The decline of the housing market continues to plague the U.S. economy with record foreclosure rates, falling home values, a declining stock market and ongoing inflation. While
subprime mortgages were a ticking time bomb in the stock market, there is another kind of mortgage that threatens to cause an even bigger shakeup: ARM mortgages. ARM or adjustable rate mortgages were originally sold to homeowners who were eager to turn a profit on rising property values, as well as those who wanted to keep their payments as low as possible.
Higher Rates & Declining Property ValuesAdjustable rate mortgages can appear very attractive to borrowers initially, as they are typically offered with lower interest rates. However, the rates attached to ARM mortgages are scheduled to reset after a given period of time, which is usually about two to five years. Unfortunately, this is when the borrower’s monthly payments can increase significantly. Because the real-estate market was thriving just a few years ago, many people assumed they could take on this type of loan and simply refinance before the higher interest rates kicked in.
Sadly, the steep declines in real estate markets over the past couple years has caused property values to drop dramatically as well as a steady increase in home foreclosures. Therefore, the mortgage collapse has made it impossible for many people to refinance their loans, resulting in the current ARM crisis. As these adjustable rate mortgages continue resetting, borrowers are left with much higher mortgage payments.
Since payments reset based on the interest rates at the time of adjustment, monthly payments on
ARM loans can become instantly unaffordable for many homeowners. Additionally, ARM loan borrowers are also suffering from declining property values. The equity built into their homes is rapidly disappearing as their monthly payment is not sufficient to pay off the interest. This is also causing property values to fall closer to the amount of the loan or below.
Could The ARM Crisis Have Been Prevented?Many people may wonder whether the ARM crisis which our country is currently facing could have been prevented. The truth is probably not. This is because many people obtained adjustable rate mortgages without fully understanding how they work, why payments are initially low and how qualifying for a competitive interest rate is possible with less than perfect credit. Some may have even been surprised to discover that they need to begin making payments on both the principal and interest of the loan when their interest rate adjusts.
Even those who were aware of the potential pitfalls associated with adjustable rate mortgages could not have predicted the economic crisis in the housing market. While predictions of an end to the recession continue to be made by financial experts, the ongoing decline of the real estate industry is not a motivating sign. However, if it’s at all possible for ARM mortgage borrowers to refinance to a fixed rate at this point, or sell their home at a profit or at least break even, now may be the time to make it happen.