How to Refinance Your ARM Loan in 2009

Millions of Americans will try to refinance their ARM loans in 2009 and 2010. People have their own reasons for doing this, but it usually comes down to one of two things — saving money and avoiding risk. When used properly, and in the right circumstances, a mortgage refi can help you achieve both of these goals.

If you have an adjustable-rate mortgage loan, and you’re thinking of refinancing out of that loan, you’ve come to the right place. On this page, I’m offering the tools and information you need to refinance your ARM loan. You’ll find links for refinancing quotes, general qualification criteria and more.

Reasons to Refinance an ARM

An adjustable-rate mortgage loan gets its name because the interest rate will adjust (or “reset”) at predetermined points. The rate on a 5/1 ARM loan, for example, will remain fixed for the first five years, but will adjust once a year after that introductory fixed period.

The initial interest rate on an ARM loan is typically lower than the rate offered on a fixed mortgage. That’s the whole reason people use adjustable-rate mortgages in the first place — to make their mortgage payments more affordable. The only problem is, you don’t know what the interest rate is going to do when it adjusts. Typically, the rate will go up, which makes the monthly payment less affordable for the homeowner.

Of course in the current economy, when we have record-low interest rates, the monthly payment on an ARM might actually adjust downward. But this is a rare case. It usually gets more expensive to maintain, not less.

That’s one of the primary reason people refinance their ARM loans in the first place, to avoid the uncertainty of rate adjustments. The other big motivator is something we have already touched on. Homeowners also use refinancing to save money with lower interest rates. This can often be done in conjunction with the first goal we talked about.

For example, if I have an ARM loan with an interest rate of 7 percent, I could refinance into a fixed mortgage today and lock down a rate of around 5 – 5.25 percent (thanks to the recent actions of the Federal Reserve). In this scenario, I would be accomplishing the two goals we discussed — I’d be lowering my interest rate and my monthly payments, and I would also be transitioning into a fixed-rate mortgage that offers more predictability.

Of course, all of this is contingent upon my ability to qualify for the best rates when I refinance my ARM loan, and that’s what we will talk about next.

Refinancing Your ARM in 2009 – What it Takes

We have entered a new economy. Over the last couple of years, we have seen a mortgage crisis, a meltdown of our housing market, and a full-scale recession. And we’re not even out of the woods yet. So anyone trying to refinance an ARM loan in the new economy could face new obstacles as well.

Here are the two most common obstacles to refinancing a mortgage today:

• Home Equity — Most lenders today will require you to have at least 20 percent equity in your home in order to refinance your ARM loan into a fixed-rate mortgage. But over the last few years, home values have dropped in most cities across the U.S. In cities that had big real estate bubbles, property values dropped significantly. The end result, of course, is that millions of Americans lost equity in their homes. So the 20 percent requirement is out of reach for a lot of folks.
• Credit Scores — Remember the days of “easy lending” and creative financing, when just about everyone could qualify for a home loan? Well, those days are behind us. And rightfully so. Mortgage lenders today have tougher standards and qualification criteria. If you want to refinance your adjustable-rate mortgage loan today, you’ll probably need a credit score of 750 or above (in addition to the equity requirement mentioned previously).

Equity note: If you have less than 20 percent equity, and you want to refinance your ARM, you might qualify for refinancing under the government’s Making Home Affordable program. You’ll need to be current on your mortgage payments to participate in this program, and your loan must currently be owned by Fannie Mae or Freddie Mac. Here are the complete eligibility requirements for that refinancing program.

Get Refi Quotes Online to Save Time

Before we go any further, we should address an important point that many homeowners overlook. A mortgage refinance is not automatically a good idea. There are scenarios where it makes good financial sense, and other scenarios where it’s cost prohibitive. In short, if you save more money by getting a lower rate than what you spend in closing costs, then a refi makes sense.

With that being said, you won’t know if you can refinance your ARM loan (and save money in the process) until you get some refinancing quotes from lenders. We recommend LendingTree for this process. In fact, theirs is the only website I’ll recommend for this process.

I hope you have found this lesson helpful, and I wish you well in your financial endeavors. If you would like to learn more about how this process works, check out this lesson: How Does Home Refinancing Work?