It’s pretty easy to be lulled to sleep by your option ARM loan. You probably know the rate is adjustable, but you don’t pay too much attention because you also probably know the minimum payment only changes once per year.

Wake up! You need to know several important components of your option ARM. There may be a reason to explore refinancing sooner rather than later.

The first thing you need to check is the date your loan started. The easiest way to find this out is to check with your mortgage advisor. If he is a good one, he will have this info on his database.

The date of inception is important because, generally speaking, the lender will re-cast the payment at the end of each five year increment of the loan. Re-casting means re-calculating the payment (usually it is a very large increase) in order to pay off the loan by the end of the term of the loan.

As an example, suppose you obtained a 30 year option ARM loan in August 2003. Guess what? You are going to receive a letter in the mail shortly stating that the payment has been re-amortized to a 25 year loan based on the current interest rate and the outstanding balance. Ouch!

A second component of your option ARM mortgage you need to know about is the maximum balance allowed. Generally speaking, lenders will allow the outstanding balance to increase anywhere from 5% to 25% of the original balance. For example, if you obtained a $500,000 loan with a maximum balance of 110% of the original balance, the maximum the loan can increase to is $550,000.

If it reaches the maximum, the lender will re-cast your payment to have the loan paid off by the end of the loan term. You need to know how much you can allow the balance to increase, rather than being surprised by a letter from your friendly lender informing you of their decision to raise your payment.

The last thing you need to know is about interest rate trends. If you are not near the end of a five year period, and if you are not near the maximum balance allowed, then your decision whether to refinance or not should be determined more by the direction of interest rates.

There is an excellent website, MoneyCafe, that gives graphs and charts of the most commonly used indexes for option ARM mortgages. If you look at this website, and consult with your mortgage advisor, you can make a pretty good guess of the direction of your option ARM mortgage rate. Use this information to determine if you should stay put or pursue another opportunity!