ARMs Are Costing People Their Homes

By:  Bob Adelmann
03/24/2014
       
ARMs Are Costing People Their Homes

Dangerous but tempting, Adjustable Rate Mortgages are now costing people like Rebecca Black their homes. 

Back in September, the Associated Press took a close look at U.S. census data and learned that the supposed economic recovery was leaving an awful lot of people behind. One segment is homeowners who bought the dream of owning a home using ARMs — adjustable rate mortgages — and who are now finding out how these sub-prime mortgages really work. ARMs are forcing homeowners to walk away from their mortgages, resulting in declining home ownership rates for the fifth straight year.

The number who has lost their homes is now seven million, and as interest rates rise, that number is bound to increase.

One of the most popular, and pernicious, of the ARMs is called a 2/28 — a type of mortgage that starts off with a very low interest rate for the first two years, and after that the interest rate rises based upon an index, plus a margin. As Investopedia puts it: "A 2/28 ARM is designed as a short-term financing vehicle that provides homeowners with time to repair their credit before they refinance into a new mortgage with more favorable terms."

Buried in the fine print, however, is this warning:

[Homeowners utilizing ARMs] don’t recognize just how much their monthly payments will increase when the interest rate starts to adjust….

There is a high probability that the fully indexed interest rate will be substantially higher than the initial two-year fixed interest rate. Once [that happens] the borrower’s payments … will increase as well.

This is precisely what happened to Rebecca Black, a U.S. Army veteran and a single mother with two teenage sons. She bought her three-bedroom home on the south side of Memphis in 2005 for $61,750, putting down $4,750 and financing the balance with a 2/28 ARM. She could make the payments and was glad to live in a modest but nice neighborhood.

Click here to read the entire article.

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