By Louise Bolger
Adjustable rate mortgages can create havoc
sun staff writer
Are you a home buyer or a home speculator? I dont mean
whether you buy property to live in or to invest in. I mean
whether you have a fixed-rate mortgage or an adjustable-rate
mortgage. If you have an adjustable-rate mortgage, known as
an ARM, you may actually be a speculator and not even know
As most of us are aware, a fixed-rate mortgage has a fixed
rate during the life of the loan. However, an ARM has periodically
adjusting interest rates, usually related to an index affecting
the amount of the payment. The initial interest rates for
ARMS are usually lower than for fixed-rate mortgages, sometimes
as low as 2 percent, making qualifying and paying for ARMS
attractive for homebuyers.
Your gamble is that interest rates will remain steady in exchange
for lower monthly payments. This can be a good strategy or
a really bad one, and for a lot of homeowners, it is turning
into a disaster.
Adjustable rate mortgages became very popular about five years
ago when the Federal Reserve Board started cutting short-term
interest rates in an effort to stimulate the economy. Now
that the Feds focus is on stabilizing inflation rates,
these short-term rates have been raised, creating havoc for
homeowners who have seen their monthly payments steadily increasing
by hundreds of dollars.
This is a double whammy for individuals who took an adjustable
rate mortgage in order to qualify and make the stretch purchasing
at the top of an inflated real estate market. Some homeowners
are finding themselves in the position of not being able to
pay the ARM increase and not being able to refinance. The
ARM payments are outpacing incomes, and homes have not appreciated
enough to cover the cost of a refinanced mortgage or to allow
these homeowners to sell.
Buyers, especially investors, who opted for an interest-only
line of credit or mortgage are in even worse shape, since
they have not paid down any of their principal. Based on the
purchase price, these owners may have a mortgage balance in
excess of the value of the property, spelling foreclosure
Borrowers whose house values have risen in recent years have
financial room to switch to a fixed-rate mortgage and get
off the treadmill. Fixed-rate mortgages have been holding
steady at about 6 percent, and at the last Federal Reserve
Board meeting in October, there was no increase in rates.
Keeping an adjustable rate mortgage could still be a good
decision for some homeowners. If raising interest rates are
not an issue for you based on your financial and tax position,
keeping an ARM may work. Or if you know you will not be staying
in the property for very long and dont want to incur
the cost of a refinance, maintaining the ARM would make sense.
But, unfortunately there are borrowers out there who are overextended
and simply cannot afford the increased monthly payments. These
people are at the mercy of the market and can only hope their
personal situation improves, or property values sharply increase.
Just like the over-heated appreciation rates of the past several
years should be considered exotic, so should the easy money
available to finance these purchases. It looks like the partys
over. Its time to get back to the reality of real estate
with the latest mortgage fashion, 30 year fixed-rate loans
deja vu all over again.