mortgage question

I keep reading articles about this & I even know one couple in the situation but I don't really know how it will play out.
If someone has a 3/1 ARM mortgage(I thought they said in the beginning that it was an I/O too) & their reset date is next year, exactly how high will their rate go? and how often will it change? DH was talking to a friend that said she fears they will not be able to afford their mortgage after next year when their rate resets, since the housing prices in their area have come down so much I guess a re-fi is out.
Does anyone know or understand how these programs really work? As an outsider looking in w/very little knowledge I can't understand why anyone would have taken this type of loan.

Re: mortgage question

they need to read their loan documents. There really isnt a set of standard rules. The 3/1 ARMs usually have a ceiling, where the rate can't go above a certain point, but that should be in their loan agreement.

Re: mortgage question

My experience is that there is a floor rate and ceiling rate. For the most part I have seen where the rate can't go higher than 3. If your starting rate was 5%, it cannot go higher than 8%. Which, is still a HUUUGE difference in mortgage payment.

A 450K mortgage @ 5% is $2,415.70/month

A 450K mortgage @ 8% is $3,301.94

That's a $886.24/month difference. That certainly can hurt.

Also, most loans I have seen, the reset is either monthly, every three months, or every 6 months.

I'm not sure when she bought, but maybe she should look into refinancing into a fixed rate.
Good luck to your friend

Re: mortgage question

Posted by MikesWife

My experience is that there is a floor rate and ceiling rate. For the most part I have seen where the rate can't go higher than 3. If your starting rate was 5%, it cannot go higher than 8%. Which, is still a HUUUGE difference in mortgage payment.

A 450K mortgage @ 5% is $2,415.70/month

A 450K mortgage @ 8% is $3,301.94

That's a $886.24/month difference. That certainly can hurt.

Also, most loans I have seen, the reset is either monthly, every three months, or every 6 months.

I'm not sure when she bought, but maybe she should look into refinancing into a fixed rate.
Good luck to your friend

Re: mortgage question

We had a 5/1 ARM on our last house, but that was because we weren't planning on staying there for more than 5 years. We actually just sold after being there for less than 3 years. I wouldn't have gotten an ARM if we were planning to stay. From what I remember, like the others have said, there was a cap on how high the rate could go after the 5 years. I don't remember exactly how it worked. We didn't really worry about it since we knew it wasn't going to affect us. Hope everything work out for your friend!