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RISMEDIA, Jan. 23, 2007-(MCT)-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 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% reset last year, with a 1.25% 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%.

"It's pretty much no-holds-barred and it gets painful from there," said Brian Wilcock, 38, of his mortgage's interest rate, which will climb yearly if he doesn't refinance. Wilcock thought the family might have to relocate due to his sales job.

For the Wilcocks and thousands of other Michigan homeowners, those low three- or five-year teaser rates on ARMs are adjusting higher this year, and homeowners will feel the difference in their wallets. 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.
Locally, lenders report an anecdotal upswing in clients refinancing into 30-year fixed-rate mortgages. Last year, ARMs represented 30% of all mortgages, according to the national Mortgage Brokers Association. By 2008, the group estimates, the number will drop to 18%

"We definitely want to get into something more secure," said Lisa Wilcock, 35, a part-time nurse and mother of two. The couple is mortgage shopping for 30-year fixed rates. "We don't want it to keep rising and rising and rising."

Monthly jolt

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 home buyers flocked to the loans as well, since they allowed often cash-strapped first timers to afford a larger house.

"There are more people now than ever with adjustable-rate mortgages," said Greg McBride, senior financial analyst at "The problem — and you could see this coming a mile away — is that interest rates have increased and those same borrowers are coming up for a rate increase."

If a homeowner in 2004 got a three-year ARM at 4% on a $250,000 loan, the monthly mortgage payment was $1,150. That payment today would increase to $1,500 monthly, lenders said. And figured at an interest rate of 7.5%, the payment would increase $509 more per month.

"That's called payment shock," said Ron Cockle, who manages Michigan, Wisconsin and Iowa as a regional manager for Wells Fargo Home Mortgage.

Still affordable

The good news is that the shock may be bearable for many. The MBA estimates that up to $800 billion of the loans will simply reset, with owners making their new payments. Interest rates are currently hovering around 6.25% and most experts expect them to stay under 7% this year.

If a homeowner decides not to refinance, the interest rate will rise at a capped percentage determined by the lender at closing. Typically the cap is 2% to 5%. And since an ARM can't adjust above the current market rate, "Nobody's going to 9%, no matter what your cap is," said Ken Mascia, president of the Oxford Financial Corporation in Birmingham.
Mortgage experts said ARMs still work for some buyers, especially those who expect their incomes to rise or those planning to live in their homes for fewer than five years.

In January, Christopher Dooley Sr. refinanced his second home in northern Michigan into a 7-year ARM at 5.8% interest. Dooley had a 30-year fixed-rate mortgage at 6.75%.

The operations manager at the DeWitt Products Co. in Detroit plans to sock away the $200 he saves monthly toward his retirement in five years. Then he plans to sell his primary residence in White Lake Township and use the profit to pay off his second home and live there during retirement.

"It frees up a little money here and there," Dooley, 50, said of his ARM.

The Wilcocks will miss the extra money their ARM freed up monthly, but said they welcome the security a fixed-rate mortgage will bring.

"We feel like we've lived with" the ARM "for a year after it adjusted," said Lisa Wilcock. "It did its job and it's time to move on."

Copyright © 2007, Detroit Free Press
Distributed by McClatchy-Tribune Information Services.