Rates keep rising

MELVILLE, N.Y. - Come next November, Kathryn Clejan’s adjustable-rate mortgage will get a whole lot more expensive. In fact, she estimates, it could rise by $1,986 a month, which the single mother of two boys can’t afford.

Clejan is carrying a $496,000 interest-only mortgage on her Manhasset, N.Y., home with monthly payments of $1,760. Though she says she knew when she took out the loan in 2003 that the payments would balloon at the end of five years, she said she had no choice. She needed the lowest possible rate or faced losing her home.

“Having an interest-only loan kept me in my house during the divorce,” said Clejan, 41, a loan officer at Americana Mortgage Group.

Like many people with ARMs, Clejan is facing a difficult decision. She has to figure out how long to keep her mortgage, which carries a 4.25 percent interest rate, before refinancing to a rate that would likely be in the 6 percent range. If she refinanced now to another interest-only mortgage, Clejan estimates her monthly tab would go up to $2,746. That would put a greater strain on her monthly budget at a time when her income is suffering from the turmoil in the mortgage market.

Others, however, face an even tougher challenge, real estate experts say. They can’t afford their current mortgage once it adjusts, but are having trouble refinancing to a monthly payment they can handle.

And the problem will only get worse. Some 2 million ARMs are scheduled to reset this year or next. Already, the number of homes in foreclosure has hit record levels, and the number of borrowers late on their payments is at a six-year high.

“They are facing sizable rate increases, which may be more than they can handle,” said Keith Gumbinger, vice president at HSH Associates, a publisher of consumer loan information.

Many homeowners with checkered financial backgrounds who obtained subprime mortgages are really stuck, real estate experts said. Their rates often jump much higher than prime borrowers’ rates once the reset kicks in. Plus, lenders are now shying away from lending money to people with poor credit, so these homeowners will have a tough time refinancing. “If your credit is pathetic, so are your chances of getting a loan,” Gumbinger said.

Today’s crisis has its roots in the easy credit of the past five years. Homeowners piled into ARMs, attracted by the low teaser rates and loose terms. Suddenly, they could afford the house of their dreams without having to document their income, making a hefty down payment or paying thousands of dollars a month.

Lenders accommodated the hunger by broadly offering these so-called exotic mortgages once reserved for a select few, while loosening credit standards. Some loans allowed borrowers to pay only the interest for the first few years. Others, called option ARMs, let homeowners choose the amount of interest they wanted to pay, tacking on the unpaid amount to the principal.

Some 35 percent of the loans made in 2004 carried adjustable rates, according to the Federal Housing Finance Board. Among first-time homebuyers the estimates are as high as 50 percent, real estate experts said.

Traditionally, ARMs make up about 20 percent of loans in any given year, Gumbinger said.

The resets can add hundreds of dollars onto a monthly mortgage bill. Homeowners who took out a threeyear ARM of $450,000 in 2004 are now facing a payment hike of more than $400 a month, Gumbinger said. Those with subprime mortgages are looking at even larger jumps. WHAT

TO DO IF YOU HAVE AN ADJUSTABLE-RATE MORTGAGE

- Look at loan terms. See when your initial rate expires. Run the numbers to see what your monthly payments will be once the rate resets.

- Check out your refinancing options. Talk to brokers to see whether you could qualify for a fixed-rate mortgage or for an ARM with better terms.

- Find out what you would have to do to secure the best possible rate if you can refinance. For instance, improve your credit score by paying down your debts and paying bills on time.

- Talk to your lender about your options, especially if you cannot afford the payments once the rate resets. Lay out your financial circumstances and ask about modifying the loan terms. Remember that lenders generally don’t want to foreclose on your house.

- Change your lifestyle. Start trimming your expenses and saving more money so you can better afford your monthly payments if you have to shoulder a higher rate.