There isn’t much sexy or exciting about home mortgages.  For most of us, you put down 10-20% on a new home and finance the rest over 30 years.  If we plan to stay in the same home, we just make our payment every month and ride out the years.  Yawn.

Two things shake up that traditional scenario.  First, most Americans don’t stay in the same house for 30 years.  Second, many buy more house than they can afford, using adjustable rate mortgages (ARMs) while rates are low and getting a huge shock later as their payments increase with rising rates.

Adjustable Rate Mortgages

If you’re in the second group, or contemplating buying a home using an ARM, proceed with caution.  Many people have gone this route only to find they couldn’t keep their homes when interest rates increased.  Right now interest rates are low, meaning the pump is primed to see this happen.  If you’re looking to purchase a house, don’t just compute your mortgage payment at current rates.  Compute your payment under some “what if” scenarios.  What if interest rates increase to 4, 5, 6%?  What will your payment look like then?  Is there a maximum interest rate allowable in the mortgage you’re considering?  What is your payment in that worst case scenario?  Can you still afford this house?

These are important questions to ponder with an ARM.  Right now rates are low, but the Federal Reserve Bank (The Fed) has hinted at increasing rates.  If our economy shows signs of recovery, the hints will become reality and your payments will increase.  Will you be ready?

Traditional Mortgages

What if you’re in that first group?  If you move every few years, you’re at the mercy of prevailing interest rates at the time of the move.  How long you plan to stay in the new house may determine the type of mortgage you choose.  If you feel interest rates will stay low during the period of time you’ll stay in this home, you may take the risk of financing with an ARM to get what may be a slightly lower initial rate.  Again, I’d suggest you weigh the possibility of worst case scenarios.  We don’t all live a charmed life.  Rates can change, or your plans to move may be scrapped for one reason or another.  Can you afford the payment under the worst case scenario?

HARP

There is another group we haven’t discussed yet.  It’s the group I’m in.  Those of us in this group bought our homes several years ago and found ourselves with interest rates of 5% or higher.  I think mine was 6 5/8%.  I would love to have refinanced but thanks to the housing market tanking around 2009, even though we had financed 80%, we found ourselves underwater.  Enter HARP, the Home Affordable Refinance Program.  You have to be eligible (see harp.gov for details) but the process is well worth it.  Unlike the typical refinance, there are no appraisals or underwriting, you can be underwater, the refinance fees are reduced, and the process is (supposedly) streamlined.

What do you get for your efforts?  You get a lower mortgage payment or a shorter repayment period, depending upon the terms you choose.  In our case, we chose a 15-year loan vs. our previous 30-year plan  Our new 15-year payments were about $50 more than our previous 30-year payments at the old interest rate.  Looking at the big picture, we’ll save more than $80,000 over the life of our loan!  It was so worth the effort!

Finally, if this sounds like something that might work for you, you need to start the process now.  The HARP program is scheduled to expire December 31, 2016.  If you qualify, the savings could be dramatic.  Where else can you find this kind of savings just by filling out a little paperwork?

To your better wealth,