A Financial Revolution 


March 11, 2006
Mortgage Teaser Rates Could Spell Financial Disaster
While we're on the topic of real estate, the Seattle Post-Intelligencer had an interesting article about a potential boom in foreclosures. According to the article, over the last two years, many borrowers have taken advantage of adjustable rate mortgages (ARMs) with super-low teaser rates (2.5% or less.) Because some lenders were offering no- to little-money-down loans and some real estate markets have cooled, some of these buyers owe more on their house than its current market value. First American Real Estate Solutions estimates that approximately $200 billion in foreclosures will result (although they don't state over what time period.)

Once an ARM's introductory period ends, the homeowner's monthly payment will increase dramatically. Some payments will double overnight. Think what effect a doubling of your mortgage or rent would do to your budget! Unfortunately, the homeowners won't have the most common solutions available to them - refinance or sell the property - unless they can cover the difference between the loan amount and the lower value of their property.

Viewing this in the context of the overall housing market, this is a small problem. Nevertheless, it demonstrates the problems that can occur when people overreach and focus solely on the maximum payment they can afford. Unfortunately, banks and mortgage brokers support and encourage these practices. It reminds me of somebody I know that spends all his money to pay the mortgage and taxes on a McMansion. He can't even afford to furnish the place. Unfortunately, our culture of conspicuous consumption condones this type of thinking. I can only hope that Sarah Susanka is successful in promoting her message about designing "not so big" homes with character and livability (The Not So Big House: A Blueprint for the Way We Really Live, Creating the Not So Big House: Insights and Ideas for the New American Home, and Inside the Not So Big House: Discovering the Details that Bring a Home to Life)


2 Comments:
Anonymous thc said...

As for payments "doubling overnight", that's not all that likely as most loans have a 2-point annual cap. But, let the buyer beware and survival of the fittest.

3/12/2006 1:16 AM  

Anonymous Jeremy said...

thc,

You are correct that most loans have a 2% cap. And I agree that most of the loans would not double overnight. However, an "interest only" loan with a teaser rate of around 2.5% would adjust the amount of the cap (2%) to 4.5% and the payment would almost double overnight.

3/12/2006 9:30 AM  

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