|Some ARM borrowers will refi in 2007
|By Holden Lewis Bankrate.com
2007 will bring an unusual refinancing boom as hundreds of thousands of borrowers bail out of their adjustable-rate mortgages while the getting is good.
On top of that, sellers and buyers will grapple with stagnant or falling house prices in some markets. And it's anyone's guess what course the Federal Reserve will take.
Like the twin strands in a DNA helix, house prices are intertwined with the fate of adjustable-rate mortgages, or ARMs. That's especially true for two types of adjustables: interest-only mortgages and a subset called pay-option ARMs. The main appeal of these nontraditional mortgages is that they have extra-low monthly payments, allowing people to buy more house than they otherwise could afford. That benefit brings a trade-off: borrowers build up equity slowly or, in some cases, actually lose equity in the house with every monthly payment.
In a self-reinforcing cycle, rapidly rising house prices pushed buyers into getting pay-option and interest-only ARMs, while the popularity of these loans sent house prices even higher. Definitive estimates of the popularity of nontraditional mortgages are hard to come by, but it is believed that in some markets, especially in coastal California, around half or even more of new home buyers took out interest-only or pay-option ARMs in 2005 and 2006.
mortgages start out with low
monthly payments, they are sensitive
to rising interest rates. A
pay-option ARM might have an
initial rate of 1.9 percent
that lasts only a month. The
rate can rise every month thereafter
and could exceed 7 percent within
six or seven months. The sneaky
thing about pay-option ARMs
is that, although the rate might
rise every month, the minimum
monthly payment doesn't. The
minimum monthly payment changes
just once a year. That means
that the minimum payment often
doesn't even cover the interest
charged, so that the loan balance
Expecting to pay off a mortgage that way is like eating a dozen doughnuts every morning and expecting to lose weight by walking a mile every evening.
believe a steady influx of homeowners
will refinance their nontraditional
mortgages into something less
exotic in 2007. A lot of them
will refinance into 30-year,
fixed-rate mortgages. Others
will get hybrid ARMs, such as
the 5/1 ARM, which has a relatively
low introductory rate that lasts
for five years, then adjusts
annually thereafter. Hybrid
ARMs are popular among people
who expect to sell their houses
within a few years.