In the early 1980s, adjustable rate mortgage or the ARM was the byword in the housing industry. It was every American’s ticket to finally owning a home. With very, very low payments to make each month, the ARM was an ideal home ownership package every working citizen would afford. It seemed like a workable deal – the five years of interest only or very minimal monthly dues would allow a borrower to work his butt off and save up for the principal dues once the loan adjusts.
Today, fewer borrowers are asking their lenders for an ARM. With all the bad publicity attributed to ARM resets causing an upsurge in foreclosures, everybody seems to be avoiding it like the plague. To add to that, fixed rate mortgages are currently enjoying record lows in terms of interest rates.
Freddie Mac reports that of all conventional home purchase loans in 2009, a mere 3 percent comprise adjustable rate mortgages. Compare that to 62 percent in 1982, last year was an all-time low for the ARM.
Fixed rate lending is currently dominating the market due to a 50-year low on interest rates and the assurance that a fixed principal and interest payment is going to stay just that – fixed. That didn’t matter five years ago; the lure of easy, ridiculously low monthly payments was just too irresistible to recognize the fine prints. But today’s housing crisis has taught us a better lesson – Better to be sure than sorry.
Experts even fear that adjustable rate mortgages taken out during the housing boom are coming close to flooding the housing market with another wave of defaults and foreclosures. $71 billion worth of interest-only ARM loans are scheduled to reset in the next 8 months with another $100 billion following a year after. The period from mid-2011 to mid 2012 projects another $400 billion resetting, and in a significant number of cases, increasing the borrower’s monthly mortgage payment by as much as 75 percent of what they are paying now.
As loan principals on ARM mortgages start amortizing beginning the last quarter of 2010, that nation might just see another mortgage crisis as dire and large as the subprime. The imminent peril of ARM resets is like a bubble ready to burst – and it is definitely something worth preparing for.
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