Released: October 10, 2006

Tick. Tick. The mortgage time-bomb

Source: By Jeanne Sahadi, CNNMoney.com

Mortgage rates have been trending down, but that won’t do much to benefit those who signed up for low-teaser-rate adjustable-rate mortgages in the past few years.

An ARM charges an initial discounted rate for a period of time, after which it adjusts to market levels. When some types of ARMs with teaser rates of 2 percent or less reset, the rates are likely to jump to more than 6 percent - and even as high as 9 percent.

That can mean a doubling in monthly payments owed for those homeowners saddled with the loans.

The jump in payments could be even bigger for some people. They could have a loan balance that’s larger today than it was when they got their mortgage - a situation called negative amortization. And it’s common with what are called “payment option” ARMs.

That’s because the initial teaser rate is a “payment rate,” not an interest rate. That means the market-rate interest on the loan starts to accrue from the get-go and monthly payments aren’t enough to cover it, let alone pay down any of your principal.

There may also be a trigger ceiling, meaning when the balance reaches a certain level - say 120 percent of the original balance - the introductory terms will end and the rate will reset upward, according to Christopher Cagan, director of research at First American Real Estate Solutions, a mortgage information provider.

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