There’s a danger is holding an Iowa mortgage these days: better make sure you can make those monthly payments.
Donna McFadden, director of the home ownership program with Family Housing Advisory Services, said foreclosures are becoming more of a concern as many adjustable rate mortgages have adjusted upward.
“We probably see at least two a week,” she said. “A year ago it could have been maybe, three or four a month.”
Usually the reason homebuyers received the ARM in the first place is they wanted a lower monthly payment, but couldn’t get a fixed rate because of poor credit. Many were told they could home mortgage loan refinance, but circumstances didn’t work out that way and they’re now in trouble with a higher monthly loan payment.
“They’re not looking at tomorrow. They’re looking at the here and now,” McFadden said.
Scott Simpson of Western Horizons Mortgage Group in Council Bluffs said during a recent week his office saw six people who could have been approved for a home loan six months ago, but no longer were eligible.
“The person that was a tougher credit, or a credit risk, so to speak . . . those people are not going to be able to get a home loan,” he said.
Simpson is concerned that the number of foreclosures will increase as people unable to make the higher monthly payments when home loans adjust and the interest rate goes from 9 percent to 14 percent. He couldn’t immediately say what percentage of loans made in his office were subprime loans.
“It’s going to get real ugly, I’m afraid,” Simpson said. “I don’t think people understand what’s going to happen.”
Doug Goodman, president of Peoples National Bank in Council Bluffs, thinks mortgage rates are still good for those with good credit and traditional 30-year fixed rate mortgages remain in the low 6 percents. The problems are with national sub-prime lenders who took on high-risk loans.
“Those rates have gone up notably,” Goodman said. “Many of those rates were high and pegged to go higher.”
Dave Selene, Council Bluffs market president for TierOne Bank, and Rhonda Bockenstedt, assistant vice president and mortgage loan officer, said most of the bank’s lending has involved 30-year fixed rate loans.
A few years ago there was an 80/20-loan product was introduced that involved 20 percent of the mortgage as an in-house ARM, Bockenstedt said. Some people were in a “panic mode” after the ARM adjusted and the assessed value of the home wasn’t enough to convert the entire loan to a secondary market product that could be sold to Fannie Mae.
She feels TierOne has a strong underwriting team that has helped avoid many problem loans.
Byron Menke of NP Dodge, president of the Southwest Iowa Association of Realtors, said the situation has been a topic of discussion and some tightening was expected on institutions that issue higher-risk loans.
He sees few if any changes for consumers with solid credit and incomes. Many of the problems will come from those individuals who entered “creative financing” agreements with 100 percent mortgage financing, he said.
“They just walked away because there’s nothing invested on their part,” Menke said.
There may even be a positive side to the situation.
“Maybe it’s not a bad thing to see a little tightening up,” Menke said. “The industry doesn’t need to see a lot of these homes coming back on the market.”
SOURCE: The Daily Nonpareil
We’ve talked about many of these mortgage products at length, but below is a brief breakdown of some of the most common home loan financing products and how they differ from one another. Especially in this lending climate, you can’t be too careful. Read up.
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FIXED-RATE MORTGAGE
Overview: A mortgage with payments that remain the same throughout the life of the loan, because the interest rate and other terms do not change.
Advantages: Predictable payment, you know you will not suffer when interest rates rise.
Disadvantages: An initial interest rate that will be higher than an ARM, as will the mortgage payment itself; no benefit when market rates fall.
ADJUSTABLE-RATE MORTGAGE
Overview: A mortgage loan subject to changes in interest rates; traditional ARMs typically have a fixed period with adjustable period afterwards. That period is generally made up of either 1, 3, 5, 7 or 10 years.
Advantages: Low initial interest rate compared with a fixed-rate mortgage, payments go down when market rates fall.
Disadvantages: No stability, payments change over time, payments increase when home loan rates rise.
BALLOON MORTGAGE
Overview: A balloon mortgage is a loan that typically offers low rates for a short period of time (usually 5, 7, or 10 years); after that, the balance must be paid off or refinanced.
