Getting a leg up on
PLENTY OF HOMEOWNERS are dealing with
major mortgage stress this year. An estimated
$1.5 trillion in adjustable-rate mortgages
(ARMs) is scheduled for a “rate reset.” That’s when
lenders get to adjust the interest rate based on current
KEI TH LATHROP
Unfortunately, those conditions boil down to
higher rates. That’s because the Federal Reserve has
spent the past few years raising the federal funds
rate, and ARM interest rates follow the lead of the
fed funds rate. For example, in 2004 you could have
snagged an ARM with a fixed rate for the first three
years of around 4. 5 percent. But now it’s time for the
first adjustment, and that 4. 5
percent is going to jump to at
least 6 percent.
On a $200,000 mortgage,
that means an increase from
a $1,013 monthly payment to
$1,200. Borrowers who took
out mortgages with lower initial rates are facing even more
painful adjustments this year.
My advice is to do your
best to absorb the pain. I think
it can make more sense to pare
your spending habits than to consider refinancing
into a different mortgage.
I understand the allure of refinancing into a fixed-rate mortgage to protect yourself from future rate
shock. But, depending on your situation, that could be
a costly move. Refinancing usually costs you money—
typically 3 percent or more of the loan amount.
Don’t be fooled by a lender who purports to offer
you no-fee refinancing. There’s always a fee: When it
isn’t an upfront cost, it’s simply hidden in a way that
isn’t so obvious, such as a slightly higher interest rate.
So you have to weigh the cost of refinancing against
what you gain.
■ If your ARM reset is close to the going market
rate of about 6 percent for a 30-year fixed rate, don’t
That’s where it gets even more interesting. If you
have an ARM that is adjusting, odds are the new rate
will be in the vicinity of 6 percent. That’s about what
you will get with a 30-year fixed rate. So refinancing
into a fixed rate won’t necessarily save you in terms of
a lower monthly bill.
The big caveat is, what about 12 months down
the line when your ARM is up for its next annual
adjustment? If rates rise, your payment will jump
again. But I think that over the next year or so the
greater likelihood is for rates to stay where they are or
even decrease slightly.
In other words, I think the risk of future rate
shock isn’t so high if you stick with your ARM. What
to do? Here’s a strategy.
Send your personal-
finance questions to:
Q&A with Suze Orman
The Costco Connection
P.O. Box 34088
Seattle, WA 98124-1088,
or fax to (425) 313-6718
or e-mail to
“Suze Orman Q&A”
in the subject line.
Suze will answer
in this bimonthly column.
She regrets that
cannot be answered
rush to refinance. You probably can solve your problem with spending cuts.
Start with your monthly bills. Trim the cable to
standard, cut out the land line and rely on your cell
phone—that alone can save you $75 or more per
month. I bet scaling back on eating out can easily save
another $50 to $75 per month.
If you need to save more, ask your insurance
agent about raising the deductibles on your home
and car insurance to at least $1,000. That should drop
your premium by 10 percent or more.
You get the idea: Look at each expenditure and
ask yourself, “How can I reduce this cost?” A bit of
conscious trimming can unearth a
couple of hundred dollars in extra
cash each month.
■ If you have an ARM that is
resetting at a rate at least 1 or 2 percentage points above 6 percent, and
you have a FICO credit score of at
least 720, consider refinancing only
if you intend to stay in the house for
a few years. While you may be able to
lower your monthly payments, you
want to make sure that the savings
are enough to recoup your refinanc-
ing costs. Ask your lender to calculate how long it
will take for your monthly savings to offset the refinancing cost.
■ If, after the budget trimming, you still can’t
afford to cover your new reset payment, consider
selling. I know that’s a drastic move—but so is ruining your financial life by falling into delinquency
and foreclosure on your home. There is no shame
in downsizing, moving to another neighborhood or
even renting for a while. It takes strength to take the
responsible route. C
“A bit of
unearth a couple
dollars in extra
cash each month.”
Suze Orman’s latest
book is Women &
Money: Owning the
Power to Control Your
Destiny. Suze’s TV
show airs Saturday
nights on CNBC. She
can be contacted at