Tough times ahead for folks with interest-onlys and ARMs
I just read a very sobering article that is documenting the woes of some families who have interest-only mortgages or adjustable rate mortgages (ARMs). I highly recommend reading the whole article (especially if you’re in this situation or know people who are, because there are resources mentioned at the bottom that might help) but here are some compelling quotes.
Now, the real estate market is cooling, interest rates are rising and tens of thousands more Americans are starting to have trouble paying their mortgages. Nearly 25% of mortgages – 10 million – carry adjustable interest rates. And most of them went to people with subpar credit ratings who accepted higher interest rates, according to the Mortgage Bankers Association.
Did you get that? 25% of mortgages nationwide. It’s even worse in some areas:
What worries experts such as Christopher Cagan at First American Real Estate Solutions are the adjustable-rate loans made in 2004 and 2005, at the end of the housing boom. These loans were concentrated in the hottest markets, such as California, where about 60% of all loans last year were interest-only or payment-option ARMs. That’s the highest such rate in the country.
And it’s already starting to bite the homeowners:
Already, in West Virginia, Alabama, Michigan, Missouri and Tennessee, about one in five homeowners with a high-interest (subprime) ARM was at least 30 days late at the end of last year, according to the Mortgage Bankers Association. After 90 days, the foreclosure clock starts ticking.
Here’s the unfortunate conclusion:
Of the 7.7 million households who took out ARMs over the past two years to buy or refinance, up to 1 million could lose their homes through foreclosure over the next five years because they won’t be able to afford their mortgage payments, and their homes will be worth less than they owe, according to Cagan’s research.
Serious stuff. As someone who has been expecting this, my goal is still to pay off my own (fixed-rate!) mortgage as soon as possible and hopefully be in a situation to invest wisely and help people avoid foreclosure.
How will this affect you?
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I just bought a house last week, and it will not affect me at all. Fixed rates are the way to go. I doubt I’ll have it paid off in the near future though…
i think that this is another sign of how americans in general do not understand credit and personal finance. an interest only loan and arms are good ideas, in the right situation. but you personally must understand those situations and not count on a loan officer to even remotely look out for you. we have an interest only loan. it work(s/ed) great for us. it is fixed through 7 years which we figured we would sell the home within 7 years and if we didn’t we would refinance to a fixed rate before the 7 year mark. now you ask, why not just get a fixed rate to start with? because we were 90% sure we were going to sell, so why pay a higher interest rate on a house that you aren’t going to keep in the long term. we also needed to qualify for buying this house without selling our old one. we looked at the numbers and if we didn’t sell our old house we could manage a payment on both and look to rent the old house. the interest only would have allowed us the flexiblity we needed for the few months we would have been juggling two mortgage payments before the old one was rented. as it turned out we sold the old one and we moved in to our new one with 20% down and some cash to spare.
now it is 5 months after we moved in and becuase of a job change we are selling our house. we are out less interest than we would have been if we had gotten a fixed mortgage.
but we looked at what we were doing and plan on paying off a house someday. when we know we are going to be in one place for a long time and our jobs will too. until then, we’ll continue to get arm’s if they have a more attractive interst rate. sometimes they don’t, sometimes they do.