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.
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