One of the big contributors to the recent financial and real estate meltdown has been the adjustable rate mortgage. This brutal loan has left many people with ruined credit and homeless. Why are adjustable rate mortgages bad you may ask? Well keep reading and I will tell you why!
The first reason is that these loans are often given to people who really do not understand what they are. In cases like this they are easily pushed onto unsuspecting buyers because the interest rates are so much lower then a fixed rate loan. These people go along happy with the low rate they got then all the sudden bam! There interest rate and payment increases and they are wondering why?
That leads us to the second reason why ARM home loans are bad, instability !! A variable rate home loan has a fixed rate for just a short period of time. Once that time period expires the interest rate will start to change, more then likely it will increase !! This increase can cause the payment you are used to pay to rise by hundreds of dollars. This can throw anyone into a tailspin that is hard to recover from.
Next take into account the recent property value drops and the fact that some many people used these loans to refinance up to 95% or even 100% of the value of their homes. No big deal you might say but the facts are that when people refinanced at the height of the real estate boom they were using inflated values. When those values corrected they were often less then the amount they owed on their house.
Owing more on your home then it is worth makes refinancing impossible as no bank will take a chance on you and you do not meet the new strict lending guidelines. You are now stuck in a higher payment that keeps going up every month. The next step is usually missed payment which will damage your credit. Low credit will make it harder to refinance even if your property values come back. Then once your rate has adjusted to a point where you can no longer afford to pay you will lose your home!
While all this sounds severe this scenario has played out for many people across the country and the record foreclosure numbers back up this claim. So before you sign that loan application for that low rate ARM mortgage really think about it and weigh the risks against the rewards!