The Trouble with ARMs

Posted in Mortgages, August 31st, 2006 |

It seems that rising interest rates and the recent housing boon are creating a lot of trouble for people with Adjustable Rate Mortgages (ARMs) all over the country.

During the real estate boon going on for the past few years, people had been taking out a large number of ARMs at extremely low “teaser” rates, sometimes half that of a traditional 30-year fixed mortgage. The lending companies offered these rates in order to encourage loan purchase during the hot market.

The low rates offered an alluring way for poorer Americans to get into a booming housing market, and many leapt at the chance. About a quarter of outstanding home mortgages nationwide carry adjustable interest rates, and the nation’s homeownership rate has climbed to a record 70 percent.
Last year, 43 percent of all mortgages taken out were adjustable or otherwise alluring at first, but given to drastic long term changes — such as those that require only the interest of the loan be paid for the first two years.

Now it seems those changes are coming to fruition, and it’s leaving many people high and dry. But rates have been climbing for two years, in some cases to nearly double what they were in 2003 or 2004. Unfortunately for homeowners who bought during those years, this is the time that those low introductory low rates on adjustable mortgages are set to expire.

That means homebuyers who were once paying just over 3 percent interest are suddenly facing rates that are at 5 or 6 percent and still climbing. As interest rates rise, late payments, also known as delinquencies, are becoming more common.

-John Grady