Strong ARMs are crushing borrowers

Rising rates at heart of mortgage and credit crises

August 24, 2007|By Laura Smitherman | Laura Smitherman,sun reporter

Adjustable rate mortgages have always meant that homeowners are taking a chance that payments could fluctuate along with interest rates, but in recent years some loans have been structured to virtually guarantee that rates go up - and stay up.

While many homeowners are feeling the pinch of rates resetting on so-called ARMs, some are getting crushed by what housing advocates call "strangulation ARMs" that continue to reset as often as every six months.

On a $200,000 home, the difference between payments under a fixed-rate mortgage and an adjustable-rate loan can be hundreds of dollars. In the following scenario that assumes interest rates remain stable for five years, monthly payments include $200 for real estate tax and insurance escrow:

30-year fixed loan: $1,598

ARM: $1,531 for first two years $1,939 in third year $2,152 in fourth year $2,370 in fifth year, assuming interest rates rise of 2 percent [Source: Federal Reserve]

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