Adjustable Rate Mortgage (ARM) FAQs

My ARM loan is scheduled to adjust soon, should I refinance now?

You may have seen your home equity line of credit rise substantially within the past two years. As interest rates rise, many homeowners are opting to pay slightly more for the piece of mind of having a fixed rate home loan. If you took an adjustable rate mortgage (ARM) instead of a fixed rated mortgage several years ago, then your credit rating may have since changed opening up more options to you. You should explore your options with a mortgage professional as least two or three months before your ARM is scheduled to adjust, especially if rising interest rates may make it harder for you to make payments.

Should I refinance to a pay option ARM loan?

Although there are drawbacks, many homeowners have refinanced into pay option ARM loans in order to take advantage of the flexibility the loans provide. One risk associated with changing to a pay option ARM is negative amortization, meaning your loan balance could go up over time. This change can occur as a result of choosing a low monthly payment option based on an interest rate that is lower than your real interest rate. The difference between the two amounts will actually be added to your loan balance. On the other hand, the pay option ARM can be a good option for you if you need to pay down credit card debt. Offering the most payment flexibility, the pay option ARM offers three to four different payment options each month.

What are the benefits of refinancing my ARM to a fixed rate mortgage?

There are benefits and drawbacks to both types of mortgages. If you decide to refinance your ARM into a fixed rate mortgage, you will lock into a stable payment and avoid the payment increase that occurs when your ARM interest rate adjusts. For some mortgage holders the monthly payment could increase by up to 50 percent making the option of locking in a fixed rate a good way to substantially reduce the monthly payment. Refinancing an ARM to a fixed rate mortgage loan will definitely reduce the stress of steadily rising payments. However, depending on how long you have had your mortgage and how long you plan to stay in your home, you might benefit from waiting until a change is absolutely necessary. Discuss your options with a mortgage professional before making a decision.

I have a sub-prime ARM loan, what are my options?

Many homeowners who used sub-prime ARMS to purchase or refinance their homes are now being hit with payments that are difficult or impossible to make. Most importantly, if you have a sub-prime ARM that has not adjusted yet, you should discuss with a mortgage professional the options you might have to switch to a different type of loan. Refinancing out of a sub-prime ARM into a fixed rate mortgage is probably the best option if you have made regular payments for at least the past 12 months.