ARM Resets Ahead
The turmoil that rocked financial markets over the past few weeks was initially sparked by problems that originated in the sub prime housing mortgage loan market.
Over the past few years interest rates have been so low, credit standards set so low, and home loan funding so easy to obtain, thanks to the maneuvering of the US Federal Reserve Bank, that a huge number of housing loans were made to people who, at best were and are poor credit risks.
Adjustable Rate Mortgages (ARMs) were taken out by a lot of these sub prime borrowers as for a short while, perhaps two years or so, monthly payments are lower than with conventional mortgages. However, when the ARMs are adjusted after the introductory period the resets can be for substantially higher monthly payments than the initial monthly amounts.
The national foreclosure rate has already reached record levels as some of the borrowers did not fully understand the terms of the ARMs and can not afford to pay the higher monthly payments now due. The higher foreclosure rates are contributing to a falling housing market.
In October 2007 a high number of ARMs are due to be reset. This process will continue well into 2008. The implications for the economy as a whole are not pleasant. A depressed housing market can weight heavily on overall economic activity.
Now would be a good time to “clean your financial house” in preparation for what could be a tough time ahead. While no one can accurately predict the future the prospect for millions of Americans losing their homes does not paint a pretty picture.
Certainly it’s best to carefully evaluate your own financial situation and make some adjustments, if need be, on your own time table than be forced into hasty action at a later date.
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