Nowadays, the topic of rising mortgage rates no longer is limited to kitchen table chit-chat. Given the state of the economy and the fact that every penny now counts (more than ever), discussions of interest rate and mortgage and refinancing have pervaded every aspect of society, from water-cooler talks at the office to shopping centers and sports arenas-especially at half-time, when you see the latest ad of a financial services giant urging you to refinance. Coping with higher mortgage rates, although a difficult exercise, can be easy if you talk to the right people, make sensible decisions, and adopt a conservative approach when it comes to things like spending, budgeting, financial planning, and retirement planning.
Go with the Status Quo
Play it safe, says my good friend Robert A., an independent mortgage adviser who has more than 25 years of experience in everything from condos and single-family houses to commercial properties like shopping malls and sports arenas. The economy may be playing yo-yo right now, and you may think your mortgage rate is too high, but do some research and ascertain the real average interest rate. Sites like Bankrate.com regularly publish average interest rates for a specific period-say a day, week, month, or quarter. Take, for example, the quarterly average rate and compare it to your mortgage rate. If the difference is not greater than a point or two, it is not worth considering a refinance because you could end up losing more money if you have to fork over extra money for things like finder's and closing fees along with prepayment penalties that your current lender may require. Either way, talk to your mortgage lender if you are bowing to economic tedium, cannot make the required monthly payments or can barely make them, and want to see available options for someone in your financial situation.
Take a Risk
If you have, say, a 15- or 30-year fixed-rate mortgage and you think that rate is too high compared with average rates, take a risk and opt for an adjustable-rate mortgage (ARM). Some critics like to say that lenders who grant ARM loans indirectly twist borrowers' arms-or tie their hands, for that matter. I disagree. I think you can still choose an ARM if the terms and conditions are right, your financial situation can handle it, you have done your homework and know the difference between an ARM and a fixed-rate mortgage, and you have professional help ready to step in. An ARM may suit your situation if you intend to make more money in the future, say, in three or five years. So in the first 36 months, you only pay interest on the mortgage, which makes your monthly payment very low. You also can sign up for an ARM loan if you have investments that you plan on liquidating after a specific period and you feel that the investments would generate a higher yield-same thing as rate or return-than how much interest the bank would charge you on the ARM.
Seek a Happy Medium
Robert A., my mortgage adviser friend, recommends that you seek a happy medium when attempting to cope with a high interest mortgage. This approach generally works if you have a primary mortgage and a secondary loan, both of which are attached to your house. For example, say you bought your $300,000 house with a $200,000 fixed-rate loan from one lender and a $100,000 ARM loan from another creditor. Depending on market conditions and interest rate movements, you can call either lender's help desk, explain your situation and intentions to a representative, and ask for the best way to reach your goal. Essentially, you can ask either lender to buy out the other's loan. Note, though, that there are legal implications if the secondary lender wants to buy out the first creditor because the first creditor typically would have a lien on your property and transferring the house's title may require legal expertise. Don't hesitate to hire an attorney to better understand the legal ramifications of first lien vs. second lien; the few hundred dollars you would pay the lawyer are worth it.
Selling your house is my least preferred option because I know people get attached emotionally-as well as spiritually and physically, for that matter-to a house in which they have lived for several years. But if your budget numbers don't add up and your financial straits don't seem to be receding any time soon, you should consider selling your house and moving to a more affordable abode-maybe a smaller house in the same neighborhood or a larger residence at a middle-class-family ZIP code. You probably bought the house when times were good, financially speaking, but now that things have turned for the worse, it makes sense to reduce your overall expenses, so that you can stay financially afloat and get back on track when the time is right.
Consider a Cash-In Refinance
In a cash-in refinance, the lender agrees to refinance your mortgage and give you a lower rate and better terms and conditions, with the express requirement that you dole out some money upfront. In other words, you make a small down payment to reduce the amount of refinancing as well as to diminish future mortgage payments. I know a cash-in refinance may not be the best option for someone who already is coping with economic tumult, but I wanted to bring it up in the off-chance that you might have some cash in the bank-or stashed under the mattress or in the kids' piggy bank. With a cash-in refinance, you can get a lower interest rate, especially if the cash-in amount is substantial.
Don't worry too much if you are coping with a high mortgage interest rates. Take things into your own hands and do some research. Seek help around and enlist the assistance of a lawyer or mortgage adviser. Don't forget to contact your current mortgage lender to discuss relief options that may be available to you. If you are having difficulties making your monthly mortgage payments, you can sell the house, refinance the mortgage, opt for an adjustable-rate mortgage, or leave things "as is" and try to improve your financial situation. You have options to deal with the high mortgage rates.