Adjustable Rate Refinancing & Prepayment Penalties
If you are like most borrowers who are in an Adjustable Rate Mortgage, or ARM, you already know when your rates are going to increase, but you’re afraid to do anything about it because of your mortgage’s pre-payment penalty. But you don’t have to wait until your prepayment penalty expires to start the refinancing process. In fact, the sooner you start, the better off you’ll be when it comes to switch over to your new fixed rate mortgage. And remember, a prepayment penalty is just that, a penalty for paying off the mortgage early. There’s no penalty for being a responsible planner!
Mortgage refinancing, especially when you are going from an adjustable rate mortgage to a fixed rate mortgage in the current market, is very much about having a strong application. This means getting your credit scores up and saving as much money as possible to keep your bank balances high, so that when you apply for the mortgage a few weeks before your rate goes up, you not only have an approval for the refinance, but you are locked in a for the best rate possible. You can be approved for a mortgage well in advance, just ask for a longer rate “lock” period once you’ve been approved for the refinance. Lock periods are normally 15 to 30 days for most refinances, however 45, 60, 90 or even 120 day locks may be available depending on your personal situation, although longer locks sometimes require an upfront “lock fee”.
Improving your credit can consist of simply paying down the balance on cards which are used up to over half their limit, writing letters to have erroneous items on your report removed, or otherwise taking small, inexpensive actions which can greatly improve your credit score. In the mortgage industry, we employ proprietary systems which allow us to simulate several small actions and estimate how much your credit scores can be improved. For maximum effect, contact a mortgage company specializing in this type of computerized simulation 60 days before you want to refinance, so all the changes have enough time to reflect on your report by the time your application for refinancing is underwritten.
The reason I mention saving money is so that you can document a history of having strong liquid cash reserves, which makes qualifying for a loan so much easier than it would be otherwise. Liquid reserves are ideally Savings or Checking accounts, although CD’s, investment accounts, and in some case retirement accounts may be considered reserves for the purposes of refinancing. Cash reserves can make up for weaker credit, and in some cases can allow you to qualify for a much, much lower mortgage payment than you would otherwise receive.
If you are like millions of homeowner locked into ARM adjustable rate mortgages which adjust later this year or later on over the next few years, you may want to consider refinancing before your prepayment penalty expires rather than risk paying a much higher rate when it comes time to refinance at the end of the penalty period. In most cases, pre-payment penalties are considered mortgage interest, and can be tax deductible as such. If you have the equity available in your home to pay for the penalty, it may be worth refinancing today while programs are still flexible and rates are still low, to reduce the likelihood of not qualifying for a good rate, or not qualifying for a refinance at all when your pre-payment penalty period does expire in the future. We do want you to consult your CPA regarding any matters pertaining to your personal tax situation, as we do not give out tax advice. If you are going to refinance and pay your prepayment penalty, please be aware that I have not seen over the past year a single lender, in literally hundreds of refinances where borrowers had to pay penalties, actually honor a promise to discuss waiving a prepayment penalty for one of their valued customers. In today’s market, the lenders can’t afford not to collect the penalty amounts, even if you refinance with them, and will generally cite something to the effect of “You signed an agreement to pay the penalty as part of the terms of your mortgage, and it would be a federal offense (etc.) for us to waive it.” Not true, but as far as you’re concerned, don’t hold onto any illusions of beating the pre-payment penalty that easily.
Either way, you’ll want to have your application processed and underwritten at least 30 days before your pre-payment penalty period expires. Once approved, this gives you plenty of time to provide any supplemental documentation the lender may request. Once your loan is cleared for closing, you can schedule the closing so that your loan funds the day after your pre-payment penalty expires, which is generally safer than doing it the day of expiry.
Refinancing into a fixed rate used to mean giving up the low payments and flexibility of an adjustable rate mortgage. Not anymore. We now offer a product which was tailor made for borrowers who want to refinance into a secure 30 year fixed rate mortgage while preserving the options available under ARM type mortgage programs. For more information about refinancing an adjustable rate mortgage to convert to a fixed rate mortgage, visit us online or call us toll free.
