On Nov 27, 2006, at 12:06 PM, joanna wrote:
> There's something I am confused about... I read in the papers that
> some people's ARMs will grow by leaps and bounds next year, but
> interest rates have only moved up, oh, 3% or so. Why would that
> make such a big difference?
The recent low in fixed 30-year mortgage rates in the US was in 6/03, 5.23%. The recent high was 6.76% in 7/06. For a plain vanilla mortgage, the monthly payments, respectively, would be $1,652.90 and $1,947.79, a difference of $294.89, an 18% increase. Not leaps and bounds, but not trivial either. But you may be thinking of the "negative amortization" mortgage, in which the first year or two's payments don't even cover the interest (with the deficiency being tacked onto principal). At a teaser rate of 3%, the monthly payment would be $1,264.81. If that reset to a 6.76% market rate, the increase would be $682.98, or over 50% - not including the increase in principal because of the deferred interest payments. That would probably bring the monthly payment over $2,000, for an increase of over 60%.
There seems to be a lot of refinancing of these teaser loans underway now, so the shock might be contained.
Doug