Refinance out of a Risky Mortgage

Home values have plummeted, while the interest rates on adjustable rate mortgages (ARMs) are rising.  The bubble has obviously burst for the U.S. housing market, and it may be "refinance risky mortgage" time for you.
    
The statements on TV ads and direct mailers may have caught your eye:  "Refinance Risky Mortgage," or "Refinance Mortgage...Before It's Too Late."  Mortgage lenders are urging homeowners with bad credit loans to consider refinancing in the face of a poor housing market.

Their warnings are dire, and for good reason.  The housing market has experienced a precipitous drop in sales and home values.  If you hold a bad credit mortgage, such as an adjustable-rate mortgage (ARM) or a balloon mortgage, it may indeed be "refinance mortgage time" for you.

Bad times theory

No matter how many times history repeats itself, Americans don't seem to learn their lessons.  Stock markets have crashed, bubbles have burst, but still consumers deny the fact that what goes up eventually comes back down.  The housing market is a prime example.  After years of sustained growth, the appreciation of housing prices at double-digit rates seemed to be a fact of life, instead of what it truly was:  a natural economic cycle.

When the market reached its apex, many short-sighted homeowners and lenders were faced with a bitter reality.  Home equity, which had been the equivalent of money growing on trees, vanished overnight as values plummeted.  For people who were set in their fixed-rate mortgage and weren't in any hurry to move, the drop in prices wasn't catastrophic.  But for those who lived life on the edge in the form of ARMs, the subprime crisis hit with hurricane force.

Play it safe

ARMs include a teaser rate.  Designed to entice a mortgage borrower with its low rate and subsequent affordable monthly payments, the rates eventually adjust upward after a period of one, three, five, or seven years.  The adjustments can be between two to five interest rate points, a fact that never used to give homeowners pause.  Their strategy was to refinance their mortgage prior to the adjustment.

This has been a cozy arrangement for homeowners who consistently refinanced their properties, year in and year out, jumping from one subprime mortgage to the next.  However, when home values sank, these individuals found that they no longer had the equity to qualify for a new loan.  They were stuck with their ARMs that, in many cases, adjusted to a higher rate that they could no longer afford.

If you're currently holding an ARM, it may be time to think "refinance mortgage."  Rates are solid, relatively low, and may be for the immediate future (although there's no telling what will happen with inflation on the rise).  To avoid foreclosure, refinance to a fixed-rate product, like a 15- or a 30-year home loan.  You won't enjoy the spectacularly low rates previously available with ARMs, but you'll avoid the sad fate of subprime borrowers across America.