Are your home mortgage rates going to increase? This may happen either if you have fallen behind your payment schedule or because of the type of mortgage you are holding or perhaps you are having financial problems due to loss of job. Regardless of the reasons for your mortgage anxiety you would like to know how to recognize and avoid foreclosure at the extreme and reduce your payments on the lighter side. Some types of home mortgage rates are Hybrid Adjustable rate mortgage, Adjustable rate mortgages (ARM) and fixed rate mortgages (FRM).

In case of hybrid ARM’s mortgage, the mortgage has few years of fixed payments and then it turns into an adjustable rate. Some hybrid ARMs are called 2/28 or 3/27 where the first number refers to the number of years the loan will have a fixed rate and the second number refers to the years the loan has an adjustable rate. While ARMs are those mortgages which have adjustable rates from the beginning and the payment changes over time, mortgages where the rate is fixed for the life of the loan are called FRMs.

If you have a hybrid ARM or an ARM, as the mortgage interest rates increase, the payments will increase. In such conditions you can consider refinancing to a FRM. By refinancing you not only can lower your interest rate, you can also optimize your loan structure and shorten pay off terms by converting from an adjustable rate mortgage (ARM) to a fixed-rate mortgage (FRM) by refinancing your mortgage. Why should you convert ARM to FRM? The fact that ARM will go up eventually when the rate of interest shoots up in the future is the reason. Unless you are able to lock into the current rate, refinancing into an ARM again would not make sense. You can also refinance later if the rates drop in the future, which is unlikely. There is no guarantee that you will be able to refinance again in the future. Moreover, many ARMs carry prepayment which forces you to pay a hefty amount if you decide to refinance within the first few years.

To decide if this is the time for you to refinance to FRM, you may need to evaluate certain parameters that will affect the home mortgage interest rate. Other than how long you are expected to live in the home, debt to income ratio and the amount of equity you have in your home is also important.

A debt to income ratio is the percentage of a borrower’s monthly gross income that goes towards paying debt generally on a monthly basis. Usually, the smaller your debt-to-income ratio, the better is your financial condition. The recommended debt-to-income ratio is under 15 percent. This percentage is good enough to get you a potential lender.
Again, your loan to value (LTV) ratio is also what most potential lenders review. This ratio compares the loan you are trying to obtain to the current value of your home. LTV is expressed as a percentage. For example if the loan is $50,000 on a value of $100,000, it has an LTV of 50%. A mortgage is also said to have a high LTV when the amount of money lent is high in relation to down payments made. For example if the borrower has made down payments of 5% and the mortgaged amount is 95% of the sale price, the loan is said to have a high LTV.

This also suggests that refinancing is not a good idea when you have had your mortgage for a long time because the proportion of your payment that is credited to the principal of your loan increases each year, while the proportion credited to the interest decreases each year. In the later years of your mortgage, more of your payment applies to principal and helps build equity. By refinancing late in your mortgage, you will restart the amortization process, and most of your monthly payment will be credited to paying interest again and not to building equity.

These areas need to be carefully assessed and you need to see if it is the right time for you to go in for refinancing.You can get these complicated decisions evaluated with the right people who will help you to understand better and put your mortgage rates on track.

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Category: Finances
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