Was the Mortgage a Mistake? (Homeowner just now figures out they are in a hole)

http://www.washingtonpost.com/wp-dyn/content/article/2007/08/18/AR2007081800089.html?referrer=digg ^ | 8-19-07 | Michael S. Rosenwald

[Hydroshock]

Two years ago, my wife and I sat at a long conference table in a mortgage-title office in Bethesda. Sitting next to us: our real estate agent, who drew up our bid on a townhouse in Germantown two days after showing it to us. We didn't get an inspection, and I don't recall going back for a second look. We had to act fast or someone else would get it.

Our bid won the house -- our very own first home -- and now we had to close the deal. The owners sat across the table. They seemed more nervous than we did, perhaps fearing we would have second thoughts -- about our risky interest-only mortgage, about seeing them walk away with a $120,000 profit, about buying a house just as "bubble" was entering the regional lexicon.

They signed. We signed. Price tag: $459,275.

And then, as the saying sort of goes, the stuff hit the fan. The sizzling home market almost immediately began to cool off, which my wife and I sort of ignored. Interest rates started to creep up, and we sort of blew that off, too. We have time. This too shall pass. No worries. Life is good! We bought a flat-panel television, took a nice vacation, bought a dog, hired him a daily dog-walker, and then we got pregnant. We have time. This too shall pass.

[DaltonNC]

I am past retirement age and won’t be buying another house. I would never have considered an interest only mortgage. How could you ever gain. You would have to see 12% annual appreciation to get ahead. This is a professional couple. Where is the common sense?

[bw17]

In 2004, I got an interest only loan locked at 4.25% for 5 years. There are 20 months remaining on the loan, and it can go up 2 points each year until it’s at prime plus 1/4.

But I knew what I was getting into. My business loan is paid off in 17 months (3 months before my mortgage adjusts), freeing up $6000/mo (pre-tax), so I knew that I’d have extra money to pay for any increase in my mortgage.

Because I knew that my disposable income would increase dramatically when my business loan expired, the interest-only loan allowed me to purchase more house than I could have afforded with a conventional 30-year fixed.

Essentially, when I refinance to a 30-year fixed mortgage (or an ARM if rates are too high 20 months from now), I’m buying my home at 2004 prices...which is still cheaper than today’s value...even with the correction.

Not everybody with these loans is belly-aching right now...nor is everybody who got one a “fool”.

Not everybody with an interest

[PayNoAttentionManBehindCurtain]

Its posted on the internet....

Most likely just pulled it out their a$$ and flung out as the gospel

BigMack

[BlueMoose]

NEW YORK (CNNMoney.com) -- Earlier this year, a Wisconsin couple won a judgment against Chevy Chase Bank that said the bank deceived them over the terms of their mortgage.

The judge ordered Chevy Chase to rescind the loan and certified the lawsuit as class-action, which could potentially release thousands of other borrowers who felt misled.

[DCPatriot]

No...if you lived in the home 2 of the previous 5 years, it can be claimed as your primary residence and not an investment property.

[RC2]

From my understanding this is how the IRS works. By the bank forgiving the loan, the IRS looks at it as profit to you.....thereby taxing it. I would highly suggest that if anyone is considering this, check with the IRS first. The IRS does not advertise this so don’t expect them to volunteer this information. Or, check with your tax guy.

[JTHomes]

I do know that if the bank accepts a short sale, you will get a 1099 for the difference between what you originally owed and the amount the bank accepted through the short sale. In that case the loan is considered paid off. The bank forgave a portion of the debt and that is considered income by the IRS. But if you default and the bank takes back through foreclosure, I don’t believe you owe taxes. The first short sale simply hurts your credit, the foreclosure destroys it.

[Moonman62]

By then they will be many thousand of dollars upside dwon on their loan. Can’t refi that way.

That's not a given, but if your wish comes true they will be.

[Hydroshock]

I expect to hear a lot more of these stories and of people jsut walkign away from their houses.

[brownsfan]

“The definition of “need” sure has changed in the last 30 years. I’m convinced that if real incomes of every American suddenly quadrupled in a year with 0% inflation, there would be even more people getting divorced over money problems and going bankrupt than there are now. People would just “need” to spend 4 times more than they are now.”

I volunteer to be a case study. We’ll need everyone to kick in to raise my income to 4 times it’s current level, and we’ll see what happens to me. :)
We only need to do this for one year, but I will sign up for multiple years if needed.

[guppas]

“It may sound crass, but we deserved a nice home.”

With a mind set like that, what could possibly go wrong?

