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The use of adjustable rate mortgages (ARMs) has increased from one quarter of all mortgages written in the 90s to one third of mortgage volume now. While ARMs can be a useful tool and an effective way to finance a home, they also need some careful consideration on how and when to use them. A recent study shows that this may not be the case with many borrowers using ARMs.

The study found that about 35 percent of people with adjustable-rate mortgages didn’t know how much the rate could increase at one time, and 41 percent weren’t sure of the maximum rate they could face. About 28 percent didn’t know which index of interest rates would be used to determine their adjustments; many others gave incorrect answers, such as the consumer price index or “the going rate.”

The study, by Fed economists Brian Bucks and Karen Pence, says people with low incomes and less education are more likely to be unsure of the terms of their mortgages.

Borrowers who take such loans often don’t fully understand the risks of eventual leaps in their monthly payments, says Stella Adams, executive director of the North Carolina Fair Housing Center, a nonprofit group that helps low-income people with housing problems.

“What they’re told (by loan officers and brokers) is, ‘Don’t worry about it because you can refinance before the adjustment hits,’ ” Ms. Adams says. But that isn’t always possible for borrowers with heavy debt loads and little equity in their homes. Part of the problem, she says, is that borrowers are too trusting: “Consumers think that if the broker says I can afford this, (then) I can afford this.”
via Arizona Central.

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1. 7% of Homeowners and 40% of Subprime Homeowners 30 Days Behind on Mortgage
2. Three Types Of Delinquent Borrowers, And How To Deal With Them
3. Robert Shiller on Mortgage Risk