So, in order to buy a home over the past couple of years, more and more people have turned to “exotic” loans. You know, interest only loans, and option ARMs.

Option ARMs are where buyers have a choice of payments to make on their mortgage loans. Borrowers can pay the typical payment, which includes principal and interest, or they can pay interest only, which delays the payment of any principal, or they can pay less than that, and have the remainder due pushed off into the future, when their payments will spike.

Presumably, those choosing to make the last type of payment are hoping they will sell their homes before they end up with the higher payments.

Um, yeah. Except, some people are going to face the fact that, 1) a slower market means they might not be able to sell, as quickly as they’d like; and, 2) they may end up having to sell their homes for less than they paid for them, meaning they will have to write a big, fat check to their bank.

Here’s an exciting situation someone may be facing, in the near future:

A model letter that Countrywide provided includes this hypothetical example of what could be ahead for a California homeowner making only minimum payments on a $402,000 loan. The current full interest rate on the loan is 7.6 percent, but the borrower has been paying just $1,348.47 per month, far less than what’s needed to fully amortize the mortgage over its 30-year term.

If the loan reset at today’s rates, the letter explains, the full payment required would be $2,887.50 — more than double what the homeowner has gotten used to paying. Future reset rates could be even steeper, making the potential payment crunch worse.

Now, it’s all well and good for you to say, “Oh, I don’t feel any sympathy for these people, they tried to beat the odds, and they tried to buy a home they couldn’t afford, otherwise. It’s their own fault, if they can’t make the new payments.”

Yeah, you could say that. If you’re a mean person.

To Avoid Reset Shock, Plan Ahead – By Kenneth R. Harney, The Washington Post

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Updated: January 2018

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