult often because a property ends up being under water. The property may simply not be valued at what you've spent. If you purchased a home at $400,000 and it's currently valued at $250,000, you could still owe $350,000 on it... and no one is going to take this loan. There are two things you can do in this situation. You can buy yourself out of the loan by putting down $100,000 in cash and taking out a $250,000 loan, or you could seek to improve the property's value by that amount and get a new appraisal. Both of these are long-term commitments that should only be taken if you truly believe that you will be in the property for some time.
Improving Your Credit Score
But maybe you aren't underwater in your loan. The other reason you may be in an ARM is because your credit score was not good enough to qualify for a fixed rate before. If your credit has improved, you may be able to refinance to a fixed rate without any issues. If your credit score has stayed the same or gotten worse (which often happens because people can't afford their ARM payments), there's still another option: you can get a co-signer. If you can find a co-signer who has a better credit score, you should be able to apply for a fixed rate mortgage.
Declaring Bankruptcy or Foreclosing
Bankruptcy and foreclosure are never a good option unless you absolutely cannot avoid it. But if your payments are currently untenable you might want to consider it. Something to consider is that bankruptcy is often better for you than a foreclosure. A bankruptcy will almost always let you keep your home if your home is currently underwater or doesn't have substantial equity. That means you might be able to get rid of your other debt while still retaining a place to live. Foreclosing, on the other hand, could still leave you on the hook for the difference if the property has to be sold under the amount that you borrowed.
What should you do if you simply can't seem to get out of your ARM? Contacting a mortgage refinancing company is still a solid first step. Most of the time you can talk to a loan officer who will be able to guide you through the appropriate decisions for your situation. It's very possible that you may not be able to refinance today, but that you may be able to refinance in a year or even two.Share
17 March 2017
I always wanted to buy my own home and after saving enough money for a down payment, I decided that it was time. Before I started looking at houses, I talked with a loan officer about financing. I wanted to know how much money I could borrow so I could look at houses in that price range. I was very happy after my meeting at the loan company and I was ready to start house hunting. My name is Jarod Spangler and I'm now a homeowner. If you have the dream of owning your own home, I think you'll find my blog of help to you. I've documented my journey of saving money, securing a loan and purchasing a house. To help you become a homeowner too, I'm offering advice and tips of things that I've learned along the way.