If your mortgage is set to adjust this year, the smart move may be to let it. Today’s conforming mortgages are adjusting lower than ever before — as low as 3 percent.  It may not be what you expected when you signed for your ARM several years ago.

The reason why ARMs are adjusting lower is because of how they’re made.

When conforming adjustable-rate mortgages adjust, they adjust according to a pre-determined formula. The formula is the sum of a constant and a variable.  The constant is usually 2.25 percent and the variable is a daily-changing interest rate called LIBOR.

The formula looks like this:

New Mortgage Rate = LIBOR + 2.250 percent

LIBOR is an acronym for London Interbank Offered Rate.  LIBOR is very similar to the Federal Reserve’s Federal Funds Rate.  Banks borrow and lend money from each other at the LIBOR or the Fed Funds Rate.

Normalcy is returning to banking and the timing couldn’t be better for Charlotte homeowners with ARMs. 15 months ago, a homeowner’s ARM may have adjusted to 6 1/2 percent.  Today, that same ARM falls to just above 3.

As a strategy play, it might make sense to let your ARM adjust. Or, because fixed rates are still near 5 percent, converting that ARM to a long-term fixed-rate product might make sense, too.  The decision is a balance between how low do you want your payment, and how long might you live in your home.

The longer you stay, the more it might make sense to switch to fixed-rate, even though ARM rates are so low.

If, however, you are in an Option Arm, and Interest Only ARM, or a Sub-Prime ARM, it won’t be so simple.  You want to carefully review the original mortgage paperwork to see what will happen with that loan when it adjusts. I can help with that.

If you’ve got a conforming, adjusting ARM, it makes sense to review why you chose that program 3,5, or 7 years ago – if htose reasons still amke sense, maybe you should keep it.  Of, it may be time to lock in a new rate for 5,7 or even 30 years.

Mortgage markets improved last week in low-volume trading.

Between Monday to Thursday, Wall Street focused on the upcoming jobs reports and mortgage markets gained while traders jockeyed for position. Mortgage rates drifted lower through Thursday afternoon. But, then, after a better-than-expected Non-Farm Payrolls report Friday morning, mortgage markets — and mortgage rates — reversed.

Overall, mortgage rates dropped last week, but only by a small margin. Rates were best Thursday afternoon.

It was the second consecutive week in which mortgage rates fell.

Last week was also interesting in that both stock markets and bond markets improved, proving that rates don’t always rise when stock prices do. 455 of the S&P 500 companies posted gains last week.

If you’re shopping for a home or a refinance, though, don’t rest on your laurels. After Friday’s big sell-off, this week opens into a major headwind and, plus, the Federal Reserve’s support for mortgage markets ends in just 3 weeks.

This week, without much data to influence traders, the upward momentum in rates may have little cause to temper. We’ll see the Consumer Confidence numbers on Tuesday and Retail Sales on Friday.  Beyond that, there’s not much else.

After last week’s performance, conforming mortgage rates in North Carolina may be poised to rise rather sharply. If you’re waiting for the right time to lock your rate, it may have been this past Thursday. Consider locking your rate early this week to protect against further rate hikes.

You are probably aware that the first time home buyer (FTHB) credit of $8,000 ends soon – contracts must be signed by April 30th and close by June 30th.  A few rules that you may not be aware of:

1. For homes purchased after November 6th, single filers with modified adjusted gross income in excess of 125k (225k for married filers) cannot take the credit.
2. The income threshold is lower if the home was purchased prior to November 7th (phase out starts at 75k for singles and 150k for married couples).
3. If you move within three years of buying the home, you have to pay the credit back.

You do have the ability to choose which year to take the credit.

• If you were a FTHB in 2009, you can elect to amend your 2008 return or claim the credit in 2009.
• Similarly, if you are a FTHB in 2010, you can elect to claim the credit in 2009 or 2010.

This rule offers flexibility if you go over the income threshold in one year, but not the other.

If you have lived in your current home for 5 of the past 8 years, you can claim a credit of $6500 using the same rules that apply to FTHB’s, above.

I’m not a huge fan of the governments decision to spend our money this way, but, I do think you will do a better job spending the $6500 /$8,000 than they will, so go ahead and enjoy the cash if you are buying a house!

As credit cards balances get close to their maximum limits, your score will start to drop. In fact, a single credit card at its maximum limit can lower someone’s credit score by 75-100 points.  This drop in a score can be the difference between a mortgage loan approval or denial, or add 2% to the interest rate on a car loan.

Reducing the amount owed on a credit card is the fastest way to increase your score.  Even using 20% of the limit of a card ($2,000 with a limit of $10,000) can start to have an impact on your credit score.

Consolidating credit card balances onto one low interest rate card can save you money on credit card interest. However, if this also maxes out the limit on the low interest rate card, you will lower your credit score.  Save the money on the credit card interest only if you are not going to be using your credit score to qualify for something more important. That is, don’t try to save $50 on credit card interest and increase your mortgage payment by $300 due to a lower credit score.

How can you lower your balances and credit utilization ratios?

