(by Helen Russon)

Increasing numbers of US homebuyers are facing the challenge with financially stretched mortgages in the present state of hot housing market and higher interest rates.

On Monday, the Consumer Federation of America’s states that at a time of rising interest rates there is a potential financial "time-bomb" due to an increasing interest among low-income consumers in adjustable-rate mortgages. Traditionally US homebuyers have favored fixed-rate mortgages allowing them to pay the same rate on their home loans for up to 30 years. But with the increase of interest rates, fixed mortgages became more expensive and homebuyers are choosing more risky adjustable mortgages with variable rates.

Adjustable mortgages make it easier for consumers to buy homes because they are initially cheaper than fixed mortgages. Over the past year the percentage of adjustable mortgages has more than doubled, rising to 36 per cent of all loans closed at the end of May. Economists claim that the payments on these loans might increase as interest rates rise, possibly creating financial stress.

Many adjustable mortgages allow consumers to "fix" rates for a certain period of time - up to 10 years - making them useful options for short-term homeowners. On the other hand, sub-prime borrowers typically provide mortgages adjusting after just two or three years, making them particularly vulnerable to higher interest rates.

The increasing number of adjustable mortgages owned by sub-prime borrowers is potentially dangerous for investors: homeowners with adjustable mortgages are more likely to default than homeowners with fixed mortgages. Thus, less-than-prime mortgage borrowers are effectively borrowing from investors willing to shoulder the higher risks involved.