Adjustable Rate Mortgages or ARM's were the loans to get during the housing boom.
An ARM can come in several different forms.
Some are the 3-1, 7-1 and 10-1 ARM to list a few.
Let's look at the 3-1 ARM.
You will pay the interest only part of the loan for 3 years and then after that the rate will adjust to the current rate.
So if you got a loan at 5.
0% then after 3 years if rates increase to 6.
5% then you could be paying substantially more.
This is OK if your income increases.
However, that is not always the case.
If you are barely able to afford a home when the rate was low you may be in trouble when it rises.
You can make payments to the principal on the home if you wish.
However, a lot of people do not.
Then there is the teaser rate loan that will get a person in a home they can barely afford.
These can have a rate as low as a 1% interest rate from 6 -12 months.
After the 6 -12 months your rate will increase to current market value and your payment will go up or down every month.
These are pay option ARMs.
You are allowed to pay as much as you want as long as you make the minimum interest payment.
The minimum interest payment is what the bank will accept.
An example of this is if your mortgage is $1500.
00 a month the bank will accept $1200.
00.
The rest of the interest is deferred.
So when you sell the house these deferred payments will come out of your profit.
So what if the home depreciates and you need to sell.
Well you will be in trouble and simply stuck.
Homeowners that took these kinds of loans are sorry they did.
Often homeowners are unable to refinance into a more stable loan.
Lenders have not been approving loans for people with ARMs.
The motto of "Bad Credit No Problem" is a thing of the past.
People with bad credit received sub prime loans and this is something that helped cause the housing boom.
First time homebuyers and even veteran homeowners are feeling the pain.
Federal regulators have raised the standard for sub prime loans given by banks.
This came after big lender Freddie Mac decided to raise its standards on loans.
Lenders and the Fed are reacting to all of the defaults on ARMs.
These tighter restrictions should help keep people from buying something they can't afford.
This will cause a problem for the sub prime loan market.
It will take at least 6-months to a year for the market to correct itself, the economy may be dragged upon and housing market bounce back will slow.
Lots of lenders that operate in the sub prime space will have to close its doors; many unfortunately already have.
Lenders all across the country are telling brokers to cut back on a few practices, such as offering two loan products such as the 80/20.
This is where you have 1 loan for 80% and then a 2nd for 20%.
Lenders are to reduce offering 100 % financing loans.
Lenders are requiring higher credit scores, more documentation on an applicant's income and a more careful examination of a homes value after it has been appraised.
These changes leave the lenders with empty shelves so to speak.
What loan products will they sell?What will the homeowner who is in financial trouble do because of ARMs?What will the hopeful homeowner do because an ARM is such a useful tool to getting that first home?These are questions that lenders and homeowners are asking themselves.
An ARM can come in several different forms.
Some are the 3-1, 7-1 and 10-1 ARM to list a few.
Let's look at the 3-1 ARM.
You will pay the interest only part of the loan for 3 years and then after that the rate will adjust to the current rate.
So if you got a loan at 5.
0% then after 3 years if rates increase to 6.
5% then you could be paying substantially more.
This is OK if your income increases.
However, that is not always the case.
If you are barely able to afford a home when the rate was low you may be in trouble when it rises.
You can make payments to the principal on the home if you wish.
However, a lot of people do not.
Then there is the teaser rate loan that will get a person in a home they can barely afford.
These can have a rate as low as a 1% interest rate from 6 -12 months.
After the 6 -12 months your rate will increase to current market value and your payment will go up or down every month.
These are pay option ARMs.
You are allowed to pay as much as you want as long as you make the minimum interest payment.
The minimum interest payment is what the bank will accept.
An example of this is if your mortgage is $1500.
00 a month the bank will accept $1200.
00.
The rest of the interest is deferred.
So when you sell the house these deferred payments will come out of your profit.
So what if the home depreciates and you need to sell.
Well you will be in trouble and simply stuck.
Homeowners that took these kinds of loans are sorry they did.
Often homeowners are unable to refinance into a more stable loan.
Lenders have not been approving loans for people with ARMs.
The motto of "Bad Credit No Problem" is a thing of the past.
People with bad credit received sub prime loans and this is something that helped cause the housing boom.
First time homebuyers and even veteran homeowners are feeling the pain.
Federal regulators have raised the standard for sub prime loans given by banks.
This came after big lender Freddie Mac decided to raise its standards on loans.
Lenders and the Fed are reacting to all of the defaults on ARMs.
These tighter restrictions should help keep people from buying something they can't afford.
This will cause a problem for the sub prime loan market.
It will take at least 6-months to a year for the market to correct itself, the economy may be dragged upon and housing market bounce back will slow.
Lots of lenders that operate in the sub prime space will have to close its doors; many unfortunately already have.
Lenders all across the country are telling brokers to cut back on a few practices, such as offering two loan products such as the 80/20.
This is where you have 1 loan for 80% and then a 2nd for 20%.
Lenders are to reduce offering 100 % financing loans.
Lenders are requiring higher credit scores, more documentation on an applicant's income and a more careful examination of a homes value after it has been appraised.
These changes leave the lenders with empty shelves so to speak.
What loan products will they sell?What will the homeowner who is in financial trouble do because of ARMs?What will the hopeful homeowner do because an ARM is such a useful tool to getting that first home?These are questions that lenders and homeowners are asking themselves.
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