From Reuters:
Remember way back in 2006, when everyone was in a frenzy to buy a house, any house, with whatever mortgage they could grab? In many cases, it meant signing up for adjustable-rate mortgages that would reset in half a decade.
Move forward those five years and here we are.
For the next 13 months, some $20 billion in adjustable-rate loans are scheduled to reset every month, according to figures from Credit Suisse.
That means the interest rates and monthly payments will adjust — in most cases, downward, because of interest rate declines.
Homeowners will have to decide whether to keep their loans or replace them with a refinance. In a few cases, the adjustment of interest-only loans will make the monthly payments go up, even if their interest rates go down.
And some homeowners may not be able to refinance, because their homes have dropped in value and they don’t have enough equity to qualify for a new loan. Anyone sitting on one of these loans now must weigh the options with the idea that today’s low rates are unlikely to last for the life of the loans, which will now begin to reset annually.
Here are some considerations. — Thank Ben Bernanke. The Federal Reserve chairman’s accommodative monetary policy has held the short-term rates upon which adjustable loans are based very, very low. That means that someone who originally took out an average 6.35 percent mortgage five years ago will see their rate adjust to the neighborhood of 3 percent, reports Keith Gumbinger of HSH Associates (www.hsh.com), a research firm. On a $300,000 loan, their principal and interest payment would drop from the $1,867 they had been paying to $1,329, says Gumbinger. And who couldn’t use an extra $500 or so a month? — That doesn’t mean you should sit on it. Having that lower payment for a year is dandy, but 25 years (the time remaining on these loans) is a very long time, and rates are likely to rise from their current low levels.
Should they blow through the roof, you could end up paying 5 percent next year, 7 percent the year after that, and so on. The maximum level for most variable rate loans made at 6.35 percent is 11.35 percent. Think that can’t happen? They were there in 1985, on the way down from 12.2 percent. —
You have choices. If you think you’re going to be in your home for five years or less, keeping your loan might be the best bet. If you want to stay there a long time, this might be the time to lock in a 30-year rate. At around 4.6 percent, “rates are about the best they’ve been all year,” says mortgage industry consultant Rob Chrisman.
Furthermore, this might be your last chance to grab a 30-year, fixed-rate loan, suggests Gumbinger. He’s speculating that they could go away altogether or become much more expensive once Washington reforms mortgage-buying giants Fannie Mae and Freddie Mac.
One other option is to refinance your current variable rate loan with a new variable rate loan. That may seem strange, but if you could lock in five years at 3.44 percent (the current going rate on 5/1 ARMs, according to HSH), that might be worth the refi costs.
Finally, note that 15-year loans are now running 3.8 percent, says Bankrate. You could take those monthly savings and put them toward the bigger payments that would come with a shorter maturity loan. — You’ll have to do the math.
Roughly one-third of the resetting mortgages are delinquent, says Credit Suisse. It’s possible the downward reset could make your payment more affordable, and you could catch up. Or that the new low rates will make your lender a little more willing to modify your loan. At the new 3 percent rate, they’ll be giving up a lot less interest than they would have if your rate was still 6 percent.
I just heard something about Goldman Sachs just announced a new derivative based on failed ARM resets and California Foreclosure levels.. . .
Did you hear that too?
P.T. Barnum was right.
Not to worry. After all of the other manipulations TPTB have engineered, this one should be an easy one.
The real challenge is creating 20M real jobs in the US and papering-over a 3 reactor melt-down in Japan.
If you are not looking at it, it is not there.
Who writes this stuff:
“That means the interest rates and monthly payments will adjust — in most cases, downward, because of interest rate declines.”
Uh, no. Although the short term rates are low, most of the recasting ARMs go from interest only to fully amortized, so the payment will be going UP. For the lucky millions who chose Pick Your Pay ARMS and have been using negative amortization to pay less than interest only for the past 5 years, the monthly payment will go WAY UP.
But who cares what happens, because no matter what, the banks won’t foreclose on you for another 2 or 3 years, even if you help yourself by taking you payment to ZERO.
I had an adjustable interest only that re-set from 5% to 3.5%. And, like the article said my payments went up slightly, about $200, but still very affordable. I’ve since sold the house but would have refinanced if I still had it. Needed to sell it to buy another house.
Okay so how many of those “frenzied” buyers in ’06 are underwater now? Sorry, but there goes your option to re-fi.
With interest rates where they are the resets aren’t really a problem, it’s the recasts that are a problem. Especially the recasts on a neg-am loan. Wacovia which is now owned by Wells Fargo was the king of the 10 year pick a pay loan. I wouldn’t be surprised if people that have these products are still paying the minimum neg-am payment hoping prices will rise before they hit their recast date. There was just such a wild west in 2005-2007 that it’s impossible to keep track of all the products out there.
LOL, You Got Me:
The real challenge is creating 20M real jobs in the US and papering-over a 3 reactor melt-down in Japan.
President Camacho
BTW: The Japanese announced today that they are erecting TENTS, like in a Barnum and Bailey circus to keep the radiation exposure in the plants. . . I know, I know, they Really did:
http://www.prisonplanet.com/japan-to-cover-damaged-nuclear-reactors-with-giant-tents.html
As for 20MJobs, haven’t you heard, The Out (White) House says it’s a jobless recovery. (Seig Heil!= hail victory). Ya gotta break a few eggs….
I gotta go now, there is a full rainbow out with unicorns and the tooth fairy is at the door and he looks remarkably like The New Public Enemy #1 Osama Bin Bernanke, killer of dreams.
Stay Safe.
cali,
Wachovia’s pick-a-pay was the best neg-am available.
WFB panicked and is scrambling to loan-mod them when they could just let them go and they’ll take care of themselves.