[Notary Sojac]

This maroon is listed as a WP "Staff Writer". God help us all if he's on the economics beat....

We pay taxes in the highest bracket.

And you think anyone should feel sorry for you?

It may sound crass, but we deserved a nice home.

I think I deserve a Gulfstream. Will you lend me $15 mill or so?

I asked Glassman, "Did we mess up?" He pointed out that we were still paying a lower interest rate than we would have by buying now or even starting with a 30-year, fixed rate, so that was good. And the market shakeout could end in the three years before my loan balloons. "The answer is we don't really know yet," Glassman said. "Five to 10 years from now, I'll be able to give you an answer." But then he quickly added, "Were you wrong? Well, you now own a house. You have a place for your family."

Totally wrong, a$$hat. You and your financial planner too. With an interest only mortgage you own nothing, you're just renting money from the bank.

In closing, here's a shot of my sympathy meter....

[jennyjenny]

Besides all that, our mortgage broker and real estate agent kept confirming what we wanted to believe: nothing to worry about.

And the appliance store guy forced him to buy a flat screen TV, and the travel agent forced them to take a nice, expensive vacation, and the pet store clerk forced them to buy a dog and hire a walker for him..... What a spoiled brat. The guy can't even walk his own dog.

[FRForever]

> Why NOT do interest only?

> The problem is that they have no reserves, no rainy-day fund - and that would have still been true with a 30 year fixed mortgage.

You answered your own question: because an interest-only mortgage encourages people to ignore the other real financial consequences of a house. If they had calculated the payment they could afford, then gotten an interest-only mortgage where the payment matched the interest payment of the mortgage they could afford, and they invested the rest as you describe, that would be fine — but how many people do that? The purpose of an interest-only mortgage in the industry is to encourage people to buy bigger and more expensive homes that they would not be able to buy otherwise.

Yes, the people brought this on themselves — by taking the advice of people who had vested interests in making the deal go through, regardless of the consequences. But it sounds like this pair won’t have any actual problems — their horizon is far enough out, and they make a pile of money (apparently.) The real question would be somebody in the same situation who’s just barely making it, who took the same bad advice.

This is the same deal as the credit card companies. Yes it’s the responsibility of the people who buy things — but if the consumer is the Eve who ate the apple, the companies are playing the part of the serpent who talked her into it.

[WI Conservative 4 Bush]

Wow, what an intriguing article. That this guy parades his stupidity in a regular article is surprisingly candid. He thinks he was snookered, but they were just stupid.

One of his comments was especially head-scratching. That is, that since it is a ‘starter home’ why bother paying principal. Yikes! That’s the whole purpose of a starter home. Build up some equity, take care of the property so it increases in value, and then you will have an easier time getting into a better house.

My wife and I bought in ‘98 at 125K with 20% down (1,100 sq feet, now that’s a starter home!). Last year, we moved into a 2,900 sq foot home with 20% down basically from the equity of the first house.

[KarlInOhio]

A physician and a Wapo staff writer. Yes, they should have a nice combined salary.

From the article:

We pay taxes in the highest bracket.

For 2006 married filing jointly, that is at least $336,550 of taxable income. If the house was "only" $459,275, they should be able to pay it pretty easily. Their interest only payments at 5.125% (until they adjust upwards) would be less than $2,000 per month.

If they are having any problems at all it is because they can't handle money.

[Hydroshock]

The market around DC has already lost value.

[ex-snook]

"Also, with the real estate market then booming, we planned to sell the house within five years anyway -"

'Ladies and Gentlemen place your bets. ..............Sorry sir you lose'.

[Bob Loblaw]

"Wow, just the kind of people who are so well hated around here. How does the Post find them?"

The author of the article is a Post staff writer.

The Post only hires really bright, intelligent people as its staff writers.

[Dems_R_Losers]

Good for you. I have a 5-year ARM that started in 2004 and will reset in 2009. The rate is fixed at 4.25%. With that I was able to buy a dream house in an excellent school district, and qualified on just my income. A 30-year fixed mortgage at that time was around 6.5% and I would not have been able to make the payments on my income. The ARM allowed my husband to stay home with our kids for the first two years in our new area which was a boon for them. I knew that within 5 years my husband would be well employed and we will be able to afford any increase in our payments. Now it appears likely that rates will fall by 2009 and we may not have much of an increase at all, and if we do we will be able to refinance easily. Our house has also appreciated by over $100,000 since we bought it in 2004. We do not live in a “boom/bust” area and the house has been an excellent investment. We put 20% down on our house and now have almost $300,000 in equity.