How Not to Fall Into the Adjustable Rate Trap

We all watch the news about Adjustable Rate Mortgages everyday...We listen to the news on the radio, hear about the news from our friends. News, news, news. The most recent mortgage news is about the ridiculous amount of Adjustable Rate Mortgage Loans that will be adjusting in 2007 and 2008. What takes place after will be catastrophic.

The last 5 years brought on an unprecendented amount Adjustable Rate Loans, and the "Refi-Boom." Now that the boom is over, we are all recognizing the effects of poor guidance. Many mortgage brokers throughout the country were given big rebates for guiding their customers to "Power Loans", or loans that started with a teaser rate as low as 1%. Consumers were qualifying for loans that they would never have had a chance to qualify had they purchased a conventional fixed rate loan. However, many of these mortgage brokers failed to tell the average consumer about the future ramifications of having such a loan. The extremely low payments would end, often times within just a few months, leaving consumers with a bill they could not pay.

How some of these brokers ever thought that an Adjustable Rate Mortgage for clients that had no plans of moving, changing jobs, or anything that would be benefited by a lower starting rate is beyond me. Rates beginning after 9/11 and up until the Feds began ticking them up at an unbelievable pace were at historic lows. Where did the rates have to go but up? Of all the times to secure a fixed rate mortgage, there were no better times than the last 5 years. Yet, a record number of Adjustable Rate Loans were written. Consumers were trapped by the greed of an extremely low starting rate.

What does this mean for the average consumer?

1) The low starting Adjustable Rate Mortgage or Power Loans allowed consumers to buy houses for inflated prices. This drove home prices up 200% or more in some cases, making homes in many areas unaffordable.

2) As rates have risen, and over-valued homes have become far less affordable, market values have began to retract. This means consumers that purchased over-priced homes with no money down are finding themselves trapped in homes, over-mortgaged by $50,000 or more in some cases. The end result, is a record number of foreclosed homes.

There is still hope for homeowners placed in an adjustable rate mortgage. Consumers should thoroughly review their loan documents to know exactly when their rate will adjust. This will give them a time frame to secure a fixed rate loan. It will also help those consumers to begin to create a budget for the increase in payment. Consumers should understand that with the recent increase in interest rates, and a generally low starting rate for adjustable rate mortgages, a difference in payments when refinancing to a fixed rate should be expected. Also, speak with a reputable mortgage lender, or broker in your area to find out what options are on the table. You may find out that you qualifyfor a comparable fixed rate loan.

It is unfortunate that the Adjustable Rate Mortgage has been used this way in the last 5 years. The idea behind this type of a program is actually extremely beneficial when used the correct way. For example, if you find yourself planning to sell your home in 2-3 years or less, or if you are using a mortgage loans as a means for cleaning up your credit, an Adjustable Rate Mortgage could be a good program for you.

The bottom line is, Adjustable Rate Mortgages can serve a purpose, but only as a SHORT term loan. Do not enter into this type of program unless you not only know all of the terms of the loan, but also have an exit strategy in place to get out of it.

Charles Crews is a Family Loan Planner in the State of Washington. You can contact him with questions via e-mail at cbcrews@ionfunding.com, by phone at (206) 219-5361 or by visiting his website at: http://e10952.eglobalmortgage.com/charles -- With over 10 years mortgage experience, Charles believes in providing a great loan experience, dedicated to helping consumers get a mortgage they deserve.