During the last part of the housing boom, many of the sub-prime mortgage loans were adjustable rate mortgages, or ARMs. ARMs are attractive because the interest rate and therefore the payments are very low in the beginning. However, the rates on ARMs reset at a given time, usually between two and five years, and the [...]
During the last part of the housing boom, many of the sub-prime mortgage loans were adjustable rate mortgages, or ARMs. ARMs are attractive because the interest rate and therefore the payments are very low in the beginning. However, the rates on ARMs reset at a given time, usually between two and five years, and the payments can go up significantly.
According to Fortune Magazine, there are still over $570 billion of adjustable rate mortgage loans that will reset between now and the end of 2008. Their average increase in payments will be more than $1,000. It includes prime borrowers who will see their payments increase by an average of $450, but the big hit will be the teaser rate borrowers who will see their payments almost double, increasing an average of $1,825.
Many consumers ended up with mortgages that they could not reach afford because they were fooled by the introductory rate and assumed that they could refinance before the rate adjusted. They felt that if they got into too much trouble, they could sell their home and possibly get a less expensive home. However, the housing bust put an end to both of these contingency plans, and millions of Americans found themselves in foreclosure or near foreclosure.
Although sub-prime ARMs make up only about 7% of total mortgages in the US, they account for almost half of foreclosures. Now that the real estate market has crashed and there are other signs of financial distress in the economy, homeowners with other types of mortgages are having difficulty making their payments as well.
The mortgage crisis is more pronounced in certain states; California with a projected 355,682 foreclosures in 2008/2009, Florida with 194,796, and Illinois with 87,918 top the list. However, it is a nationwide and even international event. Foreign investors are now withdrawing money previously invested in American companies that have even the possibility of being tainted by sub-prime mortgages. Numerous foreign banks have felt the pain of the domino effect, as global financial institutions spread the risk.
California and Arizona have negotiated with large lenders doing business there to voluntarily free sub-prime ARM interest rates at the initial rate for a set period of time. Contact your lender to find out if they are participating, and how it will impact your payment.
If you have a sub-prime ARM, there are steps you can take to protect your home. See our article ““Saving Your Home During the Mortgage Crisis.
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