Rates that sound too good to be true probably are

Some people are hearing about rates on 5/1 and 7/1 ARMS that are much lower than those offered by the main players in the mortgage market.

The main players—Chase, Wells Fargo, Citibank, and BofA—are currently offering rates on these loans in the range of 6% to 7% depending on whether or not you pay any points. Some secondary mortgage players (Union Bank and IngDirect) are offering rates as low as 5.5%. So how can they make money offering rates that are essentially out of the market?

Easy: They make their money by requiring up-front points and having prepayment penalties. They're betting the rates will drop to even lower interest levels than their current offer. The catch? Their borrowers will not be able to refinance to take advantage of lower rates because of stiff prepayment penalties.

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Finally, A Country Where Things Are Worse!

Those poor Brits. Not only do they have to eat spotted dick, but it turns out they have more debt, credit cards and mortgage headaches than the average American. After a decade of rising real estate prices, low interest rates and easy-to-get loans, British households have a debt-to-income ratio of 1.62, according to today's New York Times. Although we're not exactly sure what that number means, we're relieved that our ratio here in the New World (1.42) is lower and therefore sounds less scary.

Meanwhile, the Times says, the real estate market is melting down in England, where more than 1 million homeowners have adjustable-rate mortgages that will reset at much higher rates in the next year:

"Home prices are falling, despite a dearth of housing and an influx of wealthy Middle Easterners and Russians, especially in London. Last year, housing foreclosures reached the highest level since 1999 and are expected to rise still further this year."

The rest of Europe might still be better off than us, though, because "the trend on the Continent was the opposite. Home prices in most European countries barely moved" during the past decade. Why? "Markets were more regulated, there was more housing stock and renting was more popular."

[Photo credit: TexasChapBook Press]

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Smart Borrowers Have ARMs

Stop skulking around, feeling sheepish about your adjustable rate mortgage. So what if your next door neighbor keeps reminding you his fixed rate is never going up? He's already paid thousands of dollars in interest that you didn't. And when your rate adjusts, it probably still will be lower than if you had gone for a conventional, fixed-rate loan. Here's how Money magazine explains the situation:

If the Fed cuts rates by a half point Tuesday, the cumulative effect of the Fed cuts could entirely offset what would have been a significant rate reset for many homeowners.

For instance, a borrower with an adjustable rate of 4.5% could have faced a rate reset up to 7.5% before the Fed started cutting rates in September. Before the rate cuts, that homeowner would have seen an increase of $370 in monthly payments on a $200,000 loan.

But after Tuesday, that rate could reset only a little higher. And for some, the rate might not go up at all - and may actually drop - according to Greg McBride of Bankrate.com.

[Photo credit: Ironage]

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