Thursday, April 13, 2006

ARMed and in Danger

A Sacramento Bee columnist looks at the impending ARM implosion.

Home ownership: It's the American dream. But thousands of homebuyers who have taken a giant leap to achieve that goal may be on the brink of a financial disaster. The reason? The Federal Reserve has raised interest rates 15 times since 2004 and it still might not be finished. As a result, those with adjustable-rate mortgages or other cut-rate mortgages soon will be seeing significant increases in their monthly payments.

Financial adviser Gary Webb says homebuyers who barely qualified for adjustable-rate, interest-only mortgages are the most troubled. Webb, owner of Webb Financial Group in Bloomington, Minn., says many new homebuyers had "budgets that were so snug to begin with, there's no wiggle room. As a result, as interest rates rise, some likely will lose their homes," he warns. "It's happening now and it will happen even more in the future as the Fed continues to raise rates a quarter point at a time," he adds.

Mike McGee, owner of Winchester McGee Financial in Rancho Cordova, says many people who couldn't qualify for a fixed-rate loan took out ARMs and other low-rate mortgages "simply to keep their monthly payment affordable." McGee says many low-rate loans were fixed for a set period of time, say three to seven years, but then were due to be adjusted upward. "When that happens, there's certain to be some real sticker shock," he says. He advises homeowners facing higher payments to figure out what they can do to absorb the increase. "Right now," he says, "a lot of people are coming back to me asking for a 30-year, fixed-rate mortgage."

Greg McBride, senior financial analyst with Bankrate.com, monitors interest rate movements daily and he sees nothing but trouble ahead for many with adjustable-rate mortgages, or ARMs. "If you have an ARM and you haven't been caught yet, you are about to be," he says. "And it could be very expensive." How bad can it be? McBride says that if you took out a $200,000, interest-only mortgage three years ago when some interest rates were less than 4 percent, your monthly payment could be close to doubling in the not-too-distant future...

Webb, who's been in the financial services business for nine years, says that while refinancing is an option, many homeowners can't afford to take on the average 30-year, fixed-rate mortgage at 6.0 percent. "If that's the case, they have limited options," he says. "They can cut their expenses or ask for help from family and friends."

3 comments:

Happy Renter said...

At the bottom of the article there is a graph showing the increase in defaults. It mentions that appreciation was the only thing keeping many afloat. The cash strapped have refide away what equity they have gained. For this group selling at a profit will be next to impossible.
The doors are slamming shut in all directions.

peterbob said...

But thousands of homebuyers who have taken a giant leap to achieve that goal may be on the brink of a financial disaster. The reason? The Federal Reserve has raised interest rates 15 times since 2004 and it still might not be finished.

No, the reason is NOT that interest rates have gone up. This was expected to happen anyway. The problem was that people extended exotic mortgages, and that people took out exotic mortgages.

The Fed should NOT reduce interest rates in an effort to keep the bubble going. This is suicide in the long run.

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