Struggling with an option arm (Page 1 of 2)

MONEY MAKEOVER

Option ARM blues

This family faces a dilemma millions understand. Their option ARM started off great but is now zapping their bottom line.

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Understanding mortgages

Profile: The Flemings

The problem:

Used an option ARM to buy their home; mortgage now larger than when they bought house.

The plan:

Get finances in shape to make refinancing to a fixed rate possible.

Follow up:

Able to increase savings while refinancing to a low-interest, fixed-rate mortgage.

Profile

	UPDATE: See how the Fleming family is faring 14 months later. They ditched their Option ARM... More Phil and Stacey Fleming Phil and Stacey Fleming of California are in a situation that many can identify with � raising a family in one of the most expensive housing markets in the country. Phil, 42, works in administration for a school district. Stacey, 35, works with special education students in a middle school. They have three children � two sons, ages 14 and 11, and a daughter age 8. The Flemings purchased their home two years ago after relocating from Florida, and they intend to remain in the home for at least another 10 years. In addition to pursuing graduate studies at the University of Southern California, Phil has been spending his weekends renovating the home for the past two years.

The problem

Overview

The Flemings face a situation thousands of recent home buyers can relate to. Their option ARM started off great but is now zapping their bottom line.

Phil and Stacey bought their home with an option ARM and are finding it increasingly difficult each month to make a payment large enough to actually reduce their mortgage. The balance on the loan has increased by $30,000 since the loan originated two years ago. Further, they say they cannot make the higher interest-only payment, much less a payment that is going to chip away at the loan balance.

An option ARM permits borrowers to choose how they wish to make their payments each month: a traditional, fully amortizing payment; an interest-only payment; or a minimum monthly payment that is often not enough to cover the interest due. While Phil acknowledges the loan "was originally attractive for its low monthly payment," they've also learned over the last two years that rising interest rates mean higher monthly payments. They resort to the minimum payment each month, and watch as the interest-only payment continues to ratchet higher.

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	This report was prepared by Bankrate Senior Financial Analyst, Greg McBride, CFA.

Key issues

		Monthly mortgage payment and loan balance have increased, while they continue to make only the minimum payment.

		No liquid savings for emergencies or unplanned expenses.

		Rely on borrowing to make up the difference between spending and income.

		Typically pays only the minimum required payment on credit cards.

		No retirement savings.

		Insufficient life and disability insurance protection for Phil.

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