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A lot of people on here lately have been saying "Do not get an ARM!" and a lot of people are foreclosing because of interest rate changes due to ARMs and whatnot... the question I have then is: why can't you just refinance a new mortgage before 5 years is up on a 5/1 ARM? Why don't the people with rising payments due to their rate changes refinance? I must be missing something here...
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Quote:
Originally Posted by robwmu
A lot of people on here lately have been saying "Do not get an ARM!" and a lot of people are foreclosing because of interest rate changes due to ARMs and whatnot... the question I have then is: why can't you just refinance a new mortgage before 5 years is up on a 5/1 ARM? Why don't the people with rising payments due to their rate changes refinance? I must be missing something here...
The answer is that many of them cannot because they do not have the equity in their homes due to the downturn and high leverage loans and because of the tightening of lending standards, specifically with regards to loan to values, credit scores, and income documentation. If it was that easy then there would not be an issue.
That was a harsh and rude statement. I can't believe you would say that.
It's the truth.
I had one family try to sue a mortgage company because they did not grasp the concept of what an ARM is. They complained about how they never were informed their mortgage payments would reset to a higher amount.
I don't see how a lot of people thought an adjustable rate would be a good idea. My conversation with the mortgage guy when I bought in 2004:
Him: So basically there are fixed (15/20/30 year) mortgages available, and some adjustable ones that reset to a different interest rate in 3 to 5 years.
Me: I've been reading that interest rates are at historic lows right now. Is that true?
Him: Yep.
Me: So why would anybody want a mortgage where they're more or less sure the payment will go up in a few years?
Him: Hmmm.... good question.
Me: I'm going 15 year/fixed.
I understand that people thought they'd be able to refinance later or sell before the thing reset, but that kind depends on the whole market not coming down like a house of cards before they can do that. Kinda reminds me of playing hot potato or something. Better sell before things change or you're stuck holding the bag!
I had one family try to sue a mortgage company because they did not grasp the concept of what an ARM is. They complained about how they never were informed their mortgage payments would reset to a higher amount.
What do you do for a living where you have a family try to sue a mortgage company?
why can't you just refinance a new mortgage before 5 years is up on a 5/1 ARM? Why don't the people with rising payments due to their rate changes refinance? I must be missing something here...
Here are the reasons why people don't refinance.
1. People are not qualified or ignorant about refinancing. The other posters touched this.
2. Refinancing is not free. There's a fixed closing cost.
3. Suppose refinancing. What rate will they refinance at? Probably higher than their initial rate 5 years ago. Why would they do refinance at a higher rate? It's pointless. Refinancing ARM is not a good idea because ARM resets the rate itself.
ARM is less riskier than fixed rate mortgage from the lender's perspective. That's why lenders offer lower ARM rate.
As a borrower, if you understand this risk, then it's worth taking ARM because of the lower rate. Or, if you are certain that you will live in the house for less than 5 years, then 5/1 ARM is better.
This mess caused by ARM is due to the fact that people stretched to the limit using initial "teaser" rate 5 years ago. Fast forward 5 years, now with lower house value and higher adjusted rate, people can't get refinancing or make payments.
Less riskier? How's that possible if the mortgage will adjust with new payments?
Lenders offer lower rates on ARMs because
1. Interest rate will most likely be higher when the ARM adjusts
2. Interest rate is based on an index that flows with the market
3. You're more likely to refinance the mortgage with the current note holder due to the new payment rising.
Quote:
Originally Posted by acegolfer
Here are the reasons why people don't refinance.
1. People are not qualified or ignorant about refinancing. The other posters touched this.
2. Refinancing is not free. There's a fixed closing cost.
3. Suppose refinancing. What rate will they refinance at? Probably higher than their initial rate 5 years ago. Why would they do refinance at a higher rate? It's pointless. Refinancing ARM is not a good idea because ARM resets the rate itself.
ARM is less riskier than fixed rate mortgage from the lender's perspective. That's why lenders offer lower ARM rate.
As a borrower, if you understand this risk, then it's worth taking ARM because of the lower rate. Or, if you are certain that you will live in the house for less than 5 years, then 5/1 ARM is better.
This mess caused by ARM is due to the fact that people stretched to the limit using initial "teaser" rate 5 years ago. Fast forward 5 years, now with lower house value and higher adjusted rate, people can't get refinancing or make payments.
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