Advantages: Lower rates than fixed-rate mortgages.
Disadvantages: Will need to pay off in short time period, may need to apply for a mortgage refinance at a higher rate than you’d like.
INTEREST-ONLY MORTGAGE
Overview: A mortgage that allows the borrower to pay only on the interest during the first few years of the loan (this model can be either fixed or adjustable rate).
Advantages: Low monthly payments.
Disadvantages: Initial payments do not reduce the principal on the loan.
PIGGYBACK MORTGAGE (or 80/20 LOAN)
Overview: Two loans taken out at once, with the smaller, second mortgage loan usually obtained at a higher rate.
Advantages: Eliminates mortgage insurance (PMI) on the monthly payment, which would be required of you if you did not make 20 percent of the purchase price as a down payment.
Disadvantages: In some cases, the total monthly home loan payment can be higher than with a 100 percent loan plus PMI.
OPTION ARM
Overview: Special adjustable-rate mortgages that allow the borrower to pay a credit card-like minimum payment that is actually less than the interest owed.
Advantages: Flexibility, low monthly payments.
Disadvantages: Possible negative amortization - your debt increases instead of decreases over time, somewhat defeating the purpose of home ownership.
SOURCE: The News-Journal
With interest rates on the rise and the real estate market in a slump, adjustable mortgage rates are skyrocketing … and the high cost of low interest is turning the American dream into a nightmare for many out west.
For example: After five years of an adjustable rate mortgage, one couple sold its home and wound up owing $15,000 after they sold. The pair’s real estate agent said they were paying the lowest option every month - but were adding money to their principal balance every month, as well.
“Adjustable rate mortgages are attractive to families with little to no credit. They don’t understand these loans,” agent Mike Toste said.
Toste said families are drawn in by the low payment option, not realizing they’re only paying interest on their loan. As mortgage rates rise, the mortgages adjust, sending mortgage payments skyrocketing.
“They get into these loans and they end up falling delinquent because they just can’t afford them anymore. They’re not going up $200 to $300, but $800 to $900 - sometimes $1,000 a month,” Toste said.
It’s true: real estate records in the Sacramento housing market show more than 7,000 foreclosures in 2006 alone.
“Out of about 310 active homes for sale in Antelope, there are 57 homeowners that have their properties listed as short sales,” said Toste.
Simply put, a short sale means homeowners can no longer afford their loans. They owe more than their houses are actually worth.
“The unfortunate thing about that is people are borrowing from retirement accounts and exhausting every last penny they have to try and keep this mortgage current. They’re just running right into the wall because eventually they’re going to get to that result where they have no money. And then they’re forced to sell their home,” Toste said.
Toste said he highly recommends avoiding adjustable-rate loans, opting instead for fixed-rate California home loans.
“Your payments may be higher but you won’t have to worry about that payment skyrocketing through the roof,” he said.
SOURCE: KCRA, Channel 3
Romi Carrell Wittman of the Tucson Citizen plans to move to the Northwest Side of town. That is, if she can sell her other house first.
She’s in no rush to move, so she at least has the luxury of time. The crazy days of double-digit appreciation are over - as are the days of the adjustable rate mortgage.
ARMs were introduced in the 1980s and quickly became a popular financing mechanism for homeowners looking for the lowest possible monthly payment.
In 1984, fully two-thirds of all home loans were ARMs. Unlike traditional 30- or 15-year fixed-rate loans that offer a fixed mortgage rates over the life of the loan, ARM interest rates adjust, either up or down, over the life the loan according to the prevailing market rates.
During the 1980s, when 10-11 percent rates were not uncommon, ARMs were a boon to folks trying to lower their mortgage payments. But now, with 15- and 30-year loan rates so low, ARMs have lost much of their appeal.
Enter the hybrid ARM.
Like regular ARMs, a hybrid ARM adjusts according to the market. However, they offer a fixed rate for an introductory period, generally one, three, five or seven years. After the introductory period ends, the loan adjusts, or floats, according to the market.
