Quick Mortgage Ques..ARM Issue

[jond]

With a 5 year ARM, you get a fixed rate for 5 years then the rate starts adjusting afterwards based on some index plus a margin such as LIBOR plus some fixed percentage. It's not uncommon in today's market that the adjusted rate is lower than a 30 year fixed mortgage.

Two questions:
1. With a 5-1 ARM, what happens in 5 years IF your home is worth a lot less than your mortgage? Won't the bank force payment of the difference?

2. What happens if interest rates are 3x? Your monthly payment will skyrocket, no? The monthly payment on $300,000 @ 5% is VERY different than the monthly payments on $300,000 at 15%. More than double...

Wow, do you really expect another bust in the housing market. If the prices in my area fall another 30-50% I'll be able to get into a 6,500sq/ft home for under $500k. The only problem is that the house I built will be worthless.

I always come back to this graph.
The only thing I would change on it, is I would re-compute the average off 1999 adding 3% inflation for 11 years bringing the 100k benchmark to 138k.

The average home price across the US is I think around $175k, so another 20%. Although I would assume an overcorrection past the average, so maybe 30%.

It doesn't matter if you don't HAVE to refinance or sell though. Payments are the same, and you either have to rent or pay a mortgage so just don't sell, or if you're not yet underwater, maybe sell now, I don't know...

 

[Kitaka]

Here's a great historical summary of various mortgage rates. Graphs are in varios time formats (week. month, year) over extended periods

LINK:http://mortgage-x.com/trends.htm

and

http://www.mortgagefit.com/rates/

 

[W]

Two questions:
1. With a 5-1 ARM, what happens in 5 years IF your home is worth a lot less than your mortgage? Won't the bank force payment of the difference?

2. What happens if interest rates are 3x? Your monthly payment will skyrocket, no? The monthly payment on $300,000 @ 5% is VERY different than the monthly payments on $300,000 at 15%. More than double...

1 - You don't have to pay any difference if your home is worth less than your mortgage after 5 years. How would the bank know?

2 - Obviously, if your rate goes up, you pay more. There's no doubt that having an ARM exposes you to the risk of rates rising or falling. I think we all agree that it's not for everyone.