Tick. Tick. Beware the mortgage time-bomb
We’ve all been bombarded by continous ads for mortgages that sound too good to be true. And too many homebuyers have taken the bait, biting off more house and debt than they can chew. Foreclosures are up 163% in California and things are likely to get worse according to a CNN Money article.
This is yet another example of how out of whack the real estate market is. What’s worse is there seems to be a steady supply of buyers who are completely ignorant about how much house they can afford. A mortgage friend of mine met with a single 20-something woman who wanted him to pre-approve her for a mortgage for a $500,000 loft in San Francisco. She had a few thousand in the bank, a mediocre credit score and a $42k salary. The would be homebuyer was angered when broker explained that it just wouldn’t be possible without a cosigner or her parents.
Bottom line is there’s hundreds of thousands Americans facing mortgage timebombs cause they are buying more than they can afford.
In the past two years, homeowners took out 1.3 million ARMs with teaser rates below 2 percent, according to Cagan’s research.
Of those, 21.5 percent have negative equity, where the market value of the home is less than the amount owed. The number of people in that spot could go up significantly if home prices fall as forecast or if homeowners with teaser-rate-ARMs experience job loss, illness, divorce or a death in the family, which are the main causes of mortgage default.
An ARM charges an initial discounted rate for a period of time, after which it adjusts to market levels. When some types of ARMs with teaser rates of 2 percent or less reset, the rates are likely to jump to more than 6 percent - and even as high as 9 percent.