Aug 31 2006
Mortgage Rates Providing ARM Opportunity
Those folks who thought Adjustable Rate Mortgages were the best thing since sliced bread may be rethinking the idea these days.
- In order to get the $800,000 house he bought early last year in California’s Silicon Valley, Joe got an “option ARM,” an adjustable-rate loan that lets him choose from a variety of payments every month. The smallest payment included no principal and less than 100 percent of the interest due. The unpaid interest was tacked onto the principal, creating “negative amortization.”
- This let Joe trade lower p
- ayments now for higher payments later. He initially thought his salary would rise along with his home’s value - he was a marketing executive for a small software firm he was confident would be successful. But when a lost deal closed the company and “For Sale” signs popped up - and stayed up - in his neighborhood, a now-unemployed Joe is wondering how he will afford those higher payments when his rates adjust.
That snipped is from Vanessa Richardson’s article on MSNBC.com titled ” ‘Exotic’ mortgages seen losing their allure.”
While the ARM mortgage may not be the pending economic Armageddon some suggest, there are still more than a few problems presented by the $1.25 trillion of them due to reset in the next twelve months at much higher levels absent sensible action by those capable of refinancing their mortgages. If we look at mortgage rates this year, we can see a bullet has whizzed by more than a few ears:
Hence, dipping rates present a heck of an opportunity for mortgage brokers and home owners alike to convert ARM’s to more sensible long term loans less susceptible to higher rates.
Why the urgency? Let’s look at history:
What we do know is that there are more than a few “Joe’s” like the story above, and a whole heck of a lot of speculative flippers sitting on property that could be turning upside down. Indeed, we may not be in store for a housing caused depression, but given the vast problems with many other areas in the economy (particularly the U.S. balance sheet), don’t be surprised to find the housing bubble being the lead falling domino into a severe 1970s style recession — or perhaps worse.
Readers, this investing environment is definitely not 1982 all over again. (That was the start of the great bull markets in both stocks and bonds started, during which most currently active individuals and pros earned their investment spurs.) Don’t act like it is.
Recommended reading on the current mortgage situation in relation to the housing bubble and likely economic problems:
