Do ARMs make housing more affordable
Re-visiting the theme of the ARM, many are still deluding themselves that using these products makes housing 'affordable'.Exotic, but dangerous
Nontraditional mortgages may be the only way some people can afford a home. But the buyers should beware.
Rising home prices have caused people to look at exotic mortgages as a way to get into a house with small down payments and little monthly notes. These mortgages are a break from the traditional 30-year, fixed-rate loans. In some varieties, the borrowers only pay the interest on the note; in others, the interest rates adjust with the market.
Part of the demand for these mortgage programs is the steady rise in home prices, which have gone up an average of 33% across the U.S. since 2002. For many middle class families in hot housing markets, such as southern California, Atlanta or Las Vegas, taking out a loan and spending the first 10 years paying only the interest on it, or getting a 40-year mortgage is the only way to afford a home.
Carby says the new mortgages have been developed to manipulate monthly payments to a level the borrower can afford.
"There are people wanting to buy property at any cost, in any situation," Carby says. "It's all about making a unique fit to go with a person's income."
But now, Fishbein says there are $1.5 trillion in adjustable rate mortgages set to reset in the next few years. In the past year, interest on an adjustable rate mortgage (ARM) has jumped from 5.1% to 6.3%. That means homeowners will face a huge upswing in their monthly mortgage notes. The swing is so significant, that Wall Street analysts estimate one out of eight people could end up defaulting on their mortgage.
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