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MAMB
Consumer Center > Adjustable
Rate Mortgage Holders
ARM
Twisting - Rising Interest Rates Prove Painful
for Adjustable Rate Mortgage Holders
Reprinted
from NAMB's Consumer Focus
According to the Mortgage Bankers Association
(MBA), more than two thirds of the mortgages generated
during hte past several years are ARMs.
Adjustable
rate mortgages (ARMs) are home loans with a rate
that varies. As interest rates rise and fall in
general, rates on adjustable rate mortgages follow.
Approximately
2 trillion dollars worth of these loans are scheduled
for payment adjustment within the next two years.
Based on current market conditions, many of these
payments will increase.
"ARM
holders face the possibility of enormous hardship,"
states Howard Voyles, CEO of Focus Publications,
a provider of marketing tools to mortgage professionals.
"Income hasn't kept pace with the projected
monthly payment increases," he continues.
The
Federal Reserve Board agrees. ARMs may start with
lower monthly payments than fixed-rate mortgages,
but the following can happen:
- Monthly
payments could change. They could go up - sometimes
by a lot - even if interest rates don't go up.
- Payments
may not go down - even if interest rates go
down
- ARM
holders could end up owing more money than borrowed
- even if all payments are made on time.
- Paying
off an ARM early to avoid higher payments might
cause a penalty payment.
Justin
Pritchard, author and financial services provider,
addresses the pitfalls of Adjustable Rate Mortgages.
"Alas, there is no free lunch. While you
may benefit from a lower payment, you still have
the risk that rates will rise on you," Pritchard
says. "What was once an affordable payment
can become a serious burden... the payment can
get so high that you have to default on the debt."
When
is a good time to refinance? Right now, according
to economist Steven Wood of Insight Economics
Advisory, LLC in California, because the spread
between 30-year fixed rate mortgages and ARM rates
is currently one of the narrowest on record.
Time
to seek a mortgage alternative
ARM holders might want to seek the services of
a mortgage professional. Make sure that yoru loan
officer has the credentials and experience to
help with your selection and has access to multiple
choices that can be tailored to your individual
needs. Also, research the company and its history
to make sure that it is a reputable organization.
If
you are considering using an ARM to buy a home,
take a strong look at the possible downsides.
If you already have an ARM, you might want to
consider going to a fixed rate mortgage before
rates rise appreciably.
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