What to do with a Bad Credit Florida Mortgage

Don Taylor is a financial advisor from Bankrate.com. Below, he answers a question that could be useful for those stuck with bad credit Florida home loans.

Q: I purchased my first home back in September 2005 at a fixed rate of 6.5 percent for the first two years and an adjustable rate thereafter. When can I consider a Florida mortgage refinance so that it’ll remain at a fixed rate - preferably lower than 6.5 percent?

A: Whenever a reader mentions that he or she has a two-year fixed rate on his or her mortgage before the mortgage becomes an adjustable-rate mortgage, or ARM, it sends a signal that the person is likely to have credit problems. The mortgage is known in the trade as a 2/28 ARM. That’s in contrast to the 3/1, 5/1 or 7/1 ARMs available to borrowers with better credit scores.

This mortgage structure is used to qualify the buyer for the mortgage - and then hope for the best in terms of establishing a good payment history during the first two years of the loan. With that good payment history, it can then make sense to refinance into a different mortgage and get out from under the terms of the adjustable-rate that was taken out when your credit wasn’t as good.

There is usually a two-year prepayment penalty written into a 2/28 mortgage.

You’ll want to review your Florida home loan documents or talk to your lender about whether your mortgage has this. Depending on the terms of your existing mortgage, the terms of a new Florida mortgage loan and how long you plan on being in the house, it can sometimes make sense to bite the bullet and pay the prepayment penalty to refinance early.

A mortgage calculator can help you make this decision - just input any prepayment penalty as an additional closing cost in the new mortgage numbers under “other.”