Welcome to the gun-show...now show me your ARMs!
Yeah, too bad people's fascination with ARMs isn't in the fitness realm of things....it is in the financial.
Well, at least I'm here to "pump you up" with the real deal of what is going on out there...
Depending on where you are in the country, and whose numbers you use, ARMs (adjustible rate mortgages) are making up a staggering percentage of todays loan production. I have seen some statistics that say over 70% of the loans in California are ARMs...and many of those are interest only and option-ARMs (see my long post about them further down...or in the archives).
So what does this mean??? Here, I'll show you. Let's take the ever popular 2/28 loan that millions of "subprime", "alt-a", "non-conforming" borrowers have jumped into the past few years. Most of these have a 1.5% annual cap on the rate increases, and the index is usually the 6-month LIBOR plus the margin.
Let's just use a $300,000 loan amount as an example...and let's say the bwr got the loan a year or so ago when rates were "smokin".
$300,000 at 5.25% I/O 2/28 ARM
Payments for 24 months = (300,000 x .0525) / 12 = $ 1,312.50 a month
Now lets look at those payments when they adjust. Not only do the payments adjust, but you have to start paying the PRINCIPAL off as well (unless you refi/sell/foreclose). Let's say the rate jumps to 6.5% (could be higher) and NOW you have to amortize over the next 28 years because you didn't pay any principal during the 2 year I/O period.
Now, I'll compute the payment from my old-school HP 12c calculator...if you are smiling...you know what I'm talking about...you love'em or hate'em!
Payments when it adjusts = $ 1,941.05 a month
So the payment JUMPS $624.50 in one month!
NOW, let's assume that when you "qualified" for the loan, you met the 50% DTI (debt to income ratio). Now that your payment jumped 48% in one month, what kind of dent does that put into your cash flow?
But wait...what if you happened to have gone STATED to meet the 50% DTI requirement because you didn't make enough money to qualify for even the I/O payment??? Now what is your DTI??
I have no idea....because I don't know how much you lied your a@@ off to get the loan in the first place!
Well, I think you get my point. Now multiply this scenario by the tens of thousands. Sure, some will have sold, refi'd, or otherwise could have afforded the house in the first place...but is there any chance that maybe a few people cannot handle a $600 jump in their mortgage payments?!?!?!
Keep in mind...I only used a 300k loan amount. I see plenty of people doing this on loans from 500k to 900k and above.
Multiply the pain accordingly...