Know your mortgage.
Do you know what kind of mortgage you have and whether or not your payments are going to go up? Read the mortgage documents that you received at your settlement. If it is too complicated, contact your loan servicer or a HUD approved credit counselor and tell them you need help understanding the conditions of your loan. The servicer is the party who bills you monthly and who is responsible for collecting your monthly loan payments. As a reference to try to help you understand your paperwork, here are some of the most common types of home loans originated.
Examples of the different types of mortgages:
- Hybrid Adjustable Rate Mortgages: These are mortgages that have a fixed payment and monthly bill for a period of time, usually a few years. Then the mortgage turns into an adjustable loan. These are the most common types of mortgages that consumers need help paying, as the interest rate will often increase. They will have a number such as 2/28 or 3/27. The first number in the sequence will refer to the number of years the loan has a fixed rate for. The second number refers to the number of years the loan has an adjustable rate for.
- Another naming sequence is 5/1 or 3/1 hybrid ARMs. In these cases, the first number will refer to the years the loan has a fixed rate for. The second number refers to how often the rate changes. Maybe an example will help. In a 3/1 hybrid ARM the interest rate is a fixed rate for three years, then it adjusts annually thereafter.
- ARMs: These are mortgages that have an adjustable rate from the beginning, which means the amount you are responsible for paying will definitely change over time. The rate can change for a number of reasons, including when the federal reserve raises (or lowers) interest rates.
- Fixed Rate Mortgages: Mortgages where the interest rate is fixed for the entire term of the loan.
If you hold a ARM or hybrid ARM home loan, and you will have trouble keeping up with your bills and making the higher payments, determine if you can refinance to a fixed-rate mortgage. Review your mortgage contract first to see if you have a prepayment penalty as unfortunately many ARMs have prepayment penalties that will force borrowers to come up with hundreds or thousands of dollars if they attempt to refinance within the first few years of the loan. However, the government is now helping with mortgage refinancing.
Note, if you are planning to sell your home soon after your adjustment, refinancing and making that payment may not be worth the cost. There can be closing costs, fees, settlement expenses and other expenses involved in the refinancing. On the other hand, if you are planning to stay in your home for an extended period, a fixed-rate mortgage refinancing may be the way to go. Calculators online can provide you needed help in determining your payments, costs, and bills you may receive.