Adjustable Rate Mortgages~What will happen?

Great Discussion Starter! This is the kind of stuff I would love to more of on myLot. I'm going to talk a lot about mortgages here. If you aren't up for a lot of info/opinion, then skip it. (I won't be offended.) There is a big problem in the real estate mortgage industry. Mortgage brokers often assume that the consumer knows as much as they do. As such, they expect people to understand exactly what they are getting in to when they get a mortgage. Don't get me wrong, this is not the mortgage broker's fault. I am a part time mortgage broker. I work for a company that stresses to people that they should get into the best mortgage for them, not neccesarily the one with the lowest rate. There are lots of things to consider when chosing a mortgage. 1. How long do you think you will own the property. 2. What is the longest you might own the property. 3. Where are interest rates now as compared with historical rates. 4. What is the real estate market in your area likely to do over the time you expect to own the property. I tell my clients that are looking to purchase that if they cannot afford to live in the property with a 20 year fixed mortgage, then they might not want to purchase the property. Not that I recommend actually getting a 20 year fixed, usually. But, it is a good way to lay out your ability to pay. After all, taxes could go up, as could insurance premiums, maintainance expenses, and much more. It is better to have a little less house with more money in the bank, than a little more house and be broke. Anyway, to get back to ARMs. Many people thought ARMs were great a few years ago. Interest rates were low, which put ARM rates VERY low. Also, at that time, interest rates were not expected to sky rocket in a short period of time. So, the thought was that one could use an ARM for 2, 3, 5, or 10 years and then refinance. Their payments are lower for that period of time, so they are money ahead at the end. Great concept...if interest rates stay constant. Luckily, rates have not ballooned nearly as much as they could have. So, if people made a wise purchase and have made all payments on time, they could now still refinance and be able to make the payments. Unfortunately, a lot of people said, "I can afford a bigger house with these lower rates." And now, when the ARM kicks in, they cannot afford the new payment or what the payments would be if they refi'ed. Losing one's current home has little to do with appreciation. Regardless of what the property is really worth, they owe what they paid for the property minus any amortization and down payment. So, their payments are dependant upon their balance owed and their interest rate. As was stated, if the interest rate increases, so do the payments, which might be a problem. Dropping real estate markets hurt people that need to sell, but mostly tose who want to sell. Someone who needs to sell, because they are facing foreclosure or something similar, is not hurt that badly because their credit is already a problem, a bank will likely consider a short sale or deed-in-lieu. People that want to sell, i.e. want to move have the problem. They cannot sell their current property because it is indeed worth less than is owed. So, they cannot move even though they want to, or feel that they need to. What this actually causes is fewer people moving. That means, the market stagnates. When the market stagnates, then prices fall, especially higher end prices. In my town, a property worth $215K in 2005 can't sell for $150K today. Whereas a $50K property from that time can still sell for $50K today. (To some of you, nothing sells for $50K. In my area, that buys a 2/1 ~ 75 years old ~ 750 square feet. So, scale to your prices accordingly.) But, those people that can't sell for less will eventually be the reason why the market will spring back. It is the same as most things on a publicly traded market. When prices fall, people start selling. Eventually, people can't or won't sell for the price they can get. Other people start/continue buying so prices go back up to the point where the seller is willing to sell. So, my conclusion is that these issues will cause a faster decline in real estate values, but also a faster recovery. Faster does not neccessarily mean fast. The really large growth lasted 5 years, so a fall for 5 years would not be unexpected. That's my opinion anyway.

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I agree that forelosures have become a problem but the market has a way of correcting itself and that's already happening. You're seeing a huge increase in people interested in flipping foreclosure homes. Many buy them on a short sale so they get the owner out of their bind. This is going to result in higher property values because these houses are in like-new condition. The mortgage market is also adjusting by offering more flexible lending solutions. You'll see an increase in the popularity of the 50-year mortgage. I just hope we don't see people jumping into these PayOption ARMS. It's our job as respectible mortgage brokers to make sure that we are matching our clients with the products that meet their needs. You'll also notice that mortgage rates haven't increased much. This allows people to get out of their ARMS and into better rates. The idea is to improve your credit so that when the ARM term is done, you can lower your rate and payments. Good discussion!