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.
...
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.
...
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 ...
With a pay-option ARM, you can choose a 1% interest rate, depending on the lender. That is lower than the interest only. Actually, it is referred to as a negative amortization loan because you are adding on to your principle each month.
Glad I listened to myself.
Plenty of reasons-
Lower Monthly Payments. Sometimes, people do dumb things. If you can reduce your monthly outgo $800, how is that a bad thing?
Tax Deductibility.
You already have the debt. Why not structure it in the lowest cost way you can?
These neg-amortization/pay-option ARM loans can also offer the most points to a greedy loan officer.
They often do. But, doing that puts the fully indexed rate about a point higher than 30 year fixed...
amen to that. the facts hurt the liars.
That's a good point too. More doom-and-gloom from the MSM.
Yes, there has been a tremendous bond market rally in July and August and the 10-year treasury bond rate, which determines the interest rate on many ARM mortgages, has declined from 5.245% on June 28 to 4.783% at today's closing bond prices. So that has knocked almost half a point off the interest rate on many ARMs and new fixed-rate mortgages. The economic gloom & doom dispensed by the MSM is a myth.
My favorite loans are the negative amortization loans. At the end of the loan term, you actually end up owing more than you borrowed. It's just sick.
Including the laws against physical assault.
A couple of years ago you should have been able to get low to mid 5's.
Ask a loan officer about his or his pay-option ARM. I bet they never refer to it as a "Neg-Am" loan.
I think that's why new home sales were weak in July, because mortgage rates topped out at the end of June. Home sales should bounce back some in August, but we'll have to see the numbers next month.
Actually, from a loan officer perspective they were the worst paying loans as you had to get the borrower to agree to a pre-payment penalty to get anything approaching the Yield Spread you could get on a regular fixed or ARM.
I could easily make 2% on the back with an ARM. But with a pay option I would be lucky to make 1%. Often less because I wasn't going to try and tack on a pre-pay because thats just bull.
Also, July and Dec. are traditionally the slowest months for real estate sales.
THe answer is easy but no one is willing to do it. Prohibit apartment owners from renting to illegals and businesses from hiring illegals. THe rest will follow. Also, pursue death penalty charges for third time border hoppers.
I had no trouble getting a three year PPP, which offered the highest spread.
I disagree. 3rd time border hoppers should be required to spend 6 months doing hard labor somewhere with Al Franken droning on in the background.
hmmmm... I think I've got a new favorite bad loan/mortgage idea
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.