Loan Type Select One Purchase Home Equity Refinance Debt Consolidation FHA/VA State Select a State Alabama Alaska Arizona Arkansas California Colorado Connecticut D.C. Delaware Florida Georgia Hawaii Idaho Illinois Indiana Iowa Kansas Kentucky Louisiana Maine Maryland Massachusetts Michigan Minnesota Mississippi Missouri Montana Nebraska Nevada New Hampshire New Jersey New Mexico New York North Carolina North Dakota Ohio Oklahoma Oregon Pennsylvania Rhode Island South Carolina South Dakota Tennessee Texas Utah Vermont Virginia Washington West Virginia Wisconsin Wyoming Credit Rating Select One Excellent Good Fair Poor View Privacy Policy

Adjustable Rate Mortgages Carry Substantial Risk Staff - Mortgage Lenders Plus.com

There are some exotic adjustable rate mortgage loans (ARMs) available these days that are capable of jumping fifty to eighty percent when the day comes for adjustment. Interest only adjustable mortgage rates can be frightening when they are projected into the future, and option ARMs are worse. But setting those recent creations for a moment, consider what a standard adjustable rate mortgage issued five years ago can do to a two-income family of average means.

If a $250,000 adjustable rate mortgage loan resets from 4 percent to 6 percent, the monthly payment for principal and interest jump from $1,094 to $1,499. That's like dropping a new car payment into the budget. A family with active kids and a budget below $80,000 a year may well be challenged by an increase like that.

So-called subprime borrowers are going to face a bigger challenge, because their less-than-perfect credit histories meant they already were paying higher interest rates, and they're less protected from rate increases than prime borrowers, whose interest rates are capped at 2 percentage points a year. Subprime adjustable rate mortgage loans may go up as much as 5 percentage points in a year.

Another group at particular risk for payment shock are borrowers who chose ARMs around 2002 and 2003, when interest rates were at rock bottom, and are soon to experience their first rate adjustment. Twenty five percent of all mortgages in this country today are adjustable rate mortgage loans. Thirty seven percent of all new mortgages being issued today are ARMs; many of those are interest only adjustable loans.

About one-quarter of the total pool of first mortgage loans in the U.S., or about $2 trillion, carry interest rates set to adjust in the next three to four years, according to an analysis by research firm LoanPerformance. With what has now officially been declared a flat housing market, people paying interest only adjustable loan rates may find themselves owning a home in which they hold little or no equity. That possibility is going to eliminate the option of refinancing out of an extreme jump in the mortgage payment.

Most experts say subprime delinquencies will probably increase about 25 percent in the next year as the impact of rising interest rates sets in. According to Realty Trac Inc. foreclosures are up seventy two percent in the first three months of 2006. While these may not yet be subprime borrowers, those interest only adjustable loan rates are going to have a much higher impact than the current crop of standard ARMs.

Over the last couple of years, ten million people who could not afford a down payment and who had checkered credit ratings bought a home. It’s hard to believe that these statistics aren’t going to culminate in a real problem with adjustable rate mortgage loans over the next few years. It’s an issue worth studying if you are considering getting into the housing market in the near future.