I am a servicemember stationed in Afghanistan with a mortgage loan that is currently covered under the Service members Civil Relief Act (SCRA). Our bank is encouraging my spouse to refinance to an adjustable-rate mortgage. Our payment will be smaller at the beginning, but then will change after a year according to the index used. Is this the best action to take?
Think carefully about this decision. You have certain protections under the SCRA for a loan you took out before you entered active military service that would not apply to a loan you take out while on active duty.
Under the SCRA, the interest rate on a mortgage you took out before entering active duty (including service charges and fees) can be capped at six percent, so long as you meet the eligibility requirements and give proper notice to your lender or servicer acting on your lender’s behalf. Some financial institutions even cap the interest rate at four percent.
If you refinance while on active duty, the new mortgage may be considered a new obligation assumed after you were called to active duty and may not be subject to the SCRA interest rate cap. Given the importance of these issues, you or your spouse should consult with your installation’s legal assistance office.
