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Questions And Answers About Adjustable Rate Mortgages

Jan 18, 2008
Should I refinance my home loan if my ARM loan is about to adjust?

There are many factors that impact whether or not you should refinance an ARM loan prior to a scheduled rate adjustment. For example, if your credit scores have improved since you closed your current mortgage, you may find that you qualify for a loan with much more favorable terms now. It's also important to consider market conditions. If interest rates are trending upward, it can be very wise to change to a fixed rate home loan, particularly if you plan to be in your home for a while.

Individuals with ARM loans are well advised to begin investigating their options for refinancing a few months before their interest rates adjust. It's in your best interest to speak with a trusted mortgage professional about your options so that you can make a wise decision regarding your home loan.

Is it advisable to refinance to a pay option ARM loan?

There are positives and negatives associated with pay option ARM loans. You should educate yourself about the risks and potential rewards before making a decision to refinance to a pay option ARM loan.

Many homeowners choose this option because of the flexibility associated with this type of mortgage. With this type of loan, you have four different payment options each month. This solution can be very beneficial for individuals who need to reduce their credit card debt.

However, there is the risk of dealing with a loan balance that increases over time instead of decreasing, which is referred to as negative amortization. This happens if homeowners who choose a low monthly payment option with an interest rate lower than the actual rate. The loan balance increases because the difference between the payment amount and the actual rate is added to the loan balance.

How can I benefit from refinancing my ARM to a fixed rate home loan?

Both ARM loans and fixed rate mortgages have advantages and disadvantages. When you refinance an ARM to a fixed rate mortgage, you no longer have to worry about interest rate adjustments. When you lock in a rate, you know what your required monthly payment will be for the life of your loan. There is no worry regarding periodic fluctuations in interest rates or mandatory payment amounts.

However, if you don't plan to stay in your home for very long, it might not be in your best interest to refinance your ARM. You may not be there long enough to recoup the closing costs and origination fees associated with a home loan refinance. The length of time you have had your current mortgage can also be a factor. You should always discuss your situation and all options with a qualified mortgage professional before making a decision.

Do I have any options if my current loan is a sub-prime ARM?

If you have a sub-prime loan, you are likely concerned with how your interest rate adjustments are going to impact your ability to pay. If you have a sub-prime loan, the best thing to do for yourself is to establish a sound record of making on-time payments. Once you have made your payments as scheduled for at least a year, you may be able to refinance out of your sub-prime ARM. Talk with a mortgage broker who can work with you to establish a plan of attack for refinancing out of your sub-prime home loan before you find yourself dealing with skyrocketing monthly payments.
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