Mortgage uncertainties are currently the order of the day for homeowners as speculations have arisen that mortgage rates are likely going up while others believe they’re coming even lower. For many defaulting homeowners, 2009 offered the saving grace with base rates which many homeowners found favorable. But this is changing with recent base rate increases. How does this concern adjustable rate mortgages?
Some years back, adjustable rate mortgages were even more common than fixed rate mortgages and this was easy to understand as they came with lower interest rates. Hence many people got the big houses, spurred on by the low interest rates offered by adjustable rate mortgages. It was a sweet deal, you could even take more cash out of your home.
But then there was the recession which stopped many homeowners dead in their tracks, as home values plummeted and many who couldn’t afford their mortgages tried to refinance but couldn’t. There was no way for them to refinance with the decreasing value of their real estate. During this time, many people lost their homes to foreclosure.
Originally, the ARM was designed to help people with short term needs. It was a loan designed for anyone who wanted a mortgage just for the short term. The low interest rates spurred on a refinance boom in the 90s that saw many homeowners applying for adjustable rate mortgages.
ARMs will not profit an average American in the long run. In fact the main reason for most mortgage companies pushing these loans is that they are a sure way to get the business of its customers once the fixed rate expires in a few years.
After the introductory period, the interest is set in line with the market index. When the index falls, your interest does too. And a lesser rate means less payment, which is very good news for you. However, as the market index rises, so does your interest rate. And this could increment your monthly payment, making the adjustable-rate loan higher risk than other alternatives.
Interest Rates & Inflation
Interest rates are determined by many factors. But one of the most important is inflation. Inflation determines how high or low your mortgage payments become. The value of the dollar determines how much you pay on your mortgage.
It is proximately infeasible to estimate inflation in advance since it responds to many market factors. However, in the long run, inflation tends to go up over time. Variable rate loans will see higher interest levels when inflation is higher. Unfortunately, interest levels almost never drops when inflation goes down.
A wise thing you can do to safeguard yourself when chosing an ARM is to set how high your interest rate can go. You are able to set the limit on your interest rate increases. You can set the limit at a certain amount over your initial rate or use the prime lending rate, which adjusts itself with inflation to set the limit on your interest rate.
People who apply for ARMs often do so in hopes that the following will occur:
- They’ll sell the house before the reset of the loan.
- Their income will increase before the reset of the loan.
- They will be able to refinance before the reset of the loan.
- Interest rates will remain stable or decline, giving them a similar rate to the rate of introduction when resetting the loan.
But the market is simply not predictable and things can turn out not as expected. For many homeowners who took these types of loans during the market crash, the ten year locks are expiring and there is no way out, except refinancing or doing a short sale.
If you’re stuck with an ARM loan with increasing obligations, your lender recognizes it’s a matter of the time before you default. This costs them money and income and keeping you at home can help them and also you at the same time.
When you have been a good paying customer it’s likely that they will modify your loan to a fixed rate mortgage loan and renegotiate your interest with you to be able to help you stay put in your home. If you are still struggling to refinance your loan and you’re struggling to pay up, then you might need to do a short sale.