If You Can Refinance That ARM, Don't Delay. Do It Now!In the current mortgage crisis, getting refinancing for an existing ARM is not likely to be easy. Since, false starts in mortgage applications will register to your detriment in the credit score being published by the credit reporting agencies and since all lenders will use that score as a benchmark before they consider you and the amount of risk you represent, restricting your dealings to reputable lenders who will view your application favorably makes eminently good sense. Clearly, when you want to avoid an upcoming series of increases in your ARM's adjustable rate by refinancing to a fixed rate, it is always best to deal with the institution which wrote your ARM in the first place. The best way to approach that possibility is to contact the loan officer with whom you worked when you took out the ARM. In these rapidly changing times, either the loan officer or the institution may have significantly changed. The sub prime crisis has led to a huge shakeout in lending practices and staffs and many firms have gone under or been taken over by larger institutions (witness the current takeover of Countrywide by Bank of America).
The big question any lending officer who you deal with will ask is what has changed since you took out the ARM? One of the primary things outside of your control will be a change in the value of your home which is the banks collateral for the ARM. At this moment, the real estate market in most areas of the country is uncertain at best. Some areas like Michigan are particularly hard hit. So in order to refinance your ARM to a fixed rate loan you have to face the possibility that your home value is below the value required to be considered a risk the bank will consider refinancing. There is little that a consumer can do about this other than paying down the mortgage to a level that bears a satisfactory relationship to the refinancing loan that you are considering. The criteria commonly used by lenders in today's market are the DTI - "Debt To Income" ratio - which is a simple indicator of the relationship between your debt and your income. DTI ratio has 2 factors - "front" and "back" factor. The standard maximum DTI acceptable by lenders is 28/36, what means that the "front" factor should be maximum 28, and the "back" factor should be maximum 36.The first factor is calculated as the percentage of your gross income (income before all taxes and other deductions), which is spent on housing expenses - payments on the mortgage loan principal and interest, private mortgage insurance, hazard insurance and property taxes. It means that the above monthly housing expenses should not exceed 28% of your gross monthly income.The second factor is calculated as the percentage of your gross income, which is spent on housing expenses and recurring debt. So, this factor covers the first factor plus other expenses - including credit card payments, child support, auto loans, etc. All these monthly expenses should not exceed 36% of your monthly gross income. If you have the ability to refinance and the terms of your ARM will require you to increase your monthly payments significantly in the near to mid term future, I suggest you take advantage of that opportunity as soon as possible. |