Homeowners Pinched By Adjustable Rate Mortgages

With interest rates on the rise and the real estate market in a slump, adjustable mortgage rates are skyrocketing, and the high cost of low interest is turning the American dream into a nightmare for some.

After five years of an adjustable rate mortgage, one couple sold their home and wound up owing $15,000 after they sold. The couple's real estate agent said they were paying the lowest option every month but they were adding money to their principal balance every month.
"Adjustable rate mortgages are attractive to families with little to no credit. They don't understand these loans," agent Mike Toste said.
Toste said families are drawn in by the low payment option, not realizing they're only paying interest on their loan.
As interest rates rise, the mortgages adjust, sending mortgage payments skyrocketing.
"They get into these loans and they end up falling delinquent because they just can't afford them anymore. They're not going up $200 to $300, but $800 to $900 -- sometimes $1,000 a month," Toste said.
Real estate records in Sacramento County show more than 7,000 foreclosures in 2006 alone.
"Out of about 310 active homes for sale in Antelope, there are 57 homeowners that have their properties listed as short sales," said Toste.
Simply put, a short sale means homeowners can no longer afford their loans. They owe more than their houses are actually worth.
"The unfortunate thing about that is people are borrowing from retirement accounts and exhausting every last penny they have to try and keep this mortgage current. They're just running right into the wall because eventually they're going to get to that result where they have no money. And then they're forced to sell their home," Toste said.
Toste said he highly recommends avoiding adjustable-rate loans, opting instead for fixed-rate mortgages.
"Your payments may be higher but you won't have to worry about that payment skyrocketing through the roof," he said.
Borrowers are not the only ones facing financial hardships. Several large lenders who specialized in sub-prime loans are also facing tough times.