Low Rates Will Lessen the Blow of ARM Loan Resets
Adjustable-rate mortgages are not inherently evil, the way many people seem to think. If you know how to use an ARM loan, you can save money on your monthly mortgage payments and avoid the unpredictability of the reset period.
But in the past, many people used ARM loans in the wrong way. They used them in situations where they planned to stay in the home beyond the reset point. In addition, a lot of home buyers relied on ARM loans to defer the high interest rates they were assigned (due to bad credit and other qualification problems). In other words, the ARM was their only option for getting into a home.
The rest is history. When these hybrid ARM loans began resetting after their introductory fixed-rate period, homeowners saw their mortgage payments "explode" in size. More than any other single factor, this is what fueled the subprime mortgage crisis in the United States.
Another Wave of ARM Loans Resetting
In 2009, another wave or hybrid ARM loans (initially fixed rate) will be resetting. According to the Treasury Department, more than 400,000 of these ARM loans will reset in 2009. This means the initial fixed-rate period will expire, and the loan will take on a new interest rate driven by current economic factors.
But there's some good news for these homeowners with adjustable mortgages. Current interest rates are lower than they've been in decades, so the ARM loans of many Americans may actually reset to lower rates -- a rarity for adjustable mortgages. And those that do take on a higher interest rate will still be much lower than they would have been two years ago (when the rates were higher).
The rates assigned to an ARM loan after a reset period are determined by a variety of factors, but these factors are driven by current rates and indexes at the time of adjustment. So when the federal fund rate goes down, so too do the interest rates assigned to mortgage loans. The Federal Reserve cut this rate to nearly zero recently, which has driven key mortgage rates down to the 5% range.
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Labels: Home loans
posted by Brandon at
8:07 AM
