Arms Bring Trouble To Uneducated Borrowers
More rates and news from
Yahoo Finance and Realty Times
(As adjustable-rate mortgages begin to reset, many borrowers across the nation are just finding this fact out. And for many, it is too late.)
ARMs have become popular in recent years because they have features such as extremely low introductory interest rates and minimum payment options.
Many times, if people are only paying the minimum payment, they can cause their debt to grow. While this can be a great option for some homeowners, for those who did not understand the loan in the first place, the consequences are disastrous.
A November 19, 2006 article by Leslie Berkman of The Press Enterprise, “Trouble in ARM’s way,” discusses the problems associated with many borrowers not understanding their loans.
This problem is especially prominent in California, where the price of homes is much more expensive than in other parts of the country.
“Throughout Southern California and the nation, homeowners who have benefited from creative financing -- pushed by the lending industry to make housing initially more affordable -- are awakening to its downside.”
“In recent years, home buyers have increasingly chosen alternatives to traditional 30-year fixed-rate mortgages to buy a first home or a nicer one than they otherwise could afford in a real-estate market where prices were skyrocketing. In Riverside and San Bernardino counties, adjustable-rate mortgages or ARMs accounted for 72 percent of homes purchased in the first nine months of 2006.”
People who did not understand their loan when they signed their final papers are now getting a very rude awakening in the form of increased mortgage payments.
“If a homeowner three years ago borrowed $400,000 at an adjustable rate of 4.25 percent that reset at the current 7.5 percent adjustable rate, said Greg McBride, senior financial analyst with Bankrate.com, a personal-finance Web site., the monthly mortgage payment would jump from $1,967 to $2,730.”
This is a tremendous burden to carry for many homeowners who are already strapped for cash before the adjustment. That is why understanding a loan is crucial to survival, you don’t want to walk away (or be forced out of your home), with nothing.
One thing to know off the bat is that there are several different types of ARMs. The Option ARM and interest-only loans are two types of ARMs that are very popular but can be dangerous for those who are not financially educated.
“Despite the call for caution from consumer advocates, these riskier loans have gained popularity. Option ARMs accounted for 25 percent of mortgages tracked by First American Loan Performance in Riverside and San Bernardino counties in the first eight months of this year, up from less than 1 percent in 2003. Interest-only mortgages accounted for almost 28 percent, up from just 9 percent three years ago.”
Borrowers and lenders need to form a team in the mortgage transaction, where each party is responsible and doing their part. Many people blame the lenders for these problems, but homeowners need to understand their loans before signing anything.
