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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