Refinance Articles >> Adjustable Rate Mortgage / ARM

How to Refinance an ARM Loan - And Why It's Probably a Good Idea

by Brandon Cornett

Right now, millions of homeowners in this country are trying to refinance their adjustable-rate mortgage / ARM loans into fixed-rate loans. If you are one of them, this article is a great place to continue your research. Let's talk about why so many people are refinancing their ARM loans and how you can do the same.

Over the last decade or so, the adjustable-rate mortgage was a hot product for the lending industry. The ARM loan was especially useful to the subprime lenders who targeted borrowers with low credit scores. The lenders could offer an ARM with a low "teaser rate" that would appeal to the borrower. Then, in most cases, the lenders would turn around and sell that loan on the secondary mortgage market ... because they knew what would likely happen next.

The rest, as they say, is history. And it's an ugly history at that. This kind of easy lending practice led to the subprime mortgage crisis that wrecked our economy in 2008. All of those ARM loans started adjusting to higher rates. And for those people with bad credit scores, the rates went up considerably. You know the rest. We saw record numbers of home foreclosures all across the country.

So this is a key motivator for people trying to refinance their ARM loans — they want to avoid a similar fate. Sure, there are other reasons for refinancing. Some people do it to take advantage of lower interest rates, or to leverage the equity in their home for cash-out purposes. But a lot of folks just want to avoid the uncertainty that comes with an ARM loan, so they are refinancing to the more predictable fixed-rate mortgage loan.

Current Challenges of Refinancing an ARM

We recently wrote a blog post to explain why it's hard to refinance a home loan in today's economy. So that post is worth reading. Keep in mind, however, that the challenges listed in that article are not unique to people refinancing an ARM — they apply to people with fixed-rate mortgages as well.

One of the biggest challenges right now is that property values have dropped in so many cities across the U.S. In some places, like California, they have dropped significantly. This presents an obstacle for people trying to refinance an ARM loan, because you can't replace a bigger mortgage loan with a smaller one. For example, if your current loan balance is $300,000, but your home's value has dropped to $235,000, you won't be able to get a refinance loan.

In addition to property value decline, people refinancing their adjustable mortgages are also running into credit issues. As a result of the mortgage crisis, lenders are requiring borrowers to have better credit scores in order to qualify for the best rates. If you can't get a good rate on a refinance loan, it sort of defeats the whole purpose. This is why credit scores are so important for people refinancing ARM loans (or any type of loan for that matter).

FHA Program for People With ARM Loans

This article would be incomplete if I failed to mention the new FHA refinancing program for people with adjustable-rate mortgages. The program is called Hope for Homeowners (or H4H), and it is designed to help "at-risk" homeowners who may be facing foreclosure because of their ARM loans.

Basically, the FHA is backing loans made by private lenders to help these homeowners transition into a more affordable fixed-rate mortgage with a 30-year term. You can learn more about the FHA refinance program on our blog.

Find out if you are qualified for this program:

Get a Refinance Quote - See Where You Stand

In order to determine if refinancing makes sense for you, you'll need to figure out (A) the costs involved and (B) the interest rate you qualify for. Based on that information, you can run the numbers to see if it makes sense to refinance your ARM loan right now. To simplify the process, you can use the link provided below to get refi offers from up to four lenders (through LendingTree):

Get a Refi Quote Today

Start here:

I hope this article has given you some helpful insight into this subject, and I wish you well in your financial endeavors. We strongly recommend that you continue your research beyond this website. We have provided this information for general education, but not to serve as specific financial advice.