Sidestep Costly Option ARMS with a Mortgage Refinance

Option ARMs offer unique ways to minimize monthly payments in the beginning of a loan. But many of these mortgages can become so costly, they push homeowners into financial crisis. You can avoid the inherent problems of Option ARMs by refinancing into a less risky mortgage.

Option ARMS offer exceptional flexibility by allowing the borrower to choose from a variety of repayment options on a monthly basis. For instance, you could elect to pay the full amount of your loan installment or, if your budget was tight, you could pay considerably less. Typically, consumers with an Option ARM have four basic choices each month:

• Pay on a 15-year payoff schedule, making the largest payment choice.
• Pay on a 30-year payoff schedule, paying slightly less.
• Pay interest only, contributing nothing to principal repayment.
• Pay no principal and only a portion of the interest, which is the smallest payment option.

Pros and cons of Option ARMs

The flexibility of these loans is especially attractive to homeowners who have irregular incomes-educators who don't work during the summer; students who are about to graduate and begin lucrative jobs; or sales people who earn commissions that fluctuate with seasonal trends. Former Federal Reserve Chairman Alan Greenspan and other experts note that some consumers use the loans to buy homes that they otherwise couldn't afford. These people often wind up in serious financial trouble.

In some cases, these loans create negative amortization. When this happens, your principal debt will increase. While Option ARMs offer great flexibility in the beginning, the interest rates that govern them are subject to periodic change or "reset." As rates go up, so does the cost of servicing the loan. If prevailing interest rates rise-as they've done during the past two years-your minimum monthly payment could increase dramatically. In some cases, the payment on an Option ARM could more than double in a matter of weeks or months. Borrower beware: this loan could be ARMed and dangerous.

Mortgage refinancing to the rescue

Option ARMs gained great popularity during the recent housing boom. But now, people who chose them are finding them too costly, and are understandably worried about defaulting. If that's you, there's a viable and inexpensive solution-refinance with a more comfortable and reliable instrument, like a conventional, fixed-rate 30-year mortgage. Homeowners who do a mortgage refinance can gain predictable monthly payments that consistently and automatically chip away at the principal. At the same time, they can enjoy financial security and priceless peace of mind.

Right now, fixed rate mortgage refinance rates remain near historical lows, offering an unusually attractive option. While there are costs associated with refinancing, they're insignificant compared to the cost of losing your home if you remain in a high-risk loan. If your home is financed via an Option ARM, talk to your lender-and to competing lenders-to learn about less dangerous mortgage refinance options. You can have an Option ARM, or an option for sleeping well at night.