Preventing ARM Pain

Is your mortgage about to inflict financial pain on your family? It might be, if you have an adjustable rate mortgage (ARM) that is scheduled to reset this year.
Depending on the type of ARM you have, you could see your house payment increase by 30, 50, even 100 percent in the next few months. This is because the Federal Reserve has raised interest rates seventeen times since 2004, and ARMs are tied to these rates. In addition, many home buyers entered the market with low introductory “teaser” rates that were scheduled to go up regardless of what interest rates did.
Most ARMs are known as “hybrid” ARMs because they combine features of fixed rate mortgages and adjustable rate mortgages. With hybrid ARMs, payments are fixed for a predetermined period of time—say two years. After this period, the interest rates reset, or adjust. If an ARM started out below market rates, as in the case of teaser loans, then it will reset upward at least to the market rate. If an ARM started out at market rate, it will reset to a higher rate if interest rates have risen since the loan originated.
This is exactly what is going to happen to more than three million adjustable rate mortgages that originated from 2004-2006 and are scheduled for their first reset in 2007 and 2008. According to Dr. Christopher Cagan of First American CoreLogic, the jump in house payments will force 1.1 million homeowners to default on their loans over the next six years.
You do not have to be one of them. If you have equity in your home—and more than 91 percent of homes with loans that originated before 2006 do—you probably can refinance to a fixed-rate loan. You may be contacted about refinancing by one of many mortgage brokers or loan officers who are tracking ARM reset dates through enhanced loan records known as ARM leads. Even if the fixed rate you are offered is higher than your reset rate, you should consider taking it. Most ARMs will continue to reset every six months until they reach the maximum allowable rate.
If you do not have sufficient equity to refinance, you might consider selling your home. This is what many people planned to do from the start: they financed their homes with ARMs with the idea that they would sell the home for a profit before the ARM reset. Unfortunately, rising interest rates and a glut of new homes have combined to create a slump in the housing market. Prices have fallen, so there is no profit to be made by “flipping” houses. Many sellers refuse to lower their prices, believing that prices will rebound. The trouble is that the rising ARM rates may wipe out any gains that might be achieved by waiting.
If you have already been hit with a large ARM reset and have been unable to make your payments, do not give up. The United States Department of Housing and Urban Development can refer you to free credit counseling. Depending on your situation, the counselor may suggest a number of options, such as renegotiating your monthly payments or obtaining a “bridge loan” that does not have to be paid back until you can refinance or sell your home. Some local governments are making money available to help distressed homeowners as well. Whatever your decision, do not delay. Waiting will only make your ARM pain worse.

A frequent contributor to online and print publications, Bradley Steffens is the author of twenty nonfiction books for children and young adults and coauthor of seven more. His newest book, Ibn al-Haytham: First Scientist, is the first biography to be published in English about the medieval Arab scholar known in the West as Alhazen.