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."