Refinance Your Option ARM

Experts are concerned that option ARMs could fuel another wave of mortgage defaults. Is your option ARM set to disarm your finances and implode?

The option ARM giveth and the option ARM taketh away. In one light, this mortgage product promises access to affordable home ownership. But now that the circumstances of the housing market have drastically changed, the option ARM may be the reason why many mortgage borrowers are losing their homes.

Your mortgage sounded like a great example of modern financial creativity when you signed the loan documentation. But unfortunately, the worst qualities of an option ARM are now starting to show, as real estate values spiral downward.

Up, up and away  

The flexibility of the option ARM is compelling: you pay less when you need to and more when you can. As economic times get tougher, however, you naturally resort to using the lower payment option more frequently. That ultimately leads to an increasing loan balance, which, by itself, isn't necessarily a horrible thing. But when that increasing loan principal is coupled with a declining collateral value, the mortgage debt begins to rise dangerously close to the recast trigger-which will prompt your lender to take away your payment options and give you one large and non-negotiable payment.

True nature of a teaser

Complicating things further is the pending expiration of your teaser rate. Sources say that there are about 1.4 million active option ARMs awaiting rate resets. Those resets, and the higher payments that result, are likely to cause big problems for many homeowners. If you suspect that an ARM reset will annihilate your financial budget, don't wait to start searching for a mortgage refinance.

Where to turn

Option ARM borrowers who make their mortgage payments to BankUnited are the lucky ones. The institution is launching an extensive mortgage assistance program to refinance its ARM borrowers into less volatile debt products.

If BankUnited isn't your lender, you'll have to do a little more legwork. Start by contacting your institution to see if you qualify for any refinancing or loan modification programs. Ask specifically about FHA refinancing. You should also try the HOPE Alliance hotline and the Operation Hope Mortgage Crisis Hotline. Both lines are staffed with counselors who are trained to answer your questions and provide possible solutions.

The problems you'll face in refinancing will be related to the home's value, the affordability of the payment and, possibly, the existence of prepayment penalties. Educate yourself about what your home is worth relative to the amount you owe on the mortgage. If the debt balance is higher than the home's value, you'll have to come up with a lot of cash to qualify for a traditional refinance. Prepayment penalties will raise this burden even higher.

Your option ARM gave you flexibility, for a time. Now it might be threatening to take back that flexibility, and then some. Protect your home and your net worth by getting proactive about refinancing that option ARM.