Hybrid ARMs offer more security than traditional ARMs in that the interest rate is fixed for a period of time. This is ideal for people who don’t anticipate staying in their homes long or expect a mortgage refinance.
But there are some things to bear in mind.
Thirty-year fixed mortgages are still at record lows. In today’s market, a hybrid ARM will only save you about 0.18 of a point in interest vs. a conventional mortgage loan.
If you plan to stay in your home, you’ll likely refinance in a few years, a move that can cost several thousand dollars. Plus, you run the risk that interest rates will rise in a few years meaning the home mortgage loan refinance rate could turn out to be significantly higher than the 30-year fixed rates you can get today.
It pays to do a little homework to determine if, in the long run, a hybrid ARM really will save you money.
Brian and Lisa Wilcock looked at mortgage interest rates four years ago, did the math and came up with a plan:
- Because they intended to move in three years, they’d refinance their 30-year fixed-rate mortgage into a three-year adjustable-rate mortgage (ARM) at a lower interest rate and save hundreds of dollars a month.
It worked … for a while.
The lower rate shaved $375 off the mortgage payment on their Rochester Hills home. But four years later, they’re still in their three-bedroom, split-level house and have no plans to move. Their introductory rate of 4.37% reset last year, with a 1.25% cap that spared them the full brunt of the interest rate increase.
But that’s set to expire in April when the ARM resets to a rate that will likely be above 6%, reports RIS Media.
“It’s pretty much no-holds-barred and it gets painful from there,” said Brian Wilcock, 38, of his mortgage’s interest rate, which will climb yearly if he doesn’t refinance. Wilcock thought the family might have to relocate due to his sales job.
For the Wilcocks and thousands of other Michigan mortgage holders, those low three- or five-year teaser rates on ARMs are adjusting higher this year, and homeowners will feel the difference in their wallets.
Mortgage experts estimate that approximately $1.5 trillion worth of adjustable mortgages will reset by the end of 2007. Forecasts call for $600 billion to $700 billion of those loans to be refinanced into new loans, including fixed-rate mortgages.
Locally, lenders report an anecdotal upswing in clients home loan refinancing into 30-year fixed-rate mortgages. Last year, ARMs represented 30% of all mortgages, according to the national Mortgage Brokers Association. By 2008, the group estimates, the number will drop to 18%
“We definitely want to get into something more secure,” said Lisa Wilcock, 35, a part-time nurse and mother of two. The couple is mortgage shopping for 30-year fixed rates. “We don’t want it to keep rising and rising and rising.”
Monthly mortgage rate jolt
Just five years ago, adjustable-rate mortgages carried interest rates so low they allowed homeowners like the Wilcocks to lower their monthly mortgage payments by hundreds of dollars. First-time home buyers flocked to the loans as well, since they allowed often cash-strapped first timers to afford a larger house.
“There are more people now than ever with adjustable-rate mortgages,” said Greg McBride, senior financial analyst at Bankrate.com. “The problem — and you could see this coming a mile away — is that [mortgage rates] have increased and those same borrowers are coming up for a rate increase.”
If a homeowner in 2004 got a three-year ARM at 4% on a $250,000 loan, the monthly mortgage payment was $1,150. That payment today would increase to $1,500 monthly, lenders said. And figured at an interest rate of 7.5%, the payment would increase $509 more per month.
Still affordable
The good news is that the shock may be bearable for many. The MBA estimates that up to $800 billion of the home loans will simply reset, with owners making their new payments. Interest rates are currently hovering around 6.25% and most experts expect them to stay under 7% this year.
If a homeowner decides not to refinance home loans, the interest rate will rise at a capped percentage determined by the lender at closing. Typically the cap is 2% to 5%. And since an ARM can’t adjust above the current market rate,
“Nobody’s going to 9%, no matter what your cap is,” said Ken Mascia, president of the Oxford Financial Corporation in Birmingham.
Mortgage experts said ARMs still work for some buyers, especially those who expect their incomes to rise or those planning to live in their homes for fewer than five years.
The Wilcocks, meanwhile, will miss the extra money their ARM freed up monthly, but said they welcome the security a fixed-rate mortgage will bring.
