There are many reasons why people get behind in their mortgage payments. Some of the most common have always included the loss of a job, bills associated with severe illness or injury, the death of a spouse or divorce. However, more recently we have seen a growing number of homeowners missing payments due to their adjustable rate mortgages (ARMs) simply doing what they should have been expected to to: adjusting. If these homeowners were properly educated during the buying process, and had good representation from a caring, professional Real Estate Agent and/or Mortgage Loan Officer, many would not have financed with ARMs in the first place... and of those that did, most would not be in a financial bind as they would have known what to expect. In actuality, many Americans bought homes with ARMs because these were the only loans that would allow them to qualify to purchase a home in the price range in which they were looking. In other words, in the last several years ARMs allowed many people to buy homes that they really couldn't afford with "normal" fixed loan rates. So, can you guess what happened when those ARMs started adjusting to rates at or above the fixed rates?

The idea of an ARM is simple enough. Your mortgage interest rate is fixed for a set period of time (i.e.  one year, six months, five years, three years, etc.). This "introductory rate" (or "teaser rate") is typically nice and low and expected to adjust, often upwards (unless mortgage rates are unusually high to begin with), hence the name "Adjustable Rate Mortgage". So, after the introductory period, the rate adjusts based on the terms of your ARM. How often it adjusts, and how much, are all determined by the terms of your loan/ARM and, typically, tied to an index like the LIBOR. The Federal Reserve has compiled good info. on ARMs here. There is nothing wrong with an ARM, as long as you know what you're getting into. For someone who wants a lower payment initially, but fully expects to be able to afford the home, even after adjustment, ARMs can work well. Situations calling for ARMs might include someone who plans to sell or refinance in just a few years, or a couple with one spouse raising the kids for the next few years then going back to work. However, things change and you really need to be able to afford the adjusted payment in case you can't refinance or sell (or that spouse can't find work).

The only real problem with ARMs was that, for the past several years, mortgage lenders were qualifying people based on the introductory rate, not what the rate would be after the loan started adjusting. Combine that with the housing boom in this country which saw a surge of new, uneducated/inexperienced Loan Officers and Real Estate Agents. Many of these newbies (and some not-so-new predators) only saw $$$ and didn't look out for what was best for their clients. That has since changed as lenders have been forced to qualify buyers on the ARMs post-adjustment rate and as home buyers, Real Estate Agents and Mortgage Loan Officers have become more educated about ARMs. A side note: hundreds of thousands of Real Estate Agents and Mortgage Loan Officers are predicted to leave the business this year. The exodus began as soon as as the red-hot housing market started to cool off. Back to our topic at hand though: ARMs still have their place, and can still prove valuable for some Buyers. Thankfully, gone are the days of unscrupulous salespeople just barely squeezing someone (financially) into a home with no regard for what would happen once their Adjustable Rate Mortgage started adjusting. Of course, life is cyclical and those days will certainly return for a whole new group of buyers. You can probably expect this in a decade or two, once the housing market is again flying too high and lending practices are again too relaxed.

Ryan Cave, The "Caveman"
Truth, Honor & Personal Integrity
214-789-9366
www.CaveRealty.com