We have a 5 year ARM that is up in two years.  When we originally bought the house, we planned to move out before the end of our ARM.  The value of our house is now about $80,000 less than when we purchased it, so we may have to stay here longer than originally expected unless the market makes a big come back.  Should we go ahead and try to refinance?  WIll we even be able to refinance if the value of our house is less than our mortgage?

One thing you can do is to look at the index and margin on the rider to your note and mortgage.  Check out to see what the figures are today.  Things could be entirely different in two years, but you could see a decline in rate.  Refinancing while upside down could mean bringing a lare chunk of change to the closing table.  You can also pre-pay on the principal as the adjustment will use the remaining balance and the 25 years to maturity to calculate the new payment.  So, even if the rate goes up slightly, the payment may decrease.  I admire you for not walking away.

I would start with your lender and ask them to modify your loan and lock the rate.

You may be able to refinance even though you owe more than you home is worth. New programs for Fannie and Freddie, allow people upside down to refinance their first mortgage. To qualify for this, your current loan must be serviced by either Fannie Mae or Freddie Mac. Call your lender to find out if the loan is serviced by Fannie or Freddie... if it is you have hope for a refinance. I would not recommend a loan modification unless it is the only option available to you, and the modification locks in a 30 year fixed note.

Moving on... I would definitely try and refinance your current mortgage. Mister VA points out a couple of things regarding your interest rate and its composition (index and margin), but he does not mention the overall sentiment in the market which is: inflation is coming, and when inflation hits whichever index your current adjustable rate mortgage is tied to will skyrocket taking your interest rate and monthly payment with it. If you stay in this loan I sincerely believe come the adjustment phase, you will be spending significantly more money on your mortgage payment. You build the boat before the storm, now is time to refi (if you can) while rates are still historically (and artifically) low. If you wait the consequences may mean weather you are truly not prepared for.

Bottom line, there is not a single person in an adjustable rate mortgage right now that should not be exploring the option of refinancing into a fixed program. With rates as low as they are, and serious inflation looming, securing a low fixed interest rate now is one of the wisest investments one can make in this troubled and volatile market. There is no reason not to explore and consider your options; this does not mean you have to move forward, just do your research; then make the decision on whether moving forward is the right call.

I hope everything works out for you.

There are some restrictions with the refinance program outlined above.  Losing $80,000 in value from a starting point of $250,000 is much different than losing $80,000 on a home worth $450,000.  If the findings on your loan request do not require an appraisal, you may very well be able to take advantage of the Fannie or Freddie program.  But there is a possibility that you may not.  While the US Treasury Index is one that is at a low ebb right now, a history of that index can also be obtained to measure past performance.  1994 was a period that saw the index increase rapidly.  2000 was another year of increase.  There should be an index history with your application documents, but you can obtain a more recent history from your lender.

Your hands may be tied at this point in time.  It may even be possible that your home has declined in value more than you think.  Especially if many similar homes have been re-sold as foreclosures or short sales.  There is no absolute answer here.  Where your property is located will play a major role in telling you which options are open to you.