Mortgage Payment Surge Looms For Homeowners As Rate Hikes Bite

Homeowners with adjustable-rate mortgages (ARMs) are bracing for an increase in their monthly payments this year as initial low-rate terms expire amid historically high interest rates.

With approximately 1.7 million ARMs set to reset in 2024, many homeowners could see their payments nearly double, especially those who borrowed with lower interest rates over the past few years. The looming adjustment is challenging as the Federal Reserve maintains higher rates to combat persistent inflation, potentially straining households that once benefited from initial lower borrowing costs.

According to a Bloomberg report, the situation highlights the volatility and risks associated with ARMs, especially for properties priced around $1 million.

The stakes are particularly high for those facing the reset of their ARMs. As of earlier this year, the average size of a five-year ARM taken out in 2019 was about $791,100, with a starting rate of 3.3%. That setup initially resulted in monthly payments of around $3,465, excluding home insurance and property taxes. 

 Don't Miss:

• Warren Buffett once said, "If you don't find a way to make money while you sleep, you will work until you die." This high-yield real estate fund, offering an 8% yield, makes earning passive income easier than ever. 
• A new fund backed by Jeff Bezos offers a 7-9% target yield with monthly dividends. Here’s how you can invest today.

However, with the current ARM rates averaging around 6.5%, homeowners facing resets this year are looking at potentially steep increases in their monthly obligations. According to Bloomberg’s analysis, if these ARMs reset to even a capped rate of 5.3%, homeowners would still see their payments surge by nearly $1,000 a month.

That jump can push many to the brink. A survey by CivicScience found that 70% of ARM holders are concerned about meeting their upcoming financial obligations, and nearly 10% are considering delaying or defaulting on their mortgage payments once adjustments kick in.

"They could run into some trouble, especially on these large loan amounts, as their ARMs come out of the fixed period," Chris Stearns, a California-based mortgage loan advisor, said in the Bloomberg report. "Your payment's gonna almost double and it's not gonna be pretty."

Moreover, the broader impact on the housing market could be lasting.

The surge in payment obligations may lead to increased defaults or forced sales, particularly if economic conditions don’t improve or the Fed keeps interest rates elevated in its fight against inflation.

Trending: Are you rich? Here’s what Americans think you need to be considered wealthy. 

The Mortgage Bankers Association noted that the increase in mortgage rates, which have hovered above 7% recently, has slowed the pace of home refinancing. Homeowners who might have planned to refinance their ARMs to more stable, long-term loans find it less feasible as rates climb.

That leaves them with fewer options to mitigate the impending cost increases.

Those high rates impact buyer sentiment broadly, pushing the dream of homeownership out of reach for many Americans, particularly first-time buyers who are typically less equipped to handle large financial fluctuations. According to recent data, applications for new home loans have also decreased, reflecting a cautious approach from potential buyers wary of the current economic climate and its uncertainties.

The Bloomberg report noted that unless Fed policy is adjusted downward or an intervention is made to aid affected homeowners, the market could see an increase in loan defaults and foreclosures, potentially echoing the housing crisis of the late 2000s.

However, it would be smaller due to higher credit standards and more conservative lending practices post-crisis.

Analysts suggest the situation requires careful watch on the Fed’s next moves.

Any decision by the Fed to lower rates could provide the necessary relief to homeowners grappling with resetting ARMs and the broader market turbulence. However, with the central bank’s primary focus on controlling inflation, more than one rate cut this year seems distant.

Keep Reading:

• Commercial real estate has historically outperformed the stock market, but few investors have the capital or resources needed to invest in this asset class. This platform allows individuals to invest in commercial real estate with as little as $5,000. 
• Investing in real estate just got a whole lot simpler. This Jeff Bezos-backed startup will allow you to become a landlord in just 10 minutes, and you only need $100.