ARM Resets Will Leave Their Mark
by: Martin Lukac
We are already seeing financial advisors pointing to what is currently happening in the mortgage market as a case against stretching to buy too much house.
With record low interest rates and many new mortgage products allowing consumers to expand their buying power, the past five years has seen quite a boom in the real estate arena. Somewhere along the way, consumers stopped considering the future, instead looking for the lowest monthly payment for the time being.
Homeowners stopped paying attention to the advice of many mortgage experts -- who preached the virtues of the 30-year traditional mortgage -- and instead turned to better ways to buy more.
Adjustable-rate mortgages have been very popular. Nearly 25% of all outstanding US mortgage debt will reset in interest rate during the next two years, according to Moody's. Almost $400 billion in loans will reset this year, with $2 trillion to adjust next year.
There are a lot of worried homeowners out there. You never want to see rates going up when you are about to reset in your ARM. The prime rate is more than twice the rate two years ago. Many ARM payments are set to double.
Experts forecast that the default rate on ARMs will increase 10%.
"There is no apples-to-apples comparison from the kind of mortgage someone could get a year ago and what they can get today," explained Anthony Hsieh, president of LendingTree.com. "As rates rise on adjustables, there are steps people can take to reduce the sticker shock, but they're probably not going to be too happy with what they have to swallow now...They had a 42-year low in mortgage rates, but they were more concerned with how much they would have to pay each month than how much they could afford and buy a home reasonably."
Refinancing to a fixed mortgage may not be any better a situation for many adjustable-rate households. The first indication is that rates are much higher for current fixed rates than they are for the current rate the homeowner may have on his mortgage.
If the home was a recent purchase, perhaps with less than 20% down, there hasn't been hardly any build up in equity. With a cooling market, housing appreciation is slowing and even turning into depreciation in some areas. This affects the home's value and the ability to refinance. A few homeowners may find that they can't even sell the home for what they owe on it.
Experts advice homeowners to sit down and see by how much their ARM will adjust. Most mortgages contain annual and lifetime caps on the interest rates. This may limit the immediate damage for some borrowers. If the home wasn't a complete stretch, they may be able to afford the increase in rate that is looming.
About The Author:
Martin Lukac represents http://www.RateEmpire.com and http://www.1AmericanFinancial.com, a finance web-company specializing in real estate and mortgage rates. We specialize in daily updates, mortgage news, rate predictions, mortgage rates and more. Find low home loan mortgage interest rates from hundreds of mortgage companies!
August 2006
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