The Feds Want to Help You With Your Mortgage

Nearly one in 10 mortgage owners owes more on that loan then their home is worth. Their numbers may be growing, but help may be on the way soon.

Capitol Hill is busy organizing aid legislation that, according to a New York Times report, could "help as many as 1.5 million homeowners by refinancing riskier adjustable-rate mortgages into traditional 30-year loans."

Confused about the difference in the two home loan structures? You are not alone.

Here are the key differences between the two mortgages.

An adjustable-rate mortgage is a home loan that is typically paid out over 30 years. The interest rate on the loan, which is determined by the market or the lender, varies based on terms of the loan (often known as the "fine print").

The adjustments take place over a set period of time, depending on the type you have, such as 1-year ARMs or 5-year ARMs. And because the loan is adjustable its rate can increase or decrease over time. On the other hand, a traditional mortgage, also known as a fixed-rate mortgage, charges one locked-in rate each year. It is preferable for some because there is more stability.

Recently, an adjustable-rate mortgage became an affordable means for lower-income home shoppers, because the loans usually offered bargain rates for the first year or two.

Often times, lenders would compensate for those initial cheap rates, by jacking them up soon after. That is because with an ARM, the interest rate can increase over the lifetime of a loan, and depending on the type of loan, could vary drastically from the starting interest amount.

This is a huge difference from a traditional loan that offers a fixed rate throughout the lifetime of the loan. Homeowners looking to partake in purchasing during the real-estate boom would oft-times seek out ARMs, and their (initially at least) tempting low rates.

Then came abusive or predatory lending, which began binding less affluent home buyers to real estate they eventually could not afford. The initial terms of many ARMs were considered misleading by many on Capitol Hill.

After the real estate bubble popped, many experienced a financial tailspin as interest rates increased, causing a rise in mortgage payments, and yet income levels failed to match these rising expenses. "Analysts estimate that more than five million households, or about 10% of all homes with a mortgage, now owe more than the house is worth, and the number is expected to grow as home prices fall," according to The New York Times.

That said and current events aside, remember tight finances are not always the reason for securing an adjustable-rate mortgage and ARMs are not always equal to predatory lending. Although borrowers should consider their long term ability to repay a loan, and not just leap at the lowest rate available right now.

"I wouldn't say people aren't looking for adjustable-mortgage rates, a lot would get one if they [the banks] were writing subprime loans," says Andrew Hohnberger, a broker at Coldwell Banker in Montana.

If you're currently in the market to purchase a home, and want to shop around for interest rates, check out BankingMyWay for your local loan rates.