A decade ago, the housing market was heading into the busiest years of the bubble. 10 years later, 100 of 1000 of homeowners are about to get a spiteful surprise. As their loans turn ten years old, they will see their monthly loan expenses reset higher in some cases more than double.
The trouble is coming for loans that had such features as adjust rates and interest-only periods that let homeowners use more than they would have been able to afford via a classic fixed-rate loan. Sub prime loans have classically been resetting after 3 years or 5 years.
A report from Jeff Adams says this problem impends for more than 700,000 borrowers who took out prime extra-large loans mortgages larger than what Fannie Mae and Freddie Mac allowed and Alt-A loans, which went to borrowers whose credit scores placed them flanked by prime and sub prime. More sub prime loans have already reset than the totality number of affected prime jumbo and Alt-A loans, but payments for the newest batch will rise far more than they did for the sub prime loans.
Because the interest rates are expected to remain low over the next more than a few years, the pain of jumps in rates won’t be the largest source of trouble. The bigger problem stems from how principal payments begin to boot in.
Borrowers whose loans reset after ten years have only 20 years left to pay down what they borrowed. That means their monthly principal payment will be higher than if they did taken out a fully amortizing loan or even a sub prime loan, which offered shorter interest-only periods.
Jeff says these borrowers probably would not advantage from loan modifications because they tend by now to be paying low interest rates, and loan modification typically require the principal to be totally amortized. This means that principal payments will kick in, no matter what, making the modified payments higher than the interest-only payments borrowers were making.
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