Homeowners Pinched by Rising Interest Rates
7:36 am in Cost of Living, Real Estate by Jane in Redondo
Today’s Wall Street Journal talked about “Payments on Adjustable Loans Hit Overstretched Borrowers; ‘Budgets Are Out of Whack’” (subscription) and described a homeowner who refinanced her loan with the (soon to be infamous) adjustable rate mortgage and is now in trouble. The homeowner started with an ARM at 2.35% in 2004 and by 2006 the ARM had crept to 8.75%.
Here around the Southbay, the housing market may have “softened” but house prices are by no means decreasing. Yes, I do see lots of signs with an added “Reduced Price!” in our neighborhood, but that was because the house prices were ridiculous to begin with. The “Reduced Price” was still quite high by most standards – for example, a house in our Redondo Beach neighborhood under 2000 square feet of living space was asking for $729,000 “reduced price.”
I was glad I didn’t buy into the “cash flow management” rationale of ARM when we were purchasing our first home. We went after the fiscally conservative option of a fixed interest rate loan. It was a couple of percentage points higher than the ARM at the time, but at least we knew what we’d be paying month after month.
Homeowners who cannot refinance again or face a heavy early withdrawal penality are getting into trouble.
