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August 5, 2008 at 5:12 PM #253158
(former)FormerSanDiegan
Participant

Depending on short-term interest rates, these future loan resets may or may not be as much of a problem as advertised. Personally, I think it is being overblown. The Option ARMS are certainly toast, but the other varieties … remains to be seen.

Consider a 5/1 IO ARM loan originating in 2005 at an initial rate of 5.625%.

Typical terms:
Margin : 2.25%
Index: 12-month LIBOR

At today’s LIBOR, this resets to 5.5 %. So, the difference in payment is not 50% as the article states, but more like 20-25%.

It all depends on where the Index rates (these are short-term rates, either 1-year or 6-month treasuries or LIBOR) are upon reset.