Adjustable-Rate Relief?
A higher payment isn't the only option as adjustable-rate loans reset. The right criteria and some new programs may give some homeowners a bit of breathing room
By Patricia V. Rivera CTW Features

Borrowers with adjustablerate mortgages are facing a double-whammy when their rates reset. Not only are they making higher mortgage payments than they may have expected, but they're also at a loss for what to do next.

"The challenge for many people is to refinance an ARM when so many of the programs that they may have considered as alternative when they took out the loan no longer exist today," says Gibran Nicholas, chairman and founder of the Certified Mortgage Planning Specialist Institute, Ann Arbor, Mich.

The Mortgage Bankers Association estimates that at least $1 trillion worth of ARMs will reset in 2007. That means millions of homeowners must stretch their dollars quickly to cover mortgages that rise from teaser rates, sometimes less than 4 percent, to those more than 7 percent. The nonpartisan Center for Responsible Lending found that three out of four borrowers with teaser rates could face payment increases of 50 percent or more.

Homeowners may not have as many options in a tighter real estate market that virtually slashed the subprime sector, but they can still find relief from higher monthly payments.

Laurice Feld, owner of American Mortgage Lending Inc., Peoria, Ill., says anyone planning to stay in a home indefinitely should consider refinancing at a fixed rate.

"Fixed rates are always much more sensible in the long run," she says.

Borrowers who've taken one hit with nontraditional mortgage programs overwhelmingly prefer that stability, experts say. But the switch doesn't come without some flinching for those accustomed to artificially low rates. Fixed rates sit at below 6.5 percent, a good rate, but higher than ARMs.

Unfortunately, many ARM bearers don't qualify for fixed rates because they don't meet the traditional loan requirements or they have little equity in the property. Others who hold ARMs with prepayments penalties must assess whether the additional expenses are worth refinancing to a fixed rate.

Nicholas says a lot depends on how long they plan to stay in the property. If the idea is to move in a few years, then it may be better to make the higher interest rate payments than hand over the hefty prepayment penalties and closing costs.

Borrowers who are eligible to refinance should keep an eye out for new programs. The Federal Housing Administration, for instance, recently unveiled the FHASecure Act, which loosens the agency's criteria for refinancing for ARM holders.

The FHA program is insured by an up-front mortgage insur- ance premium, as well as monthly private mortgage insurance, which builds a segregated fund for use in the event of default or foreclosure.

To qualify for FHASecure, homeowners must have: a history of timely mortgage payments before the borrower's teaser rates expired and loans reset; interest rates that reset between June 2005 and December 2009; at least 3 percent equity in the home; a sustained history of employment; and sufficient income to make the mortgage payment.

Feld expects a huge demand for the product.

"There is still not a lot out there," she says.

Nicholas says some homeowners still see ARMs as good options, even for a refinance. It's wise, however, to know what index is used to set the interest rate on a particular loan and how often it will adjust.

"Too many people buy a product without really understanding it," he says.

Don't assume you'll refinance when an ARM resets. Think through the worst scenario and determine whether you can afford payments that readjust frequently. Hybrid ARMs, for instance, attract consumers with low rates for the first couple of years and then adjust every six months or so.

"Anyone with an ARM needs to stay on top of it every year to avoid surprises," he says.