“We feel like we’ve lived with” the ARM “for a year after it adjusted,” said Lisa Wilcock. “It did its job and it’s time to move on.”
Three years ago, the northern Nevada housing market experienced a boom that carried through until about six months ago, when it stabilized and left some homeowners in a difficult financial situation.
Sonny Lopez, a local loan officer, tells the Reno Gazette-Journal that he noticed an increase in the amount of foreclosures in the Reno/Sparks area in 2005. He believes the increase in foreclosures in this area is due to “the cost of living going up and the retirement not matching it.” he said, noting that the greatest group affected includes those in their 50s and 60s.
At this point, an investor comes in and offers the struggling homeowner money to move and pays off their Nevada mortgage, which is the remaining amount owed in the original purchase price of the house.
These investors end up buying the property for a lower rate than the market value and turn around and sell it for more. Although Churchill County does not experience this high number of foreclosures, Lopez advises struggling owners to refinance before falling into debt.
In essence, mortgage refinancing involves paying off an existing home loan to obtain a better interest rate or to spread out the duration of the mortgage loan, resulting in lower monthly payments.
Refinancing also allows borrowers to tap their home equity, or money they have paid on the principal of their home, to pay off other debts, such as credit cards. There are fees involved, and this is why loan officer Jane Capurro advises seeking out a reputable and licensed mortgage broker.
“If you’re having problems, you don’t want to get yourself backed into a corner,” said Capurro. “What you want to do is to work with a mortgage broker who you can be open and honest with,” she said.
Capurro advises against interest-only mortgage loans, as does June Young, president and director of Young & Associates Mortgage Services. She describes interest-only loans as a big, dangerous bet.
This process is a gamble because if the property value did not appreciate over that period of time, the homeowner cannot refinance and may be stuck paying more than they can afford. When searching for a fixed-rate loan in today’s market, Capurro identifies good fixed interest rates as falling between 6.0125-6.25 percent.
For some owners who need financial assistance, the best option may be home equity loans, which are like a second mortgage. These allow the owner to borrow against the amount they have paid toward the principal on their home loan combined with its appreciated value, providing the borrower access to these funds while placing their home as collateral.
Hybrid adjustable rate mortgages like the 2-28, which carries a fixed “teaser” interest rate for two years and then fluctuates with market interest rates, should be subject to the same underwriting and disclosure requirements as so-called “exotic” mortgages, a group of influential U.S. senators says.
The Mortgage Bankers Association is fighting the proposal, saying it would reduce the number of borrowers able to finance homes and contribute to downward pressure on home prices.
Federal banking regulators issued new guidance in September that applies to mortgage lenders offering payment-option ARM and interest-only home loans.
The guidance requires federally chartered banks that offer such nontraditional or exotic loans to disclose the risk of payment shock, while assessing a borrower’s ability to repay a loan at the fully indexed rate. Since that time, 23 states have adopted their own version of the federal guidance, subjecting all mortgage lenders to the same rules.
Six members of the Senate committee on Banking, Housing and Urban Affairs - including Chairman Christopher Dodd, D-Conn. - last month wrote banking regulators, saying the guidance should also apply to hybrid ARMs.
In their letter, the senators cited Michael Calhoun, president of the Center for Responsible Lending, who testified at a Sept. subcommittee hearing that borrowers using hybrid ARMs can see their monthly payments increase by 40 percent to 50 percent when the teaser rate expires.
The letter claimed that most subprime 2-28 mortgages have prepayment penalties making it “extremely costly” to refinance to a loan with a more stable payment, and that many such loans have been made on the basis of stated income or reduced borrower documentation, increasing the risk of default.
“It is our view that these mortgages have a number of the same risky attributes at the interest-only and option-ARMs and, therefore, should be covered by the new guidance,” the letter said.
In a letter to Sen. Dodd last week, MBA Chairman John Robbins took issue with characterizations of hybrid ARMs as “exploding mortgages.” On average, Robbins said, interest rates increase by no more than 2 percent to 3 percent when the introductory period expires.
