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Adjustable Rate Mortgage Payments Headed Up in 2006

By Mark Huffman
ConsumerAffairs.com

January 12, 2006

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Consumers holding adjustable rate mortgages could face significant increases in their payments this year. In fact, one mortgage planner warns that homeowners who locked in rates of around three percent in the early years of their ARMs could see their mortgage payments double once the rate is adjusted to current market conditions.

"You're seeing fixed rates at six and a half and seven percent, while some of the ARMS were available at very low levels. Now you're seeing some of these adjustable mortgages go up three or four points," Paul Harden, a broker with iLendingPro, of Cypress, California, told ConsumerAffairs.com.

What's behind the jump?

Mortgage rates are going up, and it has less to do with the Federal Reserve hiking the Fed Funds Rate than it does the bond market. Interest rates on bonds are up, and that influences mortgage rates.

"Our current market reflects the reaction of investors reading between the lines on comments made by the Fed, and mortgage interest rates are going up," Harden said.

"This will affect home owners with adjustable rate mortgages (ARMs) tied to indexes that are based on short-term interest rates. This includes the 11th District Cost of Funds, 12-Month Treasury Average (MTA), London Inter Bank Offering Rates (LIBOR) and others."

This doesn't mean that everyone with an adjustable mortgage is in trouble right away.

Harden says some indexes are more volatile than others. But he says consumers should remember, when an ARM adjusts, the new interest rate is a sum of the borrower's fixed margin plus the current rate of the index the mortgage is tied to. In the present environment, he says that can be a big number.

"Many of these people who locked in very low rates with ARMs are now going to see their interest rates double in some cases," Hardin said.

Those hardest hit are likely to be the consumers who chose ARMs because they offered the only monthly payment they could afford. Harden says many people were encouraged to buy more house than they could afford through the growth of "creative" financing options.

"Even ten years ago your debt to income ratio on a standard loan needed to be about 30 to 35 percent. Now banks, in order to get more people into homes, are taking up to 50 and 55 percent debt to income ratio. That's a recipe for disaster," he said.

Harden says consumers with ARMs should be thinking about locking into a fixed rate loan before rates go up, even though the fixed rate will be higher than what they're paying now. Those who took out an ARM because of a poor credit score may now be able to transition into a loan with more favorable terms, if they have improved their credit rating.

Before doing anything, though, he says it's a good idea to seek some solid advice from someone you trust -- an independent mortgage broker, accountant, financial advisor or attorney.

"As with any decision to refinance, it is important to take the terms of the existing loan, the cost of the new loan, and the borrower's long-term needs into consideration."

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