Refinance to Safety

Adjustable-rate mortgages (ARMs) used to be the apple of a homeowner's eye. With their low teaser rates, ARMs offered smaller monthly payments than most fixed-rate products. But today's rising rates and tightening lending standards have turned the apple rotten, and forced homeowners to look at other options, like mortgage refinancing.

It seems like only yesterday that interest rates were extremely low, and anyone, anywhere could get a mortgage. Many borrowers thought those days would last forever. But, like most things financial, they didn't.

The home market has been battered recently. Rates went up, the subprime mortgage industry went into a tailspin, and home values began to shrink. The result: tightened lending guidelines and loss of equity, which caused a mass exodus from ARMs. Borrowers who could requalify for a new loan via a refinance began focusing on fixed-rate mortgages with 15- or 30-year terms-loans that provided stability.

Borrower beware

Yesterday's mortgage mentality has become today's mortgage fiasco. Lenders over-extended ARMs to subprime borrowers, who then over-extended their personal budgets. In the meantime, rates went up. When a borrower's ARM was due to adjust, he was hit with a double-whammy: He couldn't afford the higher cost of a new mortgage refinance, and his home lost value in the declining market, shrinking his available equity. As a result, borrowers defaulted on their loans.

The subprime problem has been a reality shock for many homeowners. It's clarified the fact that variable rates are subject to market forces. It's also prompted homeowners to opt for less risky mortgage products.

The value of stability

Homeowners have turned to the stability of the 15-year or 30-year fixed-rate mortgage. The interest rate is fixed, so you can count on your mortgage payment remaining the same no matter what happens to the rest of the market. The 30-year mortgage offers a lower payment than its 15-year counterpart, which will appeal to many of those ARM users who need to refinance.

Interest-only mortgages

The rise of the fixed-rate products has taken its toll on ARMs, and their share of the overall loan market has decreased significantly. The only non-traditional mortgage that seems to have emerged unscathed is the interest-only loan. With low monthly payments-(payments during the first few years go entirely toward mortgage interest)-the loan has drawn criticism from some financial corners. But it does have its fans. For the homeowner who'll be enjoying significantly higher income in the near future, such as a medical student about to become a doctor, the interest-only loan makes dollars and sense.

As ARMs adjust out of homeowners' price ranges, fixed-rate products have emerged as the home loan du jour for refinancing. Yet, lenders will point out the mortgage market is as cyclical as its stock market counterpart. When the present-day volatility rights itself, homeowners will once again arm themselves with ARMs for low-introductory rates and even lower monthly payments. For now, though, the stable fixed-rate products offer something extremely valuable to shell-shocked ARMs holders: Peace of mind.