Written by Nathan Thomas on August 3, 2004
Written by Nathan Thomas on August 3, 2004
So the refi boom is over, because rates are going to go up, you say?
According to a new survey by the Consumer Federation of America, 25 percent of Americans prefer Adjustable Rate Mortgages (ARMs) over fixed-rate mortgages. Traditionally, the more affluent borrower was attracted to an ARM, and traditionally, ARMs were most popular during times of high mortgage rates. After all, you're betting your payment will go down, not up; and you have the wherewithal to lose that bet.
But the CFA survey reported that ARMs are most popular recently with "young adults, minorities and people with lower-incomes and less education." With the crazy push to qualify as many people as possible for as much mortgage as possible during the most recent boom, lower-income borrowers, younger borrowers and those with less of an employment track record have been able to qualify for "more home" by getting an ARM.
Unfortunately, these borrowers are most at risk when their mortgage payments spike after a year, or three, or five. According to one report cited by the CFA, subprime borrowers are more than twice as likely as those with high credit scores to purchase ARMs.
"Lenders who aggressively market ARMs to lower-income consumers and those with low credit scores are acting irresponsibly," said CFA Executive Director Stephen Brobeck. "Given the high probability of interest rate increases, an adjustable rate loan made to a family which can barely afford the initial monthly payments represents a ticking time bomb."
Some will need to sell out from under their new payments, if they have enough equity; some will be foreclosed upon. But there will be thousands, perhaps millions, who refinance their way out from under a mortgage payment that's just "adjusted" upward to maybe double what they'd been paying.
And they're apt to be taken by surprise. "Lower-income and minority Americans are not only those most likely to prefer ARMS but also those with the poorest understanding of their risks," Brobeck said.
Appraisers only see half of refinances anyway, but it's worth noting that even as everyone seems to be predicting refis will dry up completely, we predict there are a whole bunch of them on the way sooner than you think.