We survived the 2006 housing crash but are struggling with a 5/1 ARM — where can we get a refinance mortgage?
Q. Dear Credible Money Coach,
We’ve been in our home for 16 years as the original homeowners. We went through the 2006 disaster and were able to hold onto our mortgage. However, we are trying to refinance our mortgage — a 5/1 ARM that adjusts every six months. I am a nurse and my husband has recovered from COVID. We are trying to refinance, but seem to have no help. Our FICOs are 629, our LTV is 76%, and we make $115,000 a year but still can’t seem to get any help. We are a family of 8 and care for our 86-year-old father-in-law. Where can we get the help we need to keep our home? — Valarie
A. Hello Valarie. Thank you for your question — and for being a front-line hero! There’s a lot to unpack in your question, but let’s start off with the aspect that concerns me most — what type of ARM you have.
You say you have a 5/1 ARM (adjustable-rate mortgage) that’s adjusting every six months. The "5" in the name of the mortgage product indicates that your introductory period — with its low interest rate — was five years. The "1" is supposed to mean that once the five-year introductory period ends, your rate will adjust just once a year.
If your lender is adjusting your rate every six months, you may not have a 5/1 ARM. It may be a 5/6 ARM — those adjust every six months.
Getting a handle on ARMs
Your first step should be to verify exactly what type of loan you have. You should confirm this with your lender. A 5/6 loan can be very risky because the rate can rise to a point where it becomes difficult to make your monthly mortgage payment.
But if you really do have a 5/1 ARM and your lender is treating it as a 5/6 ARM, you should reach out to them right away to rectify the situation. If you don’t get prompt satisfaction, you can file a complaint with the Consumer Financial Protection Bureau.
Things that can stand in the way of a refinance
Valarie, you don’t say if you’ve already applied for refinancing and been turned down. But there are some common obstacles that can prevent you from getting a refinance mortgage.
- A high LTV — Your LTV, or loan-to-value ratio, compares how much you want to borrow and the appraised value of your home. A high LTV — generally 80% or higher — can make a lender perceive you as a riskier borrower because you don’t have much equity in your home. They think you may be more likely to walk away if you can’t make your mortgage payments down the road. But with an LTV of 76%, this may not be an issue for you.
- Poor or no credit — If you have a poor credit score or little credit history, it can be difficult to qualify for some types of credit. At 629, your score could be considered on the lower side of fair, but most lenders want to see a score of 620 or better for a conventional loan. That said, there are mortgage options for people with lower credit scores.
- A high DTI — DTI, or debt-to-income ratio, compares your gross monthly income to your total monthly expenses to get a picture of how much of your monthly income is already spoken for. If your DTI is too high, lenders may worry that you’ll struggle with the added expense of a mortgage payment.
- The amount you want to borrow — Whether you want to borrow a lot or just a little, the loan amount can be an obstacle. If you need to borrow a very large amount, lenders might want you to have a higher credit score. If you need to borrow a smaller amount, lenders may think they can’t make enough profit off the loan.
Possible refinancing options
Even if one or more of those obstacles are standing in the way, you may still have options for refinancing.
If your credit score is hindering your ability to get a conventional loan, you might consider an FHA refinance. Different types of FHA refinance loans are available, and not all of them require your original loan to be FHA-backed in order to qualify for the refinanced loan. In some circumstances, you can get an FHA loan with a credit score in the 500s.
If the loan amount you need to borrow is too small to be appealing to lenders, you may consider a cash-out refinance, where you take out a new mortgage for more than you owe on the old one and pocket the difference in cash. But be careful. Increasing your loan amount could result in a higher monthly payment, even if you’re able to get a significantly lower interest rate.
One way to reduce the interest costs of a cash-out refinance would be to put the extra cash in a savings account and use it to double up on your monthly payments. This will allow you to pay off the new loan faster, reducing total interest costs over the life of the loan.
A final word …
Right now, lenders aren’t hurting for business, so it’s not surprising that you’re having trouble finding one that’s eager to work with you. Shopping around to compare rates and options from different lenders could help lead you in the right direction.
You can check your prequalified rates for free, without affecting your credit, when you use Credible to compare rates from multiple lenders.
Ready to learn more? Check out these articles …
- Should you refinance with your current mortgage lender?
- How to get the best mortgage refinance rates
- Should you pay off your mortgage or invest the money?
- How much does a $300,000 mortgage cost and how can I get one?
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About the author: Dan Roccato is a clinical professor of finance at University of San Diego School of Business, Credible Money Coach personal finance expert, a published author, and entrepreneur. He held leadership roles with Merrill Lynch and Morgan Stanley. He’s a noted expert in personal finance, global securities services and corporate stock options. You can find him on LinkedIn.