The most important word in the phrase "adjustable rate mortgage": adjustable.
Scores of Americans are learning that the hard way. Home foreclosure rates are up nationally and in Douglas County, and several experts are pointing to people being caught unprepared for increases in their adjustable rate mortgages.
"It is just the nature of a lot of folks to not plan, and they haven't planned for their payments to increase," said Dan Immergluck, an associate professor at Georgia Tech University who specializes in foreclosure research. "They have more disposable income and they have grown used to spending it."
Through October, bankruptcies are up 27 percent nationally from the same period a year ago, according to the latest statistics from the Irving, Calif.-based bankruptcy tracking firm RealtyTrac.
In Douglas County, the sheriff's office has conducted 77 foreclosure auctions through October, up from 52 during the same period a year ago.
Still, Robert Baker, education coordinator for Lawrence's Housing and Credit Counseling, said he didn't think the increase represents signs of a distressed housing market.
"Listings are taking longer to sell, but it is really just longer by Lawrence standards," Baker said. "It's still a pretty healthy market. We're still pretty blessed in Lawrence."
The number of people coming to his office seeking counseling on issues related to foreclosure - which usually happens when a homeowner has fallen behind on payments for 90 to 120 days - has "slowly but surely" increased.
There always will be a fair number of foreclosures related to unexpected hardships, such as job losses or unexpected medical bills, Baker said.
But he also said many are homeowners seeking help after taking advantage of loans that have been heavily marketed on the radio, TV and Internet as amazingly low-rate options.
"Those commercials just like to tell you how much you can save on your mortgage," Baker said. "There's usually a lot of fine print on the television screen."
Adjustable rate mortgages
Baker said most heavily promoted loans are adjustable rate mortgages, which normally work by locking in an interest rate for the first one to three years. But after that, rates can rise by up to 2 percent per year based on the interest rate markets.
Baker said those loans can be fine for people who are expecting to move in a one- to three-year period, or for people who really plan and know they'll convert the loan into a traditional fixed-rate mortgage before their rates rise.
Some of the promotional loans also are interest-only loans, which allow borrowers to pay only the interest for the initial portion of the loan.
Others offer "teaser" rates, temporary rates in the 4 percent range, to entice people to doing business with a particular mortgage lender. When those rates increase from 4 percent to 7 percent or 8 percent, the monthly payment easily can increase by 50 percent or more, Baker said.
Immergluck, the foreclosure expert, said a large influx of Wall Street money has been invested into the mortgage industry, which has given mortgage lenders an ample supply of cash to loan. That has caused some lenders to become more lax in the standards they use to determine whether a person can reasonably take on debt.
Immergluck said federal regulators could improve the industry by creating debt-to-income ratios that lenders must follow, especially when lending to low- to moderate-income consumers.
Chris Forbes, branch broker at Lawrence-based Ad Astra Mortgage, said he hasn't jumped on the adjustable rate bandwagon, and he also shakes his head in disbelief at some of the mortgage advertising he hears.
But he said he would balk at the federal government adding regulations. He said forcing lenders to adopt specific and restrictive lending criteria could hurt first-time home buyers, who sometimes have to take on a larger percentage of debt.
"I would hate to do anything to make it harder on those buyers, because that first home is so important," Forbes said. "It is the one that lets you start building some equity."
Rick Sharga, a vice president at RealtyTrac, said home buyers are partly to blame, too.
"I hate to sound cruel, but at the end of the day, the ultimate responsibility does rest with the consumer," Sharga said. "We always look for a bad guy, but if you are a homeowner, you have to educate yourself. In most cases, it will absolutely be the largest investment you ever make."