In recent years, adjustable rate mortgages (ARMs) have been very popular with home buyers. Low interest rates allowed buyers to purchase larger houses than they might otherwise have been able to afford.
But as the end of those ARMs draws near for many, they are likely looking at significant increases in interest rates. That change in interest rates will cause borrowers to make monthly payments that are 10% to 50% higher than they had in the past.
Many will deal with the interest rate change by refinancing with different lenders. But those who can’t make the higher payments will likely sell or risk foreclosure. Since the housing market is cooling, selling may not be as easy.
The Wall Street Journal tells this story:
One couple that faces a reset this summer is Ruth and Magdi Fadlalla, who two years ago bought a three-bedroom house for about $294,000 in the New York borough of Queens. Their loan carries an interest rate of 7.46% for the first two years. This summer, at the first reset, the rate will jump to 9.46%, they have been advised, and the rate could rise further in the future unless interest rates generally decline. Already, the Fadlallas have fallen behind on their monthly payments of about $1,950 and have been put on notice that their home could soon be lost to foreclosure.
Mrs. Fadlalla, a special-education teacher, says her property taxes have risen sharply and other costs of home ownership proved higher than she expected. “This is killing me,” Mrs. Fadlalla says, though she adds that “I’m going to work it out.”
The biggest risk as ARMs run out, is for those who bought homes recently. They haven’t yet benefited from much price appreciation, their local markets are cooling, and they may owe more than their homes are worth. Also facing problems are those with high credit card debt, as their opportunities to refinance are limited.