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How can I refinance my adjustable rate mortgage (ARM)?
Linda has a question about another type of mortgage called an adjustable rate mortgage (ARM). An ARM's interest rate is linked to a financial index, and payments go up and down based on that index. "Three years ago I bought a condo here in Chicago and at the time I didn't have the resources for a down payment, so I did a hundred percent financing with two different mortgages," she says. "One is already floating, already adjusting, and the other one is set and won't start adjusting for another two years. I can afford the payments now, but what can I do to avert a financial disaster in the future?"

Because Linda has at least 10 percent equity—but not yet 20 percent—she's eligible for refinancing. "I want you to refinance the home immediately for a 30-year fixed rate mortgage," Suze says. "When you have less than 20 percent to put down, normally you have to pay something called PMI, private mortgage insurance. What I want you to do, however, is if you have at least 10 percent equity in the home, you can purchase your PMI up front. It is usually 1 percent of your mortgage amount."

Linda needs a mortgage for $180,000. "I think that's great. I do. It will cost you 1 percent, or $1,800, up front to get rid of PMI. You have now converted from an adjustable rate floating mortgage to a fixed rate mortgage," Suze says. "Your payments on $180,000 at today's interest rates are going to be about $1,100 a month."
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FROM: Ask Financial Powerhouse Suze Orman Anything
Published on January 01, 2006
Please note: This is general information and is not intended to be legal advice. You should consult with your own financial advisor before making any major financial decisions, including investments or changes to your portfolio, and a qualified legal professional before executing any legal documents or taking any legal action. Harpo Productions, Inc., OWN: Oprah Winfrey Network, Discovery Communications LLC and their affiliated companies and entities are not responsible for any losses, damages or claims that may result from your financial or legal decisions.

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