Homeowners brace for ARMs' new rates

DETROIT — Brian and Lisa Wilcock looked at mortgage interest rates four years ago, did the math and came up with a plan: Because they intended to move in three years, they'd refinance their 30-year fixed-rate mortgage into a three-year adjustable-rate mortgage (ARM) at a lower interest rate and save hundreds of dollars a month.

It worked — for a while.

The lower rate shaved $375 off the mortgage payment on their Rochester Hills, Mich., home. But four years later, they're still in their three-bedroom, split-level house and have no plans to move.

Their introductory rate of 4.37 percent reset last year, with a 1.25 percent cap that spared them the full brunt of the interest-rate increase. But that's set to expire in April when the ARM resets to a rate that will likely be above 6 percent.

Brian Wilcock thought the family might have to relocate due to his sales job.

For the Wilcocks and other homeowners, those low three- or five-year teaser rates on ARMs are adjusting higher, and homeowners will feel the difference in their bank accounts.

Mortgage experts estimate that approximately $1.5 trillion worth of adjustable mortgages will reset by the end of 2007. Forecasts call for $600 billion to $700 billion of those loans to be refinanced into new loans, including fixed-rate mortgages.

Last year, ARMs represented 30 percent of all mortgages, according to the national Mortgage Brokers Association. By 2008, it estimates, the number will drop to 18 percent.

Just five years ago, adjustable-rate mortgages carried interest rates so low they allowed homeowners like the Wilcocks to lower their monthly mortgage payments by hundreds of dollars. First-time homebuyers flocked to the loans as well, since they allowed often cash-strapped first timers to afford a larger house.

If a homeowner in 2004 got a three-year ARM at 4 percent on a $250,000 loan, the monthly mortgage payment was $1,150. That payment today would increase to $1,500 monthly, lenders said.