Mortgage Crisis Numbers

September 11, 2007

mortgagecrisis

$571 billion:

The aggregate value of adjustable-rate home mortgages that will reset, or switch from a low fixed rate to a higher variable rate, through the end of 2008. After living large off introductory rates as low as 1% (or zero, in the case of interest-only ARMs), Americans will pay an extra $42 billion in mortgage payments next year.

$1,018:

Average increase in monthly payments for reset mortgages. That includes even responsible prime borrowers, who will pay an average of about $450 more. But it’s the “teaser” borrowers – the big spenders who patted themselves on the back in 2003 and 2004 for that initial less-than-2% rate – who will get the strongest dose of reality: an average increase of $1825, way more than double their initial payments.

(From September 17, 2007 issue of Fortune Magazine)

The mortgage crisis of today is a great lesson on why not to take out “creative” or “exotic” mortgages like adjustable rate mortgages and interest-only mortgages. That’s why I’ve always recommended 30-year fixed rate mortgages, and even better, 15-year fixed. If you can’t afford a house with a traditional, 30-year fixed rate mortgage, then you can’t afford that house. Either look for a cheaper house or save up some more for a down payment so the loan amount decreases. But do not take out an adjustable rate mortgage at any cost. It will end up biting you in the butt later.

As foreclosure rates hit all-time highs, and many people around the country are losing their homes, it’s good wisdom not to buy anything you can’t afford. If you take out an ARM (adjustable-rate mortgage) the interest rate is fixed for a certain term (one, two, three etc. years) and then it converts into a much higher variable rate that can go up or down, affecting your payment. So just avoid it altogether!

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