Nontraditional Loans Causing Trouble For Homeowners After Housing Boom Busts

(The housing boom of the past few years caused a lot of people to buy houses and get into mortgages they probably would not have in a normal market. )

And when it comes to nontraditional mortgages or "exotic" loans, those became the most prevalent in a market where just about anyone could get approved for a loan.

But now things are changing as many of these loans begin to adjust or reset, and homeowners could be making mortgage payments that are double what they were before. This could cause a wave of foreclosures in the near future as people struggle to make their new payments with the higher interest.

An October 3, 2006 article by Marilyn Lewis of MSN.com, "Ouch! Your house payment just doubled," looks at how these adjustable-rate mortgages are going to skyrocket as the rates reset.

"The owners of about 7.7 million adjustable-rate loans taken out in 2004 and 2005 -- about $1.89 trillion worth -- face higher house payments in the next two to three years, says Christopher Cagan, the research director for First American Real Estate Solutions of Santa Ana, Calif. That's about a fifth of all mortgages outstanding in the U.S. right now."

"These are not traditional mortgages. Rather, they are complicated, sometimes bafflingly intricate contracts loaded with changing rates and back-end details that trip up unsophisticated borrowers. One category, sub-prime loans, is aimed at the poor, minorities and people with bad credit -- in other words, those who can't, or think they can't, get a loan by other means."

There are a variety of ARMs out there, and some are causing more trouble than others, and some are more risky than others. However ARMs are not bad loans, and they are actually a great mortgage product for those who understand them.

Some of the loans that can be the riskiest for uninformed and uneducated borrowers are teaser ARMs, sub-prime ARMs and option ARMs. The reason why these are the riskiest is because they have features that allow the borrower to pay the interest only, or other extremely low minimum payment options.

These can make it so the borrower owes more in the end than they did in the beginning, and if you do not know how to handle your money correctly, the results of these types of loans can be disastrous.

People who took out a mortgage before 2003 are probably the safest in these situations because they have built up enough equity to protect themselves.

Those people with little or no equity are probably in for the worst since they have nothing to borrow against, and could owe more than their home is worth in terms of value.

If you find yourself in the unfortunate situation of getting over your head with any type of mortgage, your best bet is to act now, because most of the time your problems can be fixed.

Your first step should be to look into refinancing or find a non-profit credit counseling agency near you to discuss your options.

"If you've got the credit needed to refinance, this is an excellent time for it: Rates are historically low in general, and they've dropped a half-point since a recent peak to 6.31%, according to Freddie Mac's Primary Mortgage Market Survey. The low point was 5.23% in June 2003, but mortgage rates have bounced around plenty since they began dropping from 7% in early 2002. Don't assume you can't get a better rate. Call lots of banks and mortgage brokers to learn all your choices."

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