09/10/2007

Is it time to refinance my option ARM?  It's a great question but not so simple to answer accurately.  Here are some important considerations:

• Negative amortization (deferred interest) 
  This is the amount of money that is added to the balance of your loan if you elect to pay less than an interest only payment option.  Many people hate this aspect of the Option ARM but of course if the full interest is paid every month there will never be any negative amortization.  Other borrowers wait until close to the end of the year and then pay down the negative amortization for a tax write-off.  Consult your tax professional, some lenders do not itemize the deferred interest separately, it gets added back to the principal balance.  Keep in mind that if you pay all of the interest, you may be making a higher payment. 
  
  So, the bottom line of the negative amortization issue is one of personal preference, it is neither good nor bad in itself and is easily avoided.  A final thought, when rates are dropping and your payment rate is higher than a fully amortizing payment, you will have accelerated amortization.  This means, not only do you not incur negative amortization but your loan is paying off faster than a normally amortizing loan.  Accelerated amortization can help take the sting out of any previous negative amortization.
   
• Adjustable rate
  Most Option ARM loans are adjustable and most adjust monthly which can result in the above mentioned negative amortization.  If your loan does adjust monthly it should be tied to a relatively slow moving index such as the 12MTA (12 Month Treasury Average) or COFI (11th District Cost of Funds Index).  Other indexes may be suitably slow moving for a monthly adjusting loan. 
  
  Whether or not you should keep an adjustable rate mortgage depends on where you think we are in the interest rate cycle, what is your current rate, what is the maximum rate of the loan and your own personal tolerance for risk.  Another consideration is your own spending habits, do you always pay the minimum payment or do you pay extra to cover all of the interest?  If you normally just pay the minimum payments and allow negative amortization to accrue, how do you spend the money saved by making lower payments?  If those funds are regularly applied to paying off higher interest debt then perhaps keeping the Option ARM is the best choice.
  
  
  Evaluating your Option ARM
  If you just can't stand the possibility of negative amortization or adjustable rates then of course it is time to refinance.  Peace of mind is worth the costs of refinancing.  If those issues do not cause you great concern then it's time to evaluate your loan to see if it really makes sense to refinance your mortgage.
  
  Since Option ARMs adjust by adding an index value to a fixed margin then the amount of margin is most important.  Index plus margin equals your fully indexed true rate, regardless of the payment rate.  A loan can start at a 1% payment rate and begin accruing interest at 8% the first day of the loan.  If your index plus margin is higher than the current  30 year fixed with no closing costs  then it would seem to be the right time to consider a refinance.  If you still need lower payments than the 30 year fixed rate loan provides then consider a hybrid interest only ARM which is fixed for the first 5, 7 or 10 years.
  
  Caveat - some Option ARMs were originated with pre-payment penalties up to 3 years.  Read your loan closing documents.

Questions?  Call Bill Meyers toll free at  877-994-9589 or 239-566-8484 or e-mail

This website is not a solicitation for mortgage brokers
Rates vary with geographic location, lender, transaction type, credit scores and other factors
APR is abbreviation for annual percentage rate
Rates change frequently and these rates may not reflect the latest market conditions
Expressed interest rate may change or be unavailable at commitment or closing
Most rates based on primary residence, purchase transaction
Cash out refinance rates may be slightly higher
Some loans may have pre-payment penalties
Rates on some programs may require higher down payments
This is only a brief summary of rates and programs and possible fees, call for additional information on underwriting requirements
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Bill Meyers is employed as a  mortgage loan consultant for one of the nation's largest residential lenders.  Bill works as an employee and not a mortgage broker.  This is Bill's personal web site and not the official web site of  any bank or mortgage company.  Please consider all information posted on this site to be general in nature and representative of mortgage rates and policies that may be available from various sources.  Bill is located on Marco Island Florida.  Bill can be reached on his cell phone at (239)566-8484

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