The ARM Time Bomb
By the end of 2007, according to several estimates, 1.5-2.0 trillion dollars of mortgages will enter their adjustment period. It truly is a staggering number when you consider, just a few short years ago, that number was less than 40 billion dollars. Ten years ago the total mortgage industry was less than 1 trillion dollars (refinance and purchase market). What's going to happen? How will this incredible increase affect the California Home Loan and real estate industry?
California Home Loan Tip: There has been a world of change in the California Home Loan industry since this article was written. Loan programs have vanished, guidelines are more strict and lenders are loosing billions of dollars. That doesn't mean that the low interest rate home loans are all gone to. In fact, interest rates have remained relatively low and those looking for a home loan can obtain them.
The ARM time bomb is very real but it's a solvable problem. The solution is to address the problem now rather than later. People who decide to "wait and see" will only get burned and could end up loosing their house. Is it really that serious? Yes. On a $300,000 mortgage at an interest rate of 5.50% (interest only) you could see your payment rise from $1,375.00 per month to $1,995.90 per month after the first adjustment (based on a loan that adjusts 1.50% and goes from an interest only loan to an amortized loan). That is a $620.00 after the first adjustment and some loans adjust every 6 months.
The mortgage industry is doing a great job of creating new products to assist borrowers in keeping their monthly payment as low as possible. The introduction of the 40-year mortgage is a great example as it allows a borrower to have a very low payment (comparable to an interest only payment based on a 30 year mortgage) and at the same time pay towards their loan balance every month. The introduction of the 2-1 buy down program in another great example. A borrower locks in a rate on an ARM or FRM and for the first year has an interest rate 2% points below the lock in rate. Example of a 2-1 buy down loan: The loan is locked in at 6.5% and in the first year the rate drops to 4.5%, the second year 5.5% and in the third it goes to 6.5% and if they choose the fixed rate option that rate will never change. How is this possible? The savings the client receives is built in to the loan balance from day one and is stated in the loan documents. There is NO negative amortization on the loan (it is not a pay-option-arm program), and clients can qualify for this program fairly easily.
The mortgage and real estate industries must continue to innovate to ensure their long term health. There is no question that times have changed and holding on to old ideas about how to do business will only lead you to the unemployment line. Education is also a key ingredient as it's vital that homeowners know their options when making a decision about their mortgage and property.
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