In the past few weeks, a lot of people have been refinancing with new mortgages that have adjustable rates and keep monthly payments low.
People are refinancing earlier this year to keep their payments the same. This is because their monthly payments have gone up sharply and they need to get cash out of their homes.
When the loan rate goes up, your income will have gone up enough to cover the higher payments.
Most of the time, the interest rates on these mortgages are set artificially low for the first few years of the loan. After that, they are reset to the current interest rates.
The bet for people who wanted to borrow money was that interest rates would stay low. Now, the first big wave of the loan boom is topping out at more than $300 billion in adjustable-rate mortgages. This is about 5% of all mortgage debt that is still out there.
For example, when an ARM goes from 4.5 percent to 6.5 percent, a typical borrower with a $200,000 loan could see his monthly payments go up by about 25 percent. In total dollars, that means a jump from $1013 a month to $1254 a month.
Instead of paying more now, many borrowers are getting a second or third adjustable-rate mortgage to avoid paying more now.
So far, only a small number of people have refinanced their loans in this way, but mortgage industry experts think that number will go up dramatically in 2007. By doing this, these people are delaying the shock of higher payments for at least two or three years, if not longer.
For now, this mini-boom in debt consolidation is easing worries that rising interest rates and higher monthly payments might force some borrowers to lose their homes or cut back on other spending.
This refinancing is also a way to double down on a bet that home prices will continue to go up. If the value of the home drops closer to the amount of the loan, it could make it harder to refinance, which could lead the homeowner to either put more money into the home or sell it.
There are many different kinds of adjustable loans. Most of them start out with low, fixed interest rates, and many of them let the borrower pay only the interest on the loan or even less than that. After the introductory period is over, lenders can raise interest rates and ask for bigger payments.
