Mortgage stress is gripping the country.
Many people, especially those with lower credit scores or incomes, took advantage of low adjustable rate mortgages several years ago to buy their homes. That was fine for people who didn't plan to stay in their homes for long. But those who are not planning to sell are now facing a rate reset -- when their interest rates are adjusted based on current market conditions.
And since the current market conditions are higher than when they bought, it means higher rates and higher monthly payments. And for some people, including many in Northwest Indiana, that could result in foreclosure.
"We're seeing some of the mortgage rates go up, and there are a greater amount of foreclosures," said Scott Swinford, a certified mortgage planning specialist with Hebron-based Trust Financial Inc.
Swinford said one of his clients with an ARM will soon see his interest rise to more than 16 percent. This could mean an additional hundreds of dollars a month, depending on the size of the loan and whether the borrower is paying mortgage insurance.
So what should these people do?
Swinford said homeowners who know their ARM will be adjusting within the next six to 12 months should switch to a fixed mortgage -- one that remains at the same rate for the length of the loan -- even if this means an extra monetary penalty.
"Yesterday would be the best day to switch, and today is probably the second best," Swinford said. "Get out of it as soon as you can, because we don't know what's going to happen down the road."
The only time an ARM works is if the buyer is sure he is going to stay in the home for only a few years. Even though fixed rates may come with a larger initial payment, they could be better off in the long run for people who want to stay for about 41â"2 years or longer, Swinford said.
Still, switching from an ARM to a fixed mortgage is pricey, so Jonathan Tasso, marketing manager of American Financial Solutions, recommends that those considering it figure out if they will own the property long enough to recoup the losses. If the homeowner decides this is worthwhile, he should switch to a low fixed rate as soon as it becomes available, Tasso said.
For those who are considering buying a home now, one very important stage that many people skip is to check their credit scores. Credit scores determine the loan you can receive, but unfortunately, about 60 percent are incorrect. In 25 percent of those incorrect cases, the wrong numbers have errors so significant, they prevent those people from getting a mortgage.
There's a free credit report service offered by the government at https://www.annualcreditreport.com.
So check out your credit, then figure out your long-term goals for your home. If you plan to stay there a long time, search around for a low fixed rate income. But if you are only there for a little while, save the money and get the adjustable rate.