Taking the Fear Out of Interest-Rate Resets

Some time in the next two years, your adjustable-rate mortgage will reset, unleashing fire from the sky and a flood of wolves that will cause you to lose your home.

Okay, not really. In all the media hoopla about ARMs and foreclosures, it's interesting to me that nobody talks about mortgage-rate resets that might be quite survivable.

Because there are resets, and then there are resets. Much like over the past decade, where we've had to sort "fat" into "partially hydrogenated vegetable oil" and "DHA-rich Omega-3 fish oil" we're going to have to start sorting "interest rates" into their different types.

And the "interest rates" on your home loans are actually not quite the same thing as the "interest rates" that the news people are always reporting that the Federal Reserve is cutting or not cutting.

If you have an adjustable-rate mortgage (or ARM) as your first mortgage, for example, those rates are probably based on an index. Two common ones are LIBOR and MTA. The LIBOR (London Interbank Offered Rate) swings often, as it tracks what London banks charge each other to borrow money. The 12-month Treasury average (sometimes called the MTA, or, more perversely, the MAT) is a rolling number based on U.S. currency. It resets once a month, so it smooths out wild fluctuations in "interest rates."

So obviously when you hear that "interest rates" are going up or down, and you want to know what's going to happen to your adjustable mortgage in a few months or a year, you want to find out what flavor of "interest rate" it's based on.

Of course you'll have to dig into your files for the original mortgage agreement, because your monthly mortgage bills from the bank don't tell you (at least mine don't).

But it's worth looking up before you freak out, because that loan that you have at 4.625% (to take a rather personal example) will reset, but it isn't necessarily going to go to the interest rate on your credit cards (which for me is 16.150% as I write this) or even the "prime rate" (which is 7.75% as I write this).

So figure out what your "interest rate" is going to be before you book yourself a trip to the poorhouse. A little belt-tightening now might help you cope with a mortgage-rate reset down the road. And put down that donut and go get yourself something healthy to eat.

Comments

[oldpotsmuggler]

The loan you have at 4and 5/8ths has a margin of 2.25% and a first change cap of 2%. The subprimers have loans at 6.5% to 8.5% with margins of 6% or more resetting off of indexes of roughly 5% and with no first change protection. Going from 7% to 11% is a realistic possibility for many people.

[mrcontinental]

Yep. Your scenario is a far more accurate prediction of the subprime ARM resets that are coming in early 2008.

[CharlesMac]

According to mortgage industry statistics, one $trillion of mortgages will reset over the next 12 months. About 80% are sub-prime agreements.

Oil prices are 20% above Katrina days. Food commodities are spiking to record highs.

Personal household debt is at record highs.

Nobody knows if the stock market is, or is not, part of the private equity bubble.

Consumer spending is the major driver of the GDP.

Here's hoping the resets don't stress the credit markets further, and people make it through the resets with a minimum of pain.

On the other hand, the coming year could be very "exciting" for us all.

[usna73]

Ms. Rogers, you ain't seen nothing yet. The bulge in the snake of the reset bubble comes largely in the first half of 2008. These folks who couldn't afford the houses trhey purchased will come to pay the piper. They can't. The foreclosure rate is going to soar. The inventory of homes for sale will go upwards past 12, maybe 15 months taking with it the prices(downward), and the pseudo-profession of real estate( sales?). The false hope of wealth locked up in your house will end up exactly that: false.

[unitron]

"...go get yourself something healthy to eat."

Once you eat it, it will no longer be healthy. Better to go get something healthful to eat.

[realitytrumpsbull]

Sleeping bag
200 dollars
All-weather tent
400 dollars
Camp stove
95 dollars
A month's camping fees in the off season
250 dollars
Not getting suckered into a real estate scam?
Priceless
Some things, money can't buy...