Adjustable Rate Mortgages- Time Bombs Ticking

Over the past few years, thousands of homeowners have financed or refinanced their homes with Adjustable Rate Mortgages (ARMs). ARMs offer lower initial interest rates, making monthly payments more affordable for many homeowners. However, this affordability is only maintained as long as interest rates remain stable or decrease. The risk arises when interest rates increase, leading to significantly higher monthly payments.

This risk is now a reality. Interest rates have been rising as the Federal Reserve has increased rates 15 times in the past two years. There is no indication that this upward trend will stop soon. As these ARMs reset to higher rates and payments, many homeowners will face financial strain, with some potentially losing their homes.

According to the Mortgage Bankers Association, by the end of 2005, states like Michigan, Missouri, Tennessee, and Alabama had up to 20% of ARM homeowners behind on their payments by 30 days or more. Foreclosure proceedings typically begin when a homeowner is 90 days late. Hopefully, these homeowners can refinance before it is too late.

If you have an ARM, it is crucial to review your finances to ensure you can remain solvent during these times. Assess how high your monthly payments could go and whether you will be able to afford them. Consulting a financial adviser to determine if refinancing to a fixed-rate mortgage is advisable could be a wise decision. Locking in a fixed rate now may be the safest choice.

Many mortgage companies offer refinancing options, but they may now have stricter credit requirements. It might be harder to secure a loan now than when you initially obtained your mortgage. However, it is essential to explore your options as time is of the essence.