The mortgage crisis in the US has now spread far beyond the sub-prime loans that precipitated the crash. As those ill advised loans have gone into foreclosure in massive numbers, the resulting glut of homes on the market has damaged the appraised value of those with standard home loans. Nationally, home values have fallen over 13% and another 10% decrease is being predicted by economists.
When the housing bubble began in the mid-90's, homes were appreciating in price so quickly in some locations buyers were seeing a return on their investment if they sold in as little as two years. As the average price climbed month after month, year after year, ARM's again became popular but for a different reason. Families were buying at the top of their price range. By applying for adjusting loans, they were able to buy more house for the same payment. The result was homeowners who were stretching to afford the low introductory rate of interest and many unable to qualify for fixed rate loans that would cause the payment to increase.
Though some economists warned of the dangers, the popularity of these specially structured mortgages soared though fixed rate loans were were the lowest seen in years. New buyers wanted bigger and better homes and saw no reason they shouldn't have them. After all, they reasoned, real estate values always increase - right?
The person who could qualify for a 5.75% fixed rate on a 30 year fixed rate mortgage on a $150,000 property learned he could also qualify to buy a $200,000 home by taking an adjustable loan with interest that began at 3%. For many buyers, it was a no-brainer. Assuming interest rates would not rise, assuming home values continued to rise rapidly, assuming their own income would be as good or better in future years - buyers assumed they were safe.
The harsh reality is this:
A fixed rate loan at 5.75% on a $150,000 will have a payment (P&I) of about $875 each month for the full term of the loan. An A.R.M. with an initial rate of 3% for a $200,000 home will require a payment of "only" $843 per month....to start. That same ARM after just two adjustment periods could require, at 7%, a monthly payment of $1330
Most lenders do have a cap that limits how high such a loan can go, but the caps are often high themselves. Should interest rates rise in the next year or two as expected, it's possible that same home purchased for $200,000 and $843 a month could cost $1700 a month or even more. For a family on a budget this could break their financial back.
Reality hit the fan when many of these risky loans reached their first adjustment period. The economy was slowing, layoffs were common, jobs hard to find, interest rates had risen somewhat - and the refinancing option was difficult as mortgage money had become tight and loan requirements had been raised.
If you have a fixed rate loan or a responsible A.R.M. and are making your payments, the best option for you now is not to panic. Unless you have no option, stay in your home till the situation improves. Selling now could mean selling at a loss but if you can outlast a year or two of mortgage crisis and confusion you should be fine when prices stabilize and again start to climb.
