Posted on 08/31/2006 5:26:52 PM PDT by Mini-14
They promise the American Dream: A home of your own -- with ultra-low rates and payments anyone can afford. Now, the trap has sprung
For cash-strapped homeowners, it was a pitch they couldn't refuse: Refinance your mortgage at a bargain rate and cut your payments in half. New home buyers, stretching to afford something in a super-heated market, didn't even need to produce documentation, much less a downpayment.
Those who took the bait are in for a nasty surprise. While many Americans have started to worry about falling home prices, borrowers who jumped into so-called option ARM loans have another, more urgent problem: payments that are about to skyrocket. The option adjustable rate mortgage (ARM) might be the riskiest and most complicated home loan product ever created.
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The bill is coming due. Many of the option ARMs taken out in 2004 and 2005 are resetting at much higher payment schedules -- often to the astonishment of people who thought the low installments were fixed for at least five years. And because home prices have leveled off, borrowers can't count on rising equity to bail them out. What's more, steep penalties prevent them from refinancing. The most diligent home buyers asked enough questions to know that option ARMs can be fraught with risk. But others, caught up in real estate mania, ignored or failed to appreciate the risk.
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The option ARM is "like the neutron bomb," says George McCarthy, a housing economist at New York's Ford Foundation. "It's going to kill all the people but leave the houses standing."
(Excerpt) Read more at businessweek.com ...
The ARM only would make sense when you were a few years away from paying off the mortgage, or if you knew that you would be selling out before the rates were to go up
It pays to fully understand the terms of your mortgage.
(Groan) "Lost ANOTHER one to Di-Tech!"
When I was looking to refi, one mortgage broker kept offering a "2/28" ARM. I told him upfront that I was only interested in a fixed loan at a low rate. He eventually got quite hostile insisting that I must take his "2/28" loan because that was the best I would ever find and he had already done the paperwork. Another broker aggressively pushed a second mortgage at over 10% with high fees, saying that was the best I would ever get. Eventually I found an honest person who quietly closed a very low fixed rate mortgage with no surprises. You have to shop around out there.
"Different times, situations, scenarios, and plans call for different loan terms."
Nice to see your wisdom here. Rare these days when somebody takes into account all the factors and using them for their gain. Nice job.
I also prefer fixed rate loans, but there is a time and place for adjustables. At a minimum, a prudent borrower would set aside the savings on a variable rate loan and use the money, if necessary, to subsidize increasing interest costs.
I think a lot of the problem is that borrowers refinanced at low variable rates and took cash out to pay credit card debt and use for other necessities (boats, cars, vacations, etc.). It is not just a rate problem, it is an increased loan amount problem.
I want to make sure you know that any anger or other overtones in my post were not directed at you. I should have included original poster sgtbono as a ping, but I just hit reply and didn't add him.
I purchased my second house in 1983 by assuming a 13.25% loan. I was thrilled as the going rate for a new loan was in the 18% range because of the peanut farmer. When rates dropped to a reasonable level, I refinanced with a 15 year loan at 7.25%.
I own my primary residence free and clear today. I've purchased an investment house with a 30 year loan at 5% fixed. I did that because I intend to keep the house and rent it. The loan has no pre-payment penalty. I insist on that as a feature of my home loans. I may pay off that mortgage if housing prices rise substantially. The goal would be to let the rental income cover my primary and rental property tax obligations and provide some additional cash flow in the long term.
I think a big problem is that people start out knowing what they are doing, realize the term of the loan and the situation of what is going on and have a plan on what to do down the road. Problem is, they never execute the plan.
And here is a related rant for anyone who is interested and actually reading all this nonsense...
I couldn't tell you how many people with ARMs are just now starting to realize they should have refinanced a year ago when daily they were hearing about rate increases and every mortgage guy in town had radio ads on to get out of their ARMs. But they never connected the dots and realized they need to refinance their ARM.
But a bit of good news for you people with ARMs, while you missed out getting a super low fixed rate (comparativley speaking) rates, like gasoline prices, have plummeted lately and I forcast a continued decline in rates for at least the very short term (meaning a month, two at most). I won't predict past that at this time. So if you have an ARM, need to refinance and have not done so, I suggest playing the floating game. Get your app approved but don't schedule closing and don't lock your rate.
You have time. Docs are good for 60 to 120 days depending on the doc. You get your best pricing with a 7 day lock, but that might cause problems, so a 15 day is a safe lock and you get a much better price than a 30 day or longer lock.
Take advantage now while you can! REFINANCE!
There are two sides to this. Yes, some mortgage companies push loan products that aren't meant for Joe Six Pack, but at the same time Joe needs to do his homework.
Personally, I do few Option ARMs. If the customer knows what they are and how to use them, I'll do it. I don't just habitually sell them to every average Joe. The key is-if the negatively amortizing minimum monthly payment is the ONLY WAY you can afford the payment, then YOU CAN'T AFFORD THE HOUSE. If you use it as a financial tool but are perfectly able to make the much-larger fully amortized payment once the time comes that the lender requires you to, then it can be a good loan.
Exactly.
This article is more 'chicken little' hyperbole. After all, the fed recently indicated they will stop raising rates at 5.25 percent, barring some spurt of super inflation which at this point seems highly unlikely.
In fact, the futures market this week indicated that the federal reserve could (emphasize could) begin lowering rates in early to mid 2007, as long as the inflation/growth bugaboo remains in check (which it seems to be so far).
Bottom line: mortgage rates ARM or otherwise are in the 6-7 percent range, which is low in comparison to the past 35 years.
Homeowners were spoiled at 4.5 percent or 5 percent mortgage money, but everyone knew it wouldn't last because bankers could barely make a living with rates that low.
This can depend on the circumstance. If you get in a bind, and consolidating to your mortgage is the only way to get above water, do it ONCE. The problem though is that many people just run up the cards again and again.
I'm glad you got what you rightfully qualified for.
However, I can spend hours telling you about Mr. Idiot-Who-Knows-More-Than-a-Loan-Officer-With-Years-Of-Experience with a 513 credit score (that's a VERY bad credit score) who INSISTS he can get a 6.125% fixed rate loan "at the bank" but for some reason, he's talking to me...
The only option ARMs I ever did were for very high income people buying very expensive (several million dollars) properties as a primary residence, or were continually purchasing investment properties that were none to cheap either. And those, while not true "flips" were short term holdings.
100% LTV on 3 million?
Wow...
Works OK here in the Midwest. Damn near impossible on the coasts...who's got 20% down on a $665,000 home? Which is another story entirely...(the insane cost of real estate in some markets...)
Again, it depends on the scenario. If you're pretty damn sure you'll sell in 5 years, then a 5 year ARM (fixed for 5 then variable) is a more sensible way to go. It's all in risk tolerance. Most non-Option ARMS done in 2003 and 2004 have life caps that keep the absolute highest rate at 9% or so, with a start rate of 3% fixed 5 years - perfectly attainable in 2003.
That's the way you're supposed to do it! Analyze your situation, and pick the loan that suits it best.
That's the majority of mine too. Or transient people who want to own a home but won't live there for more than a year or two. And in three years, I think I've done maybe 7 of them.
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