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Adjustable Rate Mortgage

Adjustable Rate Mortgage

I recently learned about an Adjustable Rate Mortgage where one person is having a hard time paying because his payment is going higher. We do not have that system (at least I doubt it) in my country, but in any case why would someone want to take out an Adjustable Rate Mortgage knowing that they run the risk of paying more in the end?

Mortgage Rate Adjustable

This is the problem with predatory lending - why would they offer that type of mortgage to someone who is barely qualifying at the low end rate, when they know (because they are experts) that the rates will eventually go up and this person will have a very difficult time of making higher payments? On the other hand, some folks don't even understand the terms of the contract, that in time the payments will go higher, and now they are saying they were deceived.

There are currently class action lawsuits pending in the US addressing this very issue. Some claimants are stating that they weren't aware of how high the payments could go; others, as in Texas, are claiming that ARM's are against the law to begin with.

www.consumeraffairs.org

https://www.washingtonpost.com/wp-dyn/conte...7020501415.html

We'll be seeing a lot more about this in the news going forward.

Adjustable Rate Mortgage History & Civil Business Politics

My question remains with Adjustable Rate Mortgages though: why? Is the idea that the person gets a low rate in the beginning as an incentive only or is it something that fluctuates based on the current market?

Mortgage Rate Adjustable

Both.

The nation-wide rates fluctuate based on the rates set by the (misnamed) Federal Reserve Bank, which is actually a privately owned corporation that LOANS the cash circulated in the USA. A very powerful group.

Then there are loans which start at a lower-than-market rate (called a "teaser rate") as an incentive, then rise after, say, five years. For some people, this is the only way they can actually qualify to own a first home. (This is the "sub-prime" lending business.)

Unfortunately, it's a huge trap if they do not refinance before their time runs out. What they hope for is to be better qualified to refinance at the end of the intro rate period so that they can obtain a fixed rate mortgage, or sell the house before the 5-year period expires. Not everyone can qualify that way, and now they are stuck with a house they couldn't afford in the first place.

In addition, some people are foolish enough to buy into an ARM when the rates in the US are at all-time lows! Ridiculous! You get an ARM when rates are HIGH, hoping they will come down and reduce your payment. You don't buy an ARM when rates are LOW, because they are *obviously* going to go UP.

We are going to see millions of dollars worth of foreclosures in the next five years.