Mortgage resets and your adjustable rate mortgage.

You do have options as a homeowner.

Over the past five years, millions of homeowners have stretched themselves financially to buy their homes. Many of these borrowers that utilized “exotic” mortgage products to buy their home face a painful adjustment as monthly payments on their adjustable-rate mortgages are reset higher.

Many households utilized these to keep their payments affordable during the first two or three years. With initial periods are coming to an end, many borrowers are facing a reset of their interest rates that can cause monthly payments to increase by up to 50% or more.

There will be more than $2 trillion of these loans, or about a quarter of all mortgage loans outstanding, that will come up for interest-rate adjustment in 2007 and 2008. This is one top of the $300 billion have already adjusted in 2006.

Most borrowers will be able to handle the mortgage reset, in some cases by refinancing into a new loan. But some borrowers will have trouble with their higher payments and may be forced to sell their homes or could lose their homes to foreclosure.

The troubles facing homeowners come at a time when property values are leveling off or even dropping, leaving many without sufficient equity to refinance. Bank regulators are encouraging lenders to tighten their standards and many of the subprime lenders that had originated these mortgages several years ago are not longer in business today. 

A typical borrower who took out a 2/28 mortgage in 2004 or 2005 has been paying an average interest rate of 7.6% for the first two years. Once that introductory period ends, the interest rate is reset every six months for the remaining 28 years of the loan at a margin over an index, many times the LIBOR.

When they do adjust, these loans typically limit the first interest rate increase to around three percentage points. That would bring the monthly rate to 10.1%. Monthly payments for a borrower with a loan of about $150,000 would rise to about $1,315 from $1,000. Assuming interest rates stay around current levels, the rate would jump again to about 11% within six months to a year, bringing the monthly payment to $1,400, or 40% higher than the initial payment.

The worst borrowing scenario is the option arm, whereby the borrower not only defers principal payments, but actually adds principal to the loan balance on a monthly basis. When these loans finally recast into a fully amortizing loan, the payments can increase by up to 300%.

Choosing to Refinance

Those choosing to refinance into new 2/28 or 3/28 loans may find very few choices. Aside from the loss of many of the lenders that specialized in these types of loans, credit criteria many have tightened in many areas. In addition, their credit may have deteriorated since they took out their last loan. Because their debt payments will be so high in relation to their income and because they utilize their home equity, they may not qualify for refinancing. That means paying the increased payments on the original loan or facing foreclosure. Current State and Federal legislation is being passed to help those homeowners.

Given the challenging nature of the mortgage markets, it more important than ever to know your rights, options and alternatives when facing a mortgage reset. At mortgageresets.com, we hope to provide you with the tools, resources and information to make a better decision with you mortgage. .
 

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