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Has Your Adjustable Rate Mortgage Become a Gamble?
By
Charles Essmeier
Three or four
years ago, interest rates on home loans dropped to levels not seen since the
1960's. Millions of Americans took advantage of the favorable rates, which
bottomed out near 5% for fixed rate, 30-year loans. For adjustable rate
mortgages, they rates were even lower. Many buyers passed on the opportunity
to lock in at fixed rates and gambled on the lower payments afforded by
adjustable rate loans in order to buy either larger or more expensive homes.
That worked out fine at the time, as the rates kept the monthly payments
affordable. Unfortunately, the sixteen increases in the Federal interest
rates since 2004 are about to have a dramatic effect on those buyers, many
of whom many find out that they can no longer afford to pay for the homes in
which they live.
Many
adjustable rate loans are set up in such a way that the interest rate is
fixed for the first three years of the loan's repayment schedule. After
that, the interest rate adjusts regularly, based upon prevailing market
rates. For the millions of homeowners who gambled and took out these loans
in 2003, the Big Adjustment is going to come soon, and it isn't going to be
pretty. As the rates adjust to current rates from the low rates of 2003,
many homeowners are going to be shocked to see that their monthly payments
rise by as much as 50%. Some will be fine with that, having anticipated this
increase for some time. Others will suddenly find themselves unable to pay
for a house that they have long thought they could afford. This will
undoubtedly lead to an increase in the foreclosure rate, which is already
some 60% above the rate of last year. In Michigan, the rate is up by 90%
over last year, as hundreds of owners have walked away from their home
loans.
What can you
do if you have an adjustable rate loan that is about to become unaffordable
and may yet become even more so? Your best bet may be to refinance and take
out a 15 or 30-year, fixed-rate loan. The benefit of doing so is the
security that comes with knowing that your payment will remain stable over a
long period of time, no matter what happens to the interest rates in the
marketplace. If you cannot afford your loan now and refinancing with a
fixed-rate loan will still leave the payments unaffordable, you may have no
choice but to sell the property and move to something smaller and/or less
expensive. You will not be alone.
©Copyright
2006 by Retro Marketing. Charles Essmeier is the owner of Retro Marketing, a
firm devoted to informational Websites, including HomeEquityHelp.net, a site
devoted to information regarding
home equity loans,
mortgages and lines of credit. He may also know something about
The Debt
Consolidator.
Article
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