Few hybrid ARMs see any adjustment at all, Robbins said, because most such loans are refinanced early in their terms. Of nonprime loans originated in 2003, he said, only 22 percent remain in effect today, and only 12 percent of subprime/bad credit home loans originated in 2002 are still in effect.
Making hybrid ARMs subject to the guidance and its tighter underwriting guidelines “will unnecessarily disqualify borrowers from home ownership and affordable credit,” the MBA chairman said in the Jan. 8 letter.
Hybrid ARMs, he said, “are frequently underwritten using more flexible guidelines based on reasonable repayment expectations. This difference makes many more borrowers eligible for these loans.”
Robbins said a “significant portion” of recent gains in home ownership are attributable to hybrid ARMs. In the first half of 2006, he said, 67 percent of new subprime loans were ARMs, while 52 percent of nonprime ARMs were hybrids.
The delinquency rate for subprime loans in the third quarter of 2006 was 12.56 percent, including a 9.56 percent delinquency rate for subprime fixed-rate loans and 13.22 percent for subprime ARMs, Robbins said.
With ARM loans now comprising 25 percent of the overall mortgage market, tightening underwriting and disclosure standards “would adversely affect the primary and secondary mortgage markets, including lenders and investors, as well as borrowers,” Robbins said.
“Most importantly, the significant lessening of credit options will markedly diminish the number of borrowers able to finance homes and thereby contribute to downward pressure on real estate prices, adversely affecting the economy as a whole.”
That’s the bottom line, according to the Houston Chronicle.
Adjustable-rate mortgages have an initial interest rate that is often lower than a fixed-rate loan. But their fluctuating or variable interest rates are more complex. A formula that specifies the rate index determines the interest on an adjustable-rate mortgage.
For example, a particular adjustable-rate mortgage’s interest rate may be tied to the interest rate on one-year Treasury bills, plus 2.5 percent.
Because the mortgage rates are linked to interest rate movements in general, an adjustable mortgage’s interest rate, and your payment, will change over time.
Because you are accepting a greater element risk, adjustable-rate loans start at a lower interest rate than comparable fixed-rate mortgages.
A fixed-rate loan maintains a constant and level interest rate. The primary benefit of a fixed-rate mortgage is that you know with complete certainty what your payment will be. Because the mortgage lender is locking in your rate for the entire 15- or 30-year term, you generally will pay a premium in the form of a higher interest rate.
To answer the question of whether you should take out an adjustable-rate mortgage or a conventional, fixed-rate loan, weigh two important issues:
1. How long do you plan to stay? Because adjustable-rate mortgages start at a lower rate of interest, and should remain lower unless interest rates rise, you would save money on interest charges and have lower payments in the early years of your home mortgage loan with an adjustable.
Basically, other things equal, the less time you expect to hold on to a property, the more beneficial adjustable-rate mortgages will be for your situation.
2. How much risk can you accept? Because an adjustable-rate mortgage can increase if interest rates rise in general, ask yourself if you can handle these higher payments. Make sure that your budget will allow you to accept the highest possible payments allowed on your ARM.
If you can’t afford the higher payments or you can’t deal with the stress or risk of volatile payments, you’re better off sticking with a fixed-rate mortgage.
Sometimes, prospective home buyers are steered into an adjustable-rate loan because it allows them to stretch and buy a more expensive home. Be careful that you’ve taken the time before you close on a deal to fully understand what impact higher payments might have on your budget.
Thr 23rd annual Freddie Mac Adjustable Rate Mortgage Survey released last week contained few surprises. The three major findings were:
- A decline in the market share of ARMs as savings from these loans as compared to fixed rate home loans shrank
- Greater lender discounts to entice borrowers into taking out ARMs
- The increasing popularity of hybrid ARMs relative to one-year adjustables.
First-year mortgage rates on one-year ARMS rose about 0.3 percentage points over the year, while the 5-year hybrid increased 0.2 percent and the long term ARM (10/1) and 30 year rates were virtually unchanged from the same time period a year earlier.
