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5-Year Option ARM Home Loans to Reset in 2010

[Aug 12, 2009.]


The home loan that has become the poster child for mortgage finance excess and error, the so-called "Option ARM," is starting to wedge its way back into the home refinance news cycle. Five-year Option Adjustable Rate Mortgages taken out in 2005, that is, are due to reset in 2010.

An Option ARM loan customarily begins with a low teaser rate for a fixed period of time, in this case five years, but the borrower has an "option" to either pay the full payment or a lower payment. The difference between the full payment and the lower payment, if the full is not paid, is added onto the mortgage balance.

"Negative amortization," it's called.

How Many 5-Year Option ARMs Will Re-Set in 2010?

It's hard to get perfect statistics on how many Option ARMs are out there, because banks were not required to report this product specifically. According to BusinessWeek, approximately 1.3 billion borrowers took out approximately $389 billion in Option ARM home loans during 2004 and 2005.

According to Fitch Ratings, up to 80 percent of Option ARM borrowers only pay the minimum payment. Added, then, to the overall decline of the housing market, is the negative amortization problem.

The batch of 5-year Option ARMs taken out in 2005 includes hundreds of thousands of severely underwater homeowners.

The Time to Refinance that Option ARM Is Now or Soon

Mortgage refinance rates remain low and, although refinancing is still not easy, credit appears to have eased at least somewhat. If there ever was a time to refinance that Option ARM, that time is now or soon.

Now or soon because the housing market appears to be stabilizing, with house prices rising over the past few months. Rising house prices, combined with government insistence that banks at least try to refi struggling borrowers, must be counted as the best hope for those wishing to refinance out of Option ARM mortgages. Conventional refinance deals are not usually possible due to loan-to-value concerns.

Refinance at Any Cost? Not Necessarily

Definitely, borrowers with Option ARMs due to reset in 2010 must be actively looking at refinance options. However, that does not necessarily mean such borrowers should refinance at any price.

No doubt, dealing with a troubled home loan can be a frightening experience, but borrowers must still strive to be rational about what's best to do in this situation. Certainly it's not worth refinancing out of one unaffordable loan into another unaffordable loan, for example.

Finding an honest, competent mortgage pro to help with these complexities is a wise choice in these trying refinance times.


About Author:

Andrew Freiburghouse is a writer and businessman. He has worked as a magazine reporter, tax preparer, screenwriter, copywriter, and loan officer. He graduated from Santa Clara University in 1999 with a B.A. in English. Andrew was born and raised in the City of Los Angeles.

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