Greg and Luisa Holmes bought into the promise of the real estate boom.
“When I first walked in the door, I knew I was at home,” says Greg, recalling the moment three years ago when they bought their house.
They were enticed by a new breed of mortgage — exotic, non-traditional, interest-only, option ARM — different names for low-cost, high-risk loans.
“I just feel like we were not informed properly of all the loan terms,” says Luisa.
They started with a “teaser rate,” just $1,700 a month. They thought it was fixed, but it wasn't. Rising rates and deferred interest have now ballooned that payment to $3,700 a month. They can't pay it, and they're not alone. Credit counselors say they're getting 10 times the concerned calls they used to.
“You need to really look into your financial situation, not listen to what mortgage brokers or lenders are telling you,” says Ting Ting Zhang, a mortgage foreclosure expert.
Understanding today's mortgages, in fact, has become so difficult that the FDIC, the chief insurer for the nation's banks, has put out a pamphlet giving consumers a glossary of new terms. The first on the list: payment shock.
But despite the warnings, Americans are still signing up: 39 percent of new mortgages in the first half of this year were non-traditional, compared to an average 2 percent over the last decade. An estimated $1 trillion worth of adjustable rate mortgages will reset at higher rates next year.
“Those people who were banking on the house continuing to go up so that they could refinance into a different loan are really getting a little surprised right now,” says Craig Strent with Apex Home Loans.
For some, it could mean default and ultimately foreclosure. Experts are predicting 1.3 million foreclosures by year's end, that's up 53 percent from last year. For Greg and Luisa Holmes, stuck with a mortgage they can't afford, that will mean selling their home and putting their dreams on hold.
“I am saddened,” says Luisa. “I just feel disappointed.”
