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Are Adjustable-Rate Mortgages As Dangerous As They Sound?


If you are old enough to remember the housing market crisis of 2008, you probably remember the news reports and think pieces blaming adjustable-rate mortgages for many of the instances of Americans losing their homes due to mortgage foreclosure.  In fact, adjustable-rate mortgages were only part of the problem; many lenders aggressively marketed mortgage loans to people whose financial circumstances were such that they would have struggled to keep up with mortgage payments whether the interest rates were fixed or adjustable.  Despite what clickbait news might have you believe, adjustable-rate mortgages are not a one-way ticket to foreclosure, although they are riskier for borrowers than fixed rate mortgages.  If you are struggling to keep up with mortgage payments and are worried about foreclosure, contact a Boca Raton foreclosure defense lawyer.

Don’t Choose an Adjustable-Rate Mortgage Based on the Assumption That Your Financial Situation Will Change for the Better

When you take out an adjustable-rate mortgage loan, the interest rate is guaranteed not to change for a certain period of time (usually several months or a year), but after that, the interest rate can increase or decrease according to the current circumstances of the market.  The trouble with adjustable-rate mortgages is that, early in the life of the mortgage, when the principal balance is high, an interest rate increase of several percentage points can increase your monthly payment enough to make it unaffordable.  Therefore, you should not choose an adjustable-rate mortgage based on overly optimistic predictions about interest rates continuing to decrease over the next few years or about your ability to sell the house before the interest rate becomes subject to change.  Selling a house is always harder than you expect it to be, and changes in the interest rate are so hard to predict that not even professional economists can always predict them accurately.  The chances are at least as high that you will be stuck with a house you can’t sell and a mortgage payment you can’t afford.

When Adjustable-Rate Mortgages Are Not So Bad

If adjustable-rate mortgages caused financial ruin to everyone who borrowed them, they would have become so unpopular that lenders would have stopped offering them.  If you are in a strong enough financial position, an adjustable-rate mortgage cannot become so unaffordable that it leads you on the path to foreclosure.  You should make a budget that assumes that the interest rate on your mortgage will increase, and you should only borrow the loan if you will be able to afford the increase.  Likewise, you should pay down the principal as much as you can before the interest rates become subject to change, so that a big increase in interest will be applied to a smaller principal balance, thus sparing you an unaffordable monthly payment.  From this perspective, an adjustable-rate mortgage can be good if you have a high income, but you don’t have enough money in savings just to put the money toward a bigger down payment.

Preventing Foreclosure Starts Before You Take Out a Mortgage Loan

A foreclosure defense lawyer can help you find your way out of mortgage trouble.  Contact Nowack & Olson, PLLC for a consultation.

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