Frank Nothaft, Freddie Mac vice president and Chief Economist, observed that as the difference between the 30-year fixed rate mortgage and the fully indexed ARM rate decreases lenders generally offer a larger initial discount on the latter, which helps lenders to maintain ARM originations.
For example, during the week ended December 21, 2006, the underlying index rates for 1-year, 5/1, 7/1, and 10/1 home loans was 4.95 percent. The margin was within two basis points plus or minus of 2.77 leading to a fully-indexed rate ranging from 7.73 to 7.75 percent. The discount offered to borrowers was 2.29 percent for the 1/1, 1.84 for the 3/1 hybrid, 1.76 for the 5/1, and 1.60 for the 10/1.
Applications for adjustable rate mortgages accounted for 25 percent of all loan applications in November 2006.
Over the 23 years of the survey the market share of ARMs has fluctuated between 11 percent in 1998 and 33 percent in 2004.
“Consumers are financially savvy and respond to changes in the relative cost of different loan products,” Nothaft said. “As ARMs became more expensive relative to fixed-rate loans during 2006, the ARM share of lending declined.”
The 5/1 hybrid ARM in which the initial interest rate remains constant for five years before adjusting and then adjusts every year thereafter continues to be one of the most popular ARMs. In 2006, 40 percent of ARMs were 5/1 hybrids.
First, the National Association of Realtors made an effort to clue individuals in about the pros and cons of adjustable-rate mortgages.
Now, the Federal Reserve is doing the same thing with a new consumer guide.
The handbook explains adjustable-rate mortgages (or ARMs), along with some of the pitfalls associated with these increasingly popular and complicated home loan arrangements. The handbook starts with two simple points about ARMs:
- Your monthly payments could go up - sometimes by a lot - even if interest rates don’t go up.
- Your payments may not go down much, or at all - even if interest rates go down.
This doesn’t mean adjustable-rate mortgages should be avoided. They may be the perfect loan for you. It just means that when choosing an ARM, like any other financial product, you should know exactly what you’re getting into.
In its simplest form, an ARM is a mortgage with an interest rate that adjusts periodically. The initial rate is typically lower than a fixed-rate mortgage. Therefore, many buyers are attracted to these products. People who know they will not live in their new home very long, in particular, can enjoy a significant financial advantage from choosing an adjustable-rate mortgage.
The Federal Reserve, however, has been concerned that promises of low payments may be luring some consumers into mortgages that don’t make financial sense.
Among those potentially questionable loans are interest-only mortgages, which require the borrower to pay only the loan interest during the first few years. In other words: the homeowner builds no equity, even though the early payments might be smaller.
Another potentially worrisome type of loan the Fed has highlighted is the payment option ARM, which gives borrowers the choice of paying as much as they want, as long as they pay a monthly minimum. Here’s the catch: That minimum may not be enough to cover that month’s loan interest.
Among the pitfalls highlighted by the Fed that some of these more exotic ARMs might pose for consumers:
- Discount rates or teaser rates. A mortgage lender may offer one of these extra-low rates, often in combination with discount points, but it may not last long. The teaser rate may not bring down your overall loan costs, while you might be better off with a slightly higher rate that lasts longer. You may also not be able to afford the higher payments after the loan rate adjusts.
- Payment shock. This is your reaction when you open the envelope from your lender to find out your rate and your monthly payment have gone up … a lot. Make sure you understand when and by how much your mortgage interest rate could increase.
- Negative amortization. This dry-sounding term describes a truly horrifying scenario where the total amount you owe increases even though you make every required payment on time. This can happen when your monthly payments don’t cover your interest costs and the unpaid interest gets added to the loan balance. It can also happen if your loan has a payment cap.
- Prepayment penalties. These can be a problem if you want to refinance home loans. If your loan is very restrictive, they can even be a problem if you sell your home.
Conclusion: Don’t be dazzled by talk of unbelievably low interest rates or rock-bottom monthly payments. They may not be good for you or your bank account. Also, make sure you understand all of the fine print in any mortgage or loan agreement.
