You will probably being hearing this a lot, if you haven’t already, about the second wave of foreclosures to hit the real estate market. Most people thought that all the foreclosures are credited to the subprime mortgage meltdown and, while this is currently true, there is a second toxic mortgage product ready to bring in another wave of foreclosures.
This second mortgage product is called an ‘option adjustable rate mortgage‘ or ‘option ARM’. Most people who got option ARM loans did so to keep their monthly payments low and were banking on the continuing rise of property values. Option ARM’s allowed borrows to pay only a small portion of the interest on their loan every month which if it’s less than the accruing interest, there is negative amortization, which means that the unpaid portion of the accruing interest is added to the outstanding principal balance. Simply put that these people are screwed because their equity is (or has) disappeared and their monthly payment is not enough to pay off the interest.
These option ARM’s are projected to start resetting in April and will in most cases result in higher mortgage payments while the homeowner’s equity has disappeared. This could easily result in fueling a self-sustaining cycle of foreclosures that will continue to drive down property values.
If you don’t know exactly what kind of mortgage you have, PLEASE ask! It’s inevitable that these option ARM’s will bring a new wave of foreclosures to the Arizona real estate market. However, there are options for homeowners to minimize the effect, for example; mortgage modifications, short-sales, bankruptcy, and more.
