The Squeeze is On
"With interest rates on the rise, and the housing market showing signs of a downturn, homeowners are starting to feel the squeeze."
"For many, the trouble started when the market was booming, and buyers flocked to interest-only loans in order to find their way into a bigger home. These interest-only loans were an attractive option while rates were low, but once the fixed term ends, monthly payments are likely to jump up to twice the previous amount."
"In the worst case scenario, homeowners could end up owing more money than their home is worth. The Early Show co-anchor Harry Smith had the story of one family that is caught in the squeeze."
"Meghan and Vince Jordan recently moved in to their brand new dream home in Denver, but they have one big problem — they can't get rid of their old one."
'"A year ago, we don't think we would have been in this situation. We think our house probably would have sold," said Meghan Jordan. The Jordans are highly leveraged, they have two kids, two mortgages and daycare costs. And their quandary is not unusual."
"Their home has been on the market since August, and so far they have dropped the price by $35,000. Now, the Jordans have taken a bridge loan to cover the costs of owning two homes. Even more nerve racking, they've taken out an interest-only loan, so for five years they are only paying interest. With rates on the rise, they are worried they took a bad risk."
"Rates on 30-year mortgages rose this week after the Federal Reserve pushed a key short-term rate up for the 15th time and indicated that more rate increases were possible."
"Mortgage giant Freddie Mac reported Thursday that rates on 30-year, fixed-rate mortgages averaged 6.35 percent this week, up from 6.32 percent last week. The increase pushed rates to the highest level since they hit a 2 1/2-year high of 6.37 percent the week of March 9."
The market was a little surprised at the (Fed's) comments which implied more tightening in the future," said Frank Nothaft, chief economist for Freddie Mac.
"That raised the expectation that inflation may be more of a threat than was previously thought, and that kind of thinking promotes upward pressure on mortgage rates like we saw across the board this week," Nothaft said.
"Some of the riskiest of loans -- the subprime ARM loans -- showed an increase in delinquencies at the end of 2005. The U.S. averaged a 12.6 percent delinquency rate in subprime ARM mortgages as of December 2005, which was up from 10.7 percent the year before."
"The last year was tough on mortgage holders. Nationwide, borrowers faced higher interest rates and fuel costs and mortgage delinquencies rose 4.7 overall, hitting its highest point since the middle of 2003."
"It's what we have been expecting," a Mortgage Bankers representative said. "There are so many new loans out there that haven't been seasoned. Interest rates may play a role in the future, but right now, it is just the economy -- job loss and low (home) appreciation."
What? I thought real estate only goes up?
"Rising mortgage rates are expected to cool off the extended boom in housing that saw sales of both new and existing homes set records for five consecutive years. Analysts are looking for sales to drop by around 6 percent this year."
"Greg McBride from Bankrate.com joined The Early Show Thursday to discuss ways for homeowners to protect their financial health. "
First, a look at the risk that comes with an interest-only loan. If, for example, a borrower took an interest only loan of $200,000 in 2003, their monthly payment would have been around $667. After the first adjustment, those monthly payments could jump to $1,415 in 2006.
"That's why (interest-only loans) are right for some but wrong for a lot of people. That payment increase is not something the average American household can handle."
"If you find yourself in this predicament, McBride says you should refinance out of harm's way."
McBride stresses the importance of cutting into the loan balance and starting to build up what he calls an equity cushion, something the Jordan family doesn't have."
"They were 100 percent leveraged," he said. "They don't have any wiggle room. They need to start chipping away at the loan balance, building up an equity," which is so important because "if you have to sell suddenly, that's what's going to absorb your transaction cost."
"Another important piece of advice from McBride: don't borrow against home equity."
"Finally, he recommends living in your home for the long haul. That means accepting the idea of your home as a long-term investment, not a vehicle to get rich quick."