Many homeowners who took advantage of low adjustable rate mortgages in the last couple of years should get ready for
a major shock to their pocketbooks. The Mortgage Bankers Association estimates that people holding about $330
billion worth of ARMs face interest rate adjustment in 2006 and $1 trillion worth of ARM holders will be impacted by
the end of 2007.
What does that mean for you? If you hold an ARM that you got when interest rates were
4%, the ARM is likely to increase by 2% to 6%. Your monthly mortgage principal and interest payment would increase
by $245 from $955 to $1,200. Ouch. That would hurt anyone’s budget. If your property taxes
increase as well, you’ll be hit by an even greater increase on your mortgage payment.
Unfortunately, if you’re in this boat, there’s not much you can do to get out. Fixed rate mortgages
averaged 6.49% at the end of last week. If you do hold an ARM, get ready for the rocky road now and start cutting
your other monthly expenses before you get hit with the payment change.
ARM Holders May Soon Face Pocketbook Shock
Reader Comments
(Page 1)2. For homeowners using adjustable rate mortgages (ARMs), rising interest rates mean ballooning payments. At best, the upwardly moving rate in an ARM puts the date of full ownership further over the horizon. At worst, homeowners on tight budgets have trouble affording the payments.
3. Yes Mort, what you say is true. ARMs do not make sense if you are planning to hold the property for a long time. An ARM can be an excellent choice, if you plan to hold the property for 5 years or less. For example, if you take a 3/1 ARM when it's at 2% below current rates. You'll have the 2% savings for the first three years. Even if the ARM adjusts after three years by 2% each of the last two years you hold the ARM, you'll still have a significant interest saving.
Posted at 6:26AM on Apr 18th 2006 by Lita Epstein
4. I have to agree with Lita, an ARM is an excellent choice for many people. The number one thing to keep in mind when choosing an ARM or Fixed loan is planning. Do you want to stay in this home until you retire or just for a few years? Most people move roughly every five years because their needs and lifestyle changes. If you have an ARM, and are planning on staying for a while you should look at your mortgage contract and see what percentage it is capped. Do the math (you can use an online amortizing calculator)and figure out how much is the worst case scenario. Being prepared will protect you and your investment.
5. I tried to tell people to stay away from ARM's.
Posted at 4:05PM on Apr 18th 2006 by Ron Wilson
6. Here's some sound advice if you have an ARM and will be retaining the property secured by this loan. 1.Check first to see if your loan includes a "conversion feature". When you have had a mortgage for sometime you sometimes forget the features. This feature would allow a 1 time conversion to "fix" the interest rate so increases will not continue. This works if you can now afford the higher payment at the higher rate.
2. Refinance into a fixed rate, another ARM or an "inertest only" mortgage. You have built your equity over the "boom" so being obligated to interest only payments with the flexibility to pay principal when you can won't hurt your equity. With interest only payments, as the principal goes down so do your payments.
Keep in mind- rates are still good, not the lowest but no where near highs of 17%. Ask around and you will appreciate today's rates. Lastly if you truly can not afford a refinanced payment or the new rate payment of your ARM then consider an "Option Arm" which bears a low monthly payment and defers the interest. All is not lost- you can always sell.
Posted at 1:07PM on Jun 11th 2006 by Angela
7. Anyone worried about rising ARM rates should take a look at these guys. They claim that they will assume your risk.
http://www.hedgecapitalgroup.com
Posted at 10:05PM on Jun 14th 2006 by Steve Alpher
1. Clearly very bad news for homeowners who took advantage of low adjustable rate mortgages in the last couple of years. As you said that there is nothing the home owners can do about it. It's a pity.
Posted at 7:25AM on Apr 17th 2006 by Razib Ahmed