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I Want to Refinance an Option ARM Home Loan

Option adjustable rate mortgages (ARM) home loans were very popular just a few years ago. That’s because they gave borrowers the ability to decide how large of a mortgage payment they would make each month. Sounds crazy, huh? Let’s take a closer look at these mortgage loans and why it makes sense for you to refinance one—if you can.

Why These Mortgage Loans Are Trouble with a Capital “T”

Mortgage lenders stopped offering option ARMs last year. But the demand for option ARMs resulted in $750 billion of the loans being underwritten from 2004 to 2007, according to Inside Mortgage Finance newsletter. More than half a million of these mortgages are scheduled to reset over the next four years. Many homeowners who have these loans are subject to mortgage rates that can rise and push up their payments to astronomical amounts. As a result, default and foreclosure rates for option ARMs have already surpassed those for subprime mortgages.

How Option ARMs Work

These home loans have mortgage rates that change monthly and the payment adjusts each year. You get a choice of how you want to make payments, such as only paying interest or making a minimum payment that may be less than the interest-only option. By choosing low payments you usually end up with a mortgage loan balance that increases over time. Use an option ARM mortgage payment calculator to see how your payments may change. Every five or 10 years, the mortgage rate must be adjusted so that the payments will actually pay off the loan by the end of its term. That means borrowers often face a huge jump in their monthly payments.

Can I Refinance My Loan?

Unfortunately, many homeowners are having trouble refinancing option ARM loans. People are getting burned because they were allowed to make minimum payments that didn’t give them any equity in their homes. As home values have fallen, many borrowers are left owing much more on their mortgages than there homes are worth.

If you have some equity in your home, contact your bank to discuss options to refinance your mortgage. Some mortgage lenders are willing to refinance mortgages to keep borrowers in their homes. A 30-year mortgage refinance can give you stable payments that won’t change if mortgage rates rise. Also ask about having your option ARM modified if you don’t qualify for a refinance. However, if you’ve been used to paying interest only, you may actually see your monthly payments rise for a period of time.

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