Time to Refinance from ARM to Fixed Rate Loan?

This may be a good time to refinance to a fixed rate mortgage from an adjustable loan if you think your ARM interest rate will go up soon. 

Q: We have a first mortgage which is a 5/1 adjustable rate mortgage (ARM) for about $200,000 and a second mortgage for about $50,000. A recent appraisal (a desktop appraisal, as the lender termed it) came in at $210,000.

Obviously, we will not be able to refinance both mortgages into one with this appraisal number. We have a good credit score and didn’t plan to be in this home for more than five years, but the market kept us here. There seems to be no way out of the increase in our interest rate that is coming soon.

We pay our bills on time, have two children in college, with a third about to go to college, and frankly, it’s almost like the current loan programs invite homeowners to fall behind and damage their good credit for one of these Mickey Mouse loan modification programs to work for you!

My husband has a VA entitlement available if needed or if it would help in any way in a refinance situation. Any idea what we can do to get out of this ARM? All we want to do is refinance and have a fixed interest rate.

A: You should probably sit down and review your loan documentation. There are several issues you need to understand before you decide what to do. Most adjustable rate mortgages (ARM) given five or so years ago were tied to LIBOR (the London Interbank Offered Rate). That index has come down substantially from where it was five years ago. If you had good credit then, your ARM loan interest rate should actually come down.

If you didn’t have good credit then and you were given a loan product that guaranteed that your interest rate would go up, you might be in trouble. But you won’t know where you stand until you see and understand your loan terms. You may have obtained a loan that had you pay only interest on your loan for the first five years and now that the loan comes up for readjustment, your interest rate may be going down but your payment may be going up.

If your payment is going up but your interest rate is going down, you should understand that you probably won’t get a new loan that will give you a better interest rate, but rather a new loan that would require you to repay the amount you owe over an additional five years. You’d trade a 25-year loan for a new 30-year loan.

Why would your payment rise? Some of that increase may be due to the new amortization schedule of your loan, an increase in your real estate taxes and an increase in your yearly insurance premiums. If your taxes and insurance payments are going up, those payments will remain constant even with a new loan.

Once you find out what is going on with your loan, you can make a decision about what you should do. You may decide that the current loan is as good as you’re going to get in this market, short of selling your home, ruining your credit and getting your lender to agree on a short sale. As you have found out, you are underwater with your mortgage loans. That is your loans are worth more than what your house is worth and your options are more limited than if you had a great deal of equity in the home.

Finally, while we have not seen much success with the loan modification and loan refinance programs that have been previously announced and run by the Obama administration, you can always try to contact your bank now and see if they have decided to allow people like you to refinance your loans.

But refinancing a first and a second loan is harder than if you only had one lender. You can still, and you should, still try, but you’ll need luck in this mortgage market.


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