As Adjustable Florida Mortgage Loans Reset, Borrowers Will Feel the Pinch
Everyone knows the Florida housing market has seen better days. As a result, demand has slowed down and buyers are waiting to see how things play out. But such a downswing doesn’t merely impact the present - those who jumped head first into the real estate boom of the prior five years could also be in trouble.
During that period, interest rates reached four-decade lows and consumers used new mortgage products to extend their buying power. Many stopped worrying about buying a home and instead worried about their ability to pay for one; rather than shopping for a deal that allowed for a lifetime purchase, they looked for a Florida mortgage loan that allowed them to buy the most home for the lowest current payment.
It was short-term thinking.
As long as Florida home loan rates stayed low and housing prices continued to move up strongly, it was a sound strategy. But what about when times changed? When the boom went bust? What happens to those exotic and/or adjustable rate Florida home loans?
Due to the popularity of adjustable-rate mortgages over the last few years, nearly 25% of all outstanding U.S. mortgage debt is due for an interest rate reset within the next two years, according to Economy.com. That’s $400 billion in loans that will get a new rate this year, with another $2 trillion set to move in 2007.
Result of rates increases on adjustable Florida home loans
Just two years ago, the prime rate stood around 4%; today, it is more than twice that. Consequently, payments on some ARMs will double accordingly. The current forecasts from a number of experts have defaults on those Florida home loans increasing by 10%.
“There is no apples-to-apples comparison from the kind of mortgage someone could get a year ago and what they can get today,” said Anthony Hsieh, president of LendingTree.com. “As rates rise on adjustables, there are steps people can take to reduce the sticker shock, but they’re probably not going to be too happy with what they have to swallow now.”
For someone who purchased a home using an ARM, there is plenty of bad news if they need to consider a refinance Florida home loan now.
It starts with current interest rates. Moving to a 30-year fixed-rate mortgage now means looking at rates over 6.5% - and the longer an owner waits, the more he or she is likely to lose in the transition. However, if the house was purchased recently - and with the ARM keeping payments low - there hasn’t been much equity build-up; if the home is in a market that is now cooling down, the owner’s equity is further impaired.
“People were gambling that their income would get to a point where it was high enough to pay for the home at some point,” says Greg McBride, senior editor at Bankrate.com. “They also were gambling that the market would help them build enough equity that they could refinance if they needed to. Now they may need to, and those gambles aren’t paying off.”
What a borrower can do
Some of these borrowers will have to default. Others will downsize, or change neighborhoods, in order to get a mortgage that’s more affordable.
Unfortunately, there’s a problem with that “smaller house” strategy too, at least in markets where prices are on the decline. A homeowner who put little down and who built little equity– and who lives in a market where prices are on the decline - may find that a small step back is not sufficient to actually cut Florida home loan payments.
Take a look at your mortgage paper work in order to see how deep of a hole you may soon be in. Refinancing doesn’t always need to be the solution, but study rates closely and try to make a decision before any resets cost you dearly.
