Adjustable Rate Mortgage Question?
I really am confused and I'd like to know from someone much smarter than I. If the rates have be dropping like crazy for a long time now (over a year) why does everyone hold on to saying the ARMs are what caused the housing crisis? Maybe I'm thinking of a different type of ARM and explicitly why it isn't making sense to me. I have an adjustable rate HELOC (because we did an 80/20) to buy our house. We have in the order of $37k on the HELOC, then a 30 yr fixed rate for about 150k. Our rate on the ARM is prime plus one because we enjoy really good credit. The reason I'm confused is because since I've have this loan (2 years now) it has consistently gone down. If ours is going down, isn't everyone else's?
Answers:
Because the FED adjusted interest rates to a severely low rate now, mortgage rates are also expected to fall. This is a root why your ARM has gone down. However, should the FED start raising rates, your ARM is going to jump up. Although I doubt it will be anytime soon, suggest you convert your ARM to fixed rate before rates go put a bet on up.
Back in the real estate boom, too oodles people took out ARMs when rates were low. The FED eventually raise rates, and, in time, causing those ARM's to dance up. Those people could only afford ARMs next to low rates, so when rates went up, defaults started occurring.
See the most recent example: http://money.cnn.com/2008/10/29/news/eco…
These low rates now-a-days could lead to a real estate boom again. However, since banks be burned on all the past default and foreclosures, they wised up and tightened their lending standards. Only people next to excellent credit could prosper somehow in this economy.
Some loans are tied to different indexes, resembling LIBOR vs 10-year treasuries. Other loans may have been interest one and only or pay-option type loans, which would rise in payments once the principle amortization started. That means they be only paying interest and no principle until a certain date. And still other loans have "teaser" rates which were really low and also rise at a normal time. There are heaps different types of loans, hence it is confusing. ARMs are a part of the problem, but there are oodles other factors in this mess too.
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Answers:
Because the FED adjusted interest rates to a severely low rate now, mortgage rates are also expected to fall. This is a root why your ARM has gone down. However, should the FED start raising rates, your ARM is going to jump up. Although I doubt it will be anytime soon, suggest you convert your ARM to fixed rate before rates go put a bet on up.
Back in the real estate boom, too oodles people took out ARMs when rates were low. The FED eventually raise rates, and, in time, causing those ARM's to dance up. Those people could only afford ARMs next to low rates, so when rates went up, defaults started occurring.
See the most recent example: http://money.cnn.com/2008/10/29/news/eco…
These low rates now-a-days could lead to a real estate boom again. However, since banks be burned on all the past default and foreclosures, they wised up and tightened their lending standards. Only people next to excellent credit could prosper somehow in this economy.
Some loans are tied to different indexes, resembling LIBOR vs 10-year treasuries. Other loans may have been interest one and only or pay-option type loans, which would rise in payments once the principle amortization started. That means they be only paying interest and no principle until a certain date. And still other loans have "teaser" rates which were really low and also rise at a normal time. There are heaps different types of loans, hence it is confusing. ARMs are a part of the problem, but there are oodles other factors in this mess too.
Related Questions: