The Dangers of Adjustable Rate Mortgages (ARMs)
Over the last several years, adjustable rate mortgages have seen a large increase in popularity as many consumers were attracted to the initial low monthly payments offered by these loans. Lenders typically offer lower monthly payments on ARMs, but after a fixed period of time the monthly payment can either increase or decrease depending on the overall market interest rates.
Unfortunately for many, a gradual increase in market interest rates has increased overall monthly mortgage payments, and made it difficult for many to maintain their mortgage payments, contributing to a large increase in foreclosures in 2006. A study by www.realtytrac.com shows that “more than 1.2 million foreclosure filings were reported nationwide during the year, up 42 percent from 2005 and a foreclosure rate of one foreclosure filing for every 92 U.S. households.” The study attributes the increase in foreclosure filings “”¦partly by the impact of monthly mortgage payments increasing dramatically for homeowners who held some of the riskier types of adjustable rate and sub-prime mortgages”¦”
I’ve consulted with many bankruptcy clients who weren’t aware that their monthly payments could increase and made the mistake of only paying attention to what the initial monthly mortgage payment was. Refinancing with a fixed rate mortgage may be the solution, but it can be difficult to refinance, especially if you are already behind on your mortgage payments.
Bankruptcy laws do offer help for individuals facing foreclosure or unmanageable mortgage payments. A Chapter 13 bankruptcy can stop a foreclosure and give you a period of 3-5 years to payback any mortgage arrears, but you will still be required to make the scheduled monthly mortgage payment in addition to the trustee payment. For some, the monthly obligations are just too much, and a Chapter 7 bankruptcy may be the best option to allow you to “surrender” the house and walk away from all outstanding mortgage balances.