1. Don’t spend too much – imagine how things would look if Congress and the White House had to have the money to spend it?  You and I should know that, so we also need to live that way.  Credit cards are ok to use to get frequent flier miles, but if they are never not paid in full at the end of the cycle – they are a problem, not a solution. Quit spending more than you can pay each month!
2. Pay off your credit cards every time you get paid.  If you get paid bi-weekly, pay your credit cards online the day you get paid.  This way your balance is always low and manageable, and you never get tempted to carry over the balance from one month to the next.  The best savings accounts today yield only 0.25% to 1.5%, so don’t risk paying interest on credit cards in the hope that you will earn an extra $0.99 on your savings account while waiting to pay off your credit cards.
3. Call your established credit card accounts and ask them to increase your credit limits.  This won’t pay down the balance but it will reduce the amount owed ratio and help your score.  Many banks won’t do this anymore, but if you don’t ask, the answer is definitely ‘No’.  Ask.
4. Don’t do the balance transfers. Most people don’t read the fine print on the transfer and credit card lenders will stick you with a 3% balance transfer fee.  On a home loan, no one would pay 3 points to get a lower rate, but people do this routinely on credit card balance transfers. Balance transfers will usually leave you with a maxed out credit card and still cost you money.
5. Steamroll your credit cards.  Pick the card that is closest to its limit, and apply all extra cash to paying off that card.  When it gets to zero, take that cash and steamroll onto the next card.  Usually we use this strategy to get out of debt, but if the goal is to increase the credit score, rank order your cards in terms of how close you are to the limit rather than the actual interest rates. As each card is paid off, you will have more and more cash available to apply to the next account.  Pay off cards prior to other loans as loan accounts won’t impact your credit score as much as credit cards.

Keep Credit Card balances low.  Reducing what you owe on credit cards can increase your score by up to 80 points in as little as 30 days.

WARNING: This a graphic story of the financial destruction of an otherwise financially successful man.

Here’s a secret for you – your credit score will go down every time you do something that people did previously just prior to defaulting on their debts.  The credit scoring model is trying to predict the likelihood of you going 90 days or more late on an account.  If someone ever defaults on a debt, they leave clues well in advance of that default.

Here is the pattern of clues John left as he trashed his credit following a medical incident that left him out of work for a few months:

1. John needed some cash, so he applied for new credit.
2. Having a lot of equity in his house, John applied for a home equity line, but the application was denied since he wasn’t working.
3. With the financial pressure of medical bills and no income, John could no longer pay off his cards in full each month.  The amount owed starts to increase close to the limit on the cards.
4. Needing cash, he turned to alternative sources, getting a signature loan at a high interest rate.
5. He was late on a few credit card payments as the money just wasn’t there to make the payments on time and he was juggling the many open accounts.
6. Creditors turned over John’s accounts to collection agencies, who immediately notified the credit bureaus of the collections.  Collection agencies wanted to lower his credit score to prevent him from opening new accounts, leaving him with a greater chance of paying the collection agency off.
7. (Trying to sell his house didn’t help as the market was slow and declining, so his equity was disappearing).
8. John first went to a credit counseling firm and then eventually filed for bankruptcy.
9. Some debts were wiped out in the bankruptcy, and he just quit making payments on the remaining debts, feeling the situation was hopeless.
10. Creditors file suit and judgments get reported to his credit report.
11. Being unable to manage then debt load, he is late paying his taxes and a tax lien is filed in court against him.
12. Unable to even make his mortgage payment with the high costs of his other bills, the house is lost in foreclosure and all the equity in the house disappears in the soft real estate market.

John’s credit destruction was now complete after just a few tragic months.  The impact will last for years, as most of these items will impact his score and stay on his credit report for seven to ten years.

While this story is a myth, the events and results happen to good people every day.

Following the StartwiththeHouse.com strategy would have helped:

1. Always have an emergency fund – this would have tied John over during the short period when he wasn’t working.
2. Keep credit cards and other loan payments very low
3. Have proper insurance against all the threats out there – not just uninsured motorists, but illness, sickness, death or lawsuits as well.
4. Store your cash where is can be accessed.  In the above story, John had over $200,000 of equity in his house – but with no job, he couldn’t access it and lost his house in addition to destroying his credit.

Your mortgage can’t be just a loan to be hated – today it has to be an integral part of your overall financial plan to help you succeed financially.  Could you survive two months without work with the increased expenses of a health issue?  If not, what are you doing to make sure you have a different outcome?

The foreclosure filing statistics are shocking — over 300,000 homes were served last month alone.  However, the real number depends on where you live.

As reported by RealtyTrac, just 4 states accounted for more than half of the country’s foreclosure-related activity last month.

• California : 22.7 percent of all activity
• Florida : 14.9 percent of all activity
• Arizona : 6.7 percent of all activity
• Illinois : 5.7 percent of all activity

Just because foreclosures are concentrated geographically, that doesn’t make them less important to homebuyers in Charlotte and around the country.  There’s been more than 1.4 million foreclosure filings in the last 12 months and that’s a figure that can’t be ignored.

Distressed properties now play a role in one-third of all home resales.

Therefore, if you’re in the market for a foreclosed home, here’s a few things to keep in mind.

1. Properties are usually sold “as-is” and may not be up to living standards. Be sure to physically inspect the home before buying it.
2. The home has to meet living standards to use normal FHA or COnventional financing.
3. Buying a home from a bank is rarely as streamlined as buying from an individual homeowner. Be prepared for delays form the selling bank that can delay closings.
4. Some foreclosures aren’t listed for sale publicly.  A real estate agent may be able to access more foreclosure inventory.

In order to use the federal homebuyer tax credit, you must be under contract for a home by April 30, 2010 and closed by June 30, 2010.  That doesn’t leave much time to find a bank-owned home and make it to closing.  If you’re serious about buying foreclosures, it’s probably best to start your search soon.