Do Adjustable Rate Mortgages cause Foreclosures?
The media has been reporting that part of the reason why the foreclosure rate is high is because there are millions of people that financed their homes with ARM's (Adjustable Rate Mortgage). These reports claim that people are loosing their home because of an upward adjustment to their interest rate. As a result they can’t afford to make their mortgage payment. Once again the media has it wrong.
There are two main reasons why the foreclosure rate is so high. The first is that simply these people buy homes they can't afford.
Let’s say someone purchased a $120,000 home 2 years ago. They decided to go with a low adjustable interest rate with a 2 year start rate of 6% and they put no money down. Their monthly mortgage payment was $719. Let’s say the interest rate went up a 2% to a fully amortized rate of 8%. Their payment is now $880 a month. Of course they need to come up with the extra $161 a month. However, if an extra $161 out of your pocket would result in something as drastic as loosing your home, you probably shouldn't be paying $719 a month to start with. If this person looses their home it is not because they went with an adjustable interest rate, they simply bought a home they can’t afford.
Another reason the foreclosure rate is so high is because of the poor job market. In Michigan, it seems like factories are closing left and right causing extremely high unemployment rate. If someone is used to earning $50,000-$60,000 a year and now forced to collect just a few hundred dollars a week in unemployment, they will not be able to continue to live the same life style that they are used to. In a lot of cases, this will result in people loosing their home. In this situation the foreclosure was because of a change in income, not because their payment went up a couple of hundred dollars.
When I write a mortgage for a customer I don't just look at the underwriting guidelines and see if they qualify. I look at the customer’s financials and spending habits. Because of the many "Stated Income" or "No Income Ratio" loans, most people can get an approval from an underwriter on just about any price of a home. However, I install my own guidelines to protect the customer. Job stability, assets, and family situation are some of the key factors I consider when pre-qualifying a customer.
About a week ago, I had someone on SSI come to me looking to get a second opinion on a mortgage. She only earns about $900 a month, had credit scores in the high 700's, and already had a home picked out. Because of the liberal lending programs and their high credit scores, I probably could have qualified her for just about any price of a home. However, I figured the customer could only afford a payment of about $400 a month after taxes and insurance. So I told her they could qualify for about a $45,000 mortgage. She was disappointed that this was all I would lend her when she was approved for a loan around $100,000 by another local lender. Her mortgage payment would be around $600 a month and she was not considering taxes or insurance. I explained to her why it wasn't a good idea to go that rout and suggested that she should work on saving up a down payment if she wanted to buy a nicer home. I know I lost the deal, but hopefully she listened to my suggestion and will give me a call a few years down the road.
So how do you protect your self?
If you put $5000 down, the only way you can access that money is either sell your home or pay closings costs to refinance. I always recommend that my customers buy a home with as little down as possible and have them put their extra money in a liquid interest baring account that they can access in case of an emergency such as a job loss or illness. If you do this, you are financially protected.
Also, look at your future income not just your current income. If you are receiving $400 a month in child support and your going to loose that in 2 years, you should look for a home that you can afford with out that as part of your income. Or if you are planning on retiring in a few years, make sure you can afford your home on your retirement income.
ARM loans are great programs. I believe in them so much, I have one for my self. When ever I offer a quote to a customer I always look at both some sort of ARM and a fixed rate. When looking at your options, don’t be afraid to consider an ARM.
Please feel free to call me about any questions about foreclosures or ARM’s.
Thank you,
Jason Lash
Branch Manager
Family Home Lending
866-366-5724
http://www.virtualloanpro.com/
http://www.homecredible.com/
http://www.honestmortgageanswers.com/
Posted by Jason Lash at 10:22 PM
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