This very unpleasant situation does require a considerable financial effort on your part, but it can be resolved eventually to your advantage. The two most reliable ways are: to make extra payments towards the Principal, or/and refinance into a Fixed Rate Mortgage.

How do extra payments help? The amount paid as Interest is a percentage of the outstanding balance (the principal part). The lower the balance - the lower the absolute interest payment. If your mortgage carries no principal prepayment penalties, you can pay some extra cash towards the principal. It may keep the absolute sum of your monthly interest payment close to intact on the one hand, and it will accelerate the overall payoff of the mortgage on the other. So none of your money will be wasted, but you may have to tighten your belt for a while.

Refinancing into a Fixed Rate Mortgage is not cheap either, so before you decide to turn to the stability of a fixed rate, analyze your current mortgage – make sure the change is worth it. Points to consider:

• a convertible loan feature that allows for an easier conversion of an Adjustable Rate Mortgage into a Fixed Rate Mortgage may already be included into your current contract.
• Compare the cost of refinancing with the gain on the saved interest.
• Your current adjustable rate mortgage very likely carries all kinds of caps. You have to see how they limit the rate and how much higher it can possibly get. It may well so happen that your highest rate will still be lower than the fixed rate.
• Watch out for the Payment Cap as the rates rise! Make sure it is not amortizing your mortgage negatively! If it is – refinance immediately into anything you can afford, before it brings your current balance to the size far beyond your financial potential!

 Why do people refinance? All for different reasons, of course, but the most common ones are:

• To obtain a lower interest rate,
• To build the equity of their property faster,
• To change the type of their loan,
• To take advantage of an improved credit rating,
• To get some cash out of the equity already built in the home.

How does it work?

Obtaining a lower interest rate is probably the most popular reason to refinance. One may have an adjustable rate mortgage with a rate gone too high, or a high-rate mortgage resulting from negative points, or an above-the-average rate caused by the poor credit score at the time of the loan origination, or it may have been a very sensible loan all the way until mortgage market interest rates dropped. Refinancing in such and such like situations can save you quite some money, but you have to be very thorough in estimating the benefit. The main question is whether the amount saved will be worth the amount paid. The procedure of refinancing is not cheap, so you have to make sure, that the money you pay for it will not only return to you, but also gain you some profit as savings on the interest, as compared with your current loan.

One of the decisive factors is Read the rest of this article »

 It’s amazing how surprised people usually are to find out how much an extra $20 payment may save them on their loan in the long run. For example, a $100,000 30-year mortgage bearing 9 percent annual interest calls for monthly payments of $804.62. Suppose a borrower could afford to increase the payment amount by $20 to $824.62, and the lender does not charge prepayment penalties. By making the larger payment each month, the borrower would save $24,135.56. No, you didn’t misread the amount. An extra $20 a month results in roughly $24,000 of interest savings!

Here is our little manual on how to work your own miracle.

First of all, the topic you absolutely must discuss with your mortgage lender is the treatment of extra payments towards principal, because some lenders tend to include a penalty clause regarding extra principal payments in the mortgage. If your credit score is not particularly high, you will very likely have a mortgage loan with a higher-than-average interest rate, and you may be penalized if you try to make extra or early principal payments on the loan.

If your lender allows you to make extra payments - it is action time! Read the rest of this article »