Do you have an adjustable rate mortgage? I know a lot of people who do and who will need to review their agreements to see how much trouble they’re in. A lot of adjustable rate mortgages (ARMs) have caps on the maximum annual rate increase and total rate increase but even then those caps may be as high as 2% a year, a pretty significant jump for most borrowers. We’ve known about interest rate increases for a while now, the Fed has been working overtime trying to stem inflation, so the increase in the 30-year fixed to its rate of now over 6% comes as no surprise…
A CNNMoney article  writes:
If you took out an 3/1 ARM for $300,000 back in late 2002, your initial interest rate was probably around 5 percent and your monthly payment has been about $1,610.
3/1 ARM coming due today would readjust to a rate of 7.1 percent… [and] Your new payment: $1,995 a month — a difference of $385, or more than $4,600 a year.
Not many folks can realistically handle a bump in monthly payments of nearly $400 for nothing. Those that can will be forced to face another rate hike in yet another year (probably not as drastic) but how many can handle pushing more money out the door?
The lesson here? Fix your rates ASAP. The prevailing rate of a 30-year loan is 6.43% so you’ll be only paying $260 more each month (plus a few thousand in closing costs) but you’ll be safe… or you could sell the house.
The worst case scenario is if ARM holders can’t afford it and are banks are forced to foreclose: that’s when the foreclosure watchers in the real estate world will snatch up properties and the cycle of real estate boom and bust will continue.