Sonoma Housing Bubble

Pulling the cork out of Sonoma's bubbly housing foolishness

Wednesday, May 17, 2006

Adjustments in One Direction: Up

(MONEY Magazine) "As many as 3 million homeowners holding more than a trillion dollars in adjustable-rate debt will face an interest-rate adjustment in the next two years, according to the Mortgage Bankers Association."

"Assume that adjustment will be in one direction: up."

"As the real estate boom inflated home values all over the country, millions of would-be owners did whatever it took to join the party: bid well over the asking price, hit up parents for a down payment and resorted to ever more creative financing tools, from short-term adjustable-rate mortgages to exotic interest-only option-payment loans."

"Now that the party seems to be winding down, many of those borrowers are going to be left with a messy cleanup."

"If you shaved your monthly payments by putting off paying principal, your day of reckoning will be that much more intense. Mortgage rates are at their highest in four years, and with rates on ARMs nearing those on fixed loans, you won't find any easy or cheap solutions."

'"There are going to be people getting into trouble," says Christopher Cagan, the director of research at data provider First American Solutions. He's found that nearly half of borrowers who took out ARMs in the past year have 10 percent or less equity in their home, making it hard for them to refinance easily or sell at a profit, especially if prices in their local market have softened."

"If you are nervous about what your mortgage payments might look like next year or next month -- or have already seen them increase by hundreds -- now's the time to do some serious calculations."

The three families you are about to meet are grappling with these issues. Read on to find out how experts suggest they survive the rate hikes coming their way.

Toni Lapp: This single mom should hope for a rate turnaround. Risk: 53% increase in monthly payments.

Aaron and Lacey Blank: Young first-time buyers need to build equity. Risk: 81% increase in monthly payments.

John and Mona Ramonetti: These risk-takers should refinance to a fixed loan. Risk: 68% increase in monthly payments.


At 5/17/2006 02:02:00 PM , Anonymous tom stone said...

i suspect a lot fewer than half of those who got ARMS in the last 3 years could qualify for a refi to a fixed rate...and many with a fixed first took out helocs (helocs for helots!) which adjust and ran them up to the point of 0 equity...and considering the likely correction this year many who think they have plenty of equity will see it disappear by year end,not to mention the prospects for '07...

At 5/17/2006 03:45:00 PM , Blogger moonvalley said...

I love the guy who just took a look at the index for the late 80's early nineties. Too bad he didn't loook further back to the early 80's when I bought a place. Interest rates were about 18%, because we had great credit plus we put almost 60% down in cash we qualified for the previous owners "great" rate of 11% and were the envy of our friends.
Those rates would curl his hair, and it could happen again, why not?

At 5/18/2006 04:11:00 PM , Anonymous tom stone said...

mv i have a number of small bets out that the rate will be 10% or more by october of 07...hard money rates for subprime borrowers are already as high as 11.5% from major lenders.i think 15% or more is certainly possible within a few years


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