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Mortgage Inflation: How Bad Is Bad?

I know the basics about mortgages, just as I suspect you do: Fixed-rate mortgages offer few surprises. Adjustable-rate mortgages (ARMs) offer lower introductory rates, but eventually begin fluctuating with the interest-rate environment. Fixed-rate loans can be good if you plan on staying put for a long time; ARMs can be good if you plan to sell and move within a few years.

One thing I didn't fully appreciate until recently, though, is just how much of a difference a rising rate can make for an ARM borrower. And other kinds of mortgages, such as interest-only ones, can cause even more trouble. Here are some examples I've run across:

  • A recent Newsday article told the story of one homeowner who borrowed roughly $500,000 with an interest-only mortgage a few years ago. She felt she had to do so, in order to stay in her home during a divorce, and she managed to swing the $1,760 monthly payments. But the payments will soon balloon to around $3,750 per month -- a sum she can't afford to pay.
  • The article offered another sobering example -- a couple with an ARM that charged 8.25% for the initial two years, but is scheduled to rise to 11.6% shortly. That kind of increase is enough to hike the monthly payment on a $200,000 fixed-rate loan from $1,500 to $2,000, a 25% jump.

Countrywide Financial's (NYSE: CFC  ) Countrywide Home Loan, which is one of America's largest mortgage providers, expects roughly a third of its 150,000 subprime mortgage holders to experience an upward interest-rate adjustment in the coming year or so. According to a Boston Globe article, the company has "modified terms on about 17,000 mortgages this year in an effort to keep customers in their homes" -- reducing rates for some of them. Other major lenders, such as Wells Fargo (NYSE: WFC  ) and JPMorgan Chase (NYSE: JPM  ) , are likely also looking at what can be done to prevent failures.

Learn more
If you're interested in homebuying and -selling issues, visit our Home Center, which features lots of money-saving tips on mortgages and other issues. You might also want to check out these articles:


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Selena Maranjian
TMFSelena

Selena Maranjian has been writing for the Fool since 1996 and covers basic investing and personal finance topics. She also prepares the Fool's syndicated newspaper column and has written or co-written a number of Fool books. For more financial and non-financial fare (as well as silly things), follow her on Twitter...

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