Well, the government said today that new homes are selling at the second highest rate on record. And as most people know, very low mortgage rates have helped fuel the housing boom in the country. But now those rates have begun to rise, and for a lot of people, that is going to be painful.
Richard and Juanita Greene just took out a 260,000-dollar mortgage to buy this New Jersey home. The only way they could afford it was to get an adjustable-rate mortgage.
"They gave us that flexibility to have the low interest payments and allowed us to realize our dream."
Twice as many home buyers are getting adjustable mortgages as one year ago. The reason is they are cheaper than fixed-rate mortgages.
"And they get excited, they see the home, they really like it, they want it for their family, and they don't really think about the adjustments that are to come."
The problem with an adjustable-rate mortgage is when interest rates go up, so do your mortgage payments. And interest rates are going up.
"Low income and minority consumers are least aware of the interest rate risks of adjustable-rate mortgages, so that those mortgages represent ticking time bombs for those households."
Example : If you have a 200,000-dollar mortgage and interest rates go up two percent, your annual payments spike by more than 3,000 dollars. This is more than many families can afford. And if a lot of homeowners default on their payments, it could damage the whole economy. "A wave of foreclosures not only hurts consumers who lose their homes, but it does harm, financially, the investors who purchase those mortgages."
Adjustable-rate mortgages can save you money if you expect to move within a few years, or have a financial cushion to absorb changes in interest rates. The important thing is to know what you're moving into.