Nearly one in ten mortgage owners owes more on that loan then their home is worth. Their numbers may be growing, but help may be on the way soon.
Capital Hill is busy at work organizing aid legislation that, according to a New York Times (NYT) report, could “help as many as 1.5 million homeowners by refinancing riskier adjustable-rate mortgages into traditional 30-year loans.” Confused about the difference in the two home loan structures? You are not alone. Here are the key differences between the two mortgages.
An adjustable-rate mortgage is a home loan that is typically paid out over 30 years. The interest rate on the loan, which is determined by the market or the lender, varies based on terms of the loan (often known as the "fine print"). The adjustments take place over a set period of time, depending on the type you have, such as 1-year ARMs or 5-year ARMs. And because the loan is adjustable its rate can increase or decrease over time. On the other hand, a traditional mortgage, also known as a fixed-rate mortgage, charges one locked-in rate each year. It is preferable for some because there is more stability.
Recently, an adjustable-mortgage rate became an affordable means for lower-income home shoppers, because the loans usually offered bargain rates for the first year or two. Often times, lenders would compensate for those initial cheap rates, by jacking them up soon after. That is because with an ARM, the interest rate can increase over the lifetime of a loan, and depending on the type of loan, could vary drastically from the starting interest amount. This is a huge difference from a traditional loan that offers a fixed rate throughout the lifetime of the loan. Homeowners looking to partake in purchasing during the real estate boom would oft-times seek out ARMs, and their (initially at least) tempting low rates.