Adjustable Rate Mortgages

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Is the housing boom going bust because of increased interest rates? That may be the case. One in five homeowners with a high-interest adjustable rate mortgage was at least 30 days late with payment at the end of last year and after 90 days foreclosure is in sight.

Most people who buy a home choose to lock in an interest rate on a loan. But 10 million Americans carry an adjustable rate mortgage, which means their interest rate fluctuates.

"The interest rate is typically lower when they start out, and the disadvantage is of course your running a risk of rising interest rates," Janelle Carver with College Station's Cornerstone Mortgage Company said.

Adjustable rate mortgages are risky, and now more expensive.

"In November interest rates were on a 30 year fixed rate, they were running at about 5 1/2 percent," Carver said. "Right now they're at 6 1/4 percent."

And there may be no relief in sight. The Fed recently raised interest rates for the 15th time since June 2004, and at least one more increase is likely.

Adjusted rate mortgages have drawing power, because some offer interest only payment options or interest rates below two-percent for a certain amount of time. The shock comes after the grace period, when loans can reset to higher rates.

"You just need to be very careful, you need to read the fine print on adjustable rate mortgages," Carver said. "If you’re not comfortable or not familiar with your lender or their not referred to you, I would suggest getting an attorney just to make sure."

A good tip, if you decide on an adjustable rate mortgage, make sure you can handle it when rates go up.