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Adjustable Rate Mortgage Resets Threaten Housing Recovery

[Jun 11, 2009.]


Bloomberg Press reports that more than one million adjustable rate mortgage loans (ARMs) are due to reset between now and 2013. Of these, about 75% are expected to reset in 2010 and 2011. Homeowners who've enjoyed very low mortgage payments may find their payments unaffordable once they reset according to the terms of their mortgage loans.  Although many ARMs are scheduled to reset after five years of low payments, homeowners could face payment resets before their initial period of low payments expires if their mortgage balances exceed 110 to 125% of their homes' value. Exact timing for resets depends on the terms of individual mortgage loans.

Why is my Mortgage Balance Increasing?

Homeowners who've taken out ARMs may be surprised to learn that their mortgage amount is increasing rather than decreasing. This happens because the initial low payment amount is not enough to cover principle and interest payments; unpaid amounts are added to the mortgage balance. This can mean that homeowners are hit with a double whammy when their payments reset. Not only do mortgage payments increase when mortgage terms reset to  to higher interest rates,  but the new payment amount is based on the higher mortgage balance caused by  the unpaid interest added to the mortgage balance during the initial period of very low payments. Adding unpaid interest to the mortgage amount is called negative amortization, and it is a practice that erodes home equity and increases homeowner debt.

Home Values are Decreasing, and my Mortgage Keeps Going Up

Homeowners who took out ARMs allowing for negative amortization may face deep trouble if home values int their areas decrease significantly. The California Association of Realtors notes that between April 2008 and April 2009, the median price of a single family home in California declined by approximately 37%, which left many homeowners "upside down" with their mortgages--they owe more than their homes are worth, which makes it difficult to sell and impossible for mortgage refinancing. As more ARMs reset in the next few years, foreclosures are expected to increase. An oversupply of available homes coupled with potential for neighborhood blight associated with numerous vacant homes could impact housing market recovery. 

Mortgage Refinancing and Modifications: How to Get Help

Homeowners who currently owe more on their mortgage loans than their homes are worth may qualify for loss mitigation programs through their mortgage lenders, or through government sponsored programs. Those struggling to make mortgage payments or who cannot sell their homes due to fallen home values should contact their mortgage loan servicing company, or visit this website for more information.


About Author:

Karen Lawson is a freelance writer with extensive experience in mortgage banking and home loan loss mitigation programs. She holds BA and MA degrees in English from the University of Nevada, Reno.

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