Adjustable Rate Mortgages

What Happens to Adjustable Rate Mortgages Down the Road?

Nonprofit agencies across the country that are set up to help low-income people get mortgages and buy homes, are instead aiming their resources at folks who already have homes but need help nevertheless. These are Americans who are struggling to make the payments on their mortgages, hoping not to lose their homes.

An Increase in Delinquencies

Professionals in the lending industry, as well as in the credit counseling field, have seen a definite, marked increase in delinquencies in the past year. The increase in numbers of mortgage loan delinquencies is solid, and now, following that, there is a slow trickle of foreclosures on its heels. Delinquencies are, after all, the first sign or the first step towards actually losing a home and entering into forecloseure situations. This is what everyone hopes to avoid, which is why credit-counseling and nonprofits across the country, and even the banks are working on solutions to help people out. While it's mostly about education, not cash, the help is available to anyone who needs it.

Adjustable Rate Mortgages are Expiring

Why are nonprofits and lending professionals starting to see so many delinquencies in the past year? The answer is clear: Adjustable Rate Mortgages takes out in the past three to five years are now beginning to expire, resetting to a fixed rate. Mortgage interest rates are higher today then they were three to five years ago, so those borrowers who took out Adjustable Rate Mortgages (ARMs) back then are facing higher monthly payments. They enjoyed low payments for a few years, but now unfortunately, because of the type of mortgage loan they took out, they have to face reality, and reality bites!

The Allure of Adjustable Rate Mortgages

If ARMs carry such a risk, where afer the initial period of a low interest rate, the rate can adjust to whatever the current rate is that day, why did so many people choose them? Why did so many borrowers put themselves at the mercy of the fluctuating interest rates? The answer is very simple, and that is, the low initial rate was too good to pass up, and people have difficulty thinking ahead as much as five years or even three years sometimes. That is, they were lured by the teaser rates offered and promoted by just about every mortgage company out there.

Help for Lower-Income Americans Trying to Enter the Homeownership Club?

ARMs also offered many Americans a chance they wouldn't otherwise have had, without the low monthly payments made possible by the Adjustable Mortgage Rate. However, that should have been a warning sign. If they coudln't afford the monthly payments of a traditional mortgage, then perhaps they should have readjusted their homeownership goals. That means, perhaps borrowers should consider smaller homes, or homes in less trendy or popular neighborhoods, if the only way they can afford to purchase a home is with a teaser loan. But three to five years ago was a whirlwind-type of situation in the housing industry. The industry was booming, it seemed that everyone was buying homes, taking out whopping mortgages, and lots of poorer Americans leapt at the chance to own a home, and they were happily helped out by the lending industry who stood to make millions off this housing industry boom. In 2005, 43 percent of all the mortgages taken out by borrowers were either exotic mortgages or ARMs. The nation's rate of homeownership has reached an all-time high of seventy percent!

The Harsh Reality

Well, times are different now. The interest rates are higher, and more borrowers are slipping into delinquency. Homeonwership has grown, but so have the costs of borrowing. Rates now are so much higher than they were in 2003 and 2004...sometimes double. That's terrible news for the ARM borrowers who got their mortgages in those years, because it means the increase in their monthly payments is going to be especially devestating. In some cases, their interest rates will go from three to six percent. These borrowers are really going to be hit hard, and unless they can come up with the extra cash for their increased monthly payments, they will be late or not there at all with mortgage payements (the definition of delinquency, in this field). Just ninety days of delinquency, and foreclosure procedings will begin. That's just three missed payments!

What Does the Future Hold?

The future right now looks a little grim for poorer borrowers who took out ARMs during the past three to five years. We're already seeing an increase in delquencies, and an increase in foreclosure rates is sure to follow. Economists and lending industry professionals are bracing for a tidal wave of late payments and they worry that this wave could trigger a collapse in the housing industry. The rate of delinquencies on mortgages rose from 4.44% in the middle of 2005 to 4.70% by the end of 2005, according to The Mortgage Bankers Association, who exist to track such trends. One small part of that increase is, however, due to Hurricane Katrina, but one of the major reasons why delinquencies are on the rise is because there are more and more adjustable, exotic and subprime loans. We can expect an increase in delinquency rates to follow an increase in ARMs after a lag time of about one year. That means that even if mortgage rates stop climbing eventually, borrowers will still continue to enter delinquency status at an increased rate for about one year.

It's All About Knowing What You're Getting Into

The moral of the story is, for borrowers, that people really should try and look into the future when they take out a mortgage loan. They need to try and guess what their situation will five years down the road from time of purchase. This is especially true of borrowers who choose Adjustable Rate Mortgages. You have to try and imagine what will happen when the grace period of your loan is over, and the interest rate will become fixed. You have to be prepared for higher payments. Alternatively, you have to understand how the Adjustable Rate Mortgages work in the first place. Consumer groups who study and protect borrowers report that some of the unfortunate borrowers they've talked to, who are now in delinquency, didn't even know their ARMs would adjust after the grace period! They didn't have any inkling that would happen, until it actually happened and suddenly the monthly mortgage bill was a whole lot larger than before. It's about education, and consumers need to arm themselves with knowledge before they sign up for such loans. The consumer protection groups, nonprofits, and financial counselors are working with these borrowers, helping them to refinance into better situations with their mortgages, so they can try and avoid foreclosure. After all, foreclosure is the last resort for everybody involved.

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