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 ...
On the other hand, people who get this stuff pitched to them may have little financial knowledge. In my opinion, the people who take out these loans are less culpable than the bankers who provide the loans.
Don't know shit huh? Sorry, I know because it is what I have done for a living for 10 years.
Sorry that you got taken or had subpar credit. But 6.75% was the PEAK rate about a month ago after years of increases.
My case being a perfect scenario.
When I bought my home in 1999, a 30 year fixed was 7.25%. I got a 1 year ARM at 5.25%. Worst case scenario in a year it would go to 7.25%. But it didn't. It dropped in 2000. It dropped again in 2001. And again in 2002. And again in 2003. But in 2003 I was able to refi to an even lower rate of 3% for a 3/1 ARM. And it was known that I would be in a new home before sometime during the last year of the 3 year fixed period.
So, should I have gone with the 7.25% fixed, or did I make the right move with the ARM?
I hope the answer is obvious.
Very very few people should be getting short term (1 and 3 year)ARMs right now. Fixed is prefered, but if a nice spread can be obtained with a 10/1 or 7/1 I would have no hesitation about putting someone in one of those. Especially first time buyers. They won't be in the home that long.
Well, my Northern VA neighbor thought the same thing two years ago, and now they want to move, have no paid-down equity, and can't get their price (house has been on the market a while with no lookers). So basically, it's like they rented from the bank, but instead of a $2,000 a month rent they paid $3000 a month plus upkeep.
What would a similar property to yours rent for per month, and what is your current monthly nut? That sometimes can clue you in to the fundamentals of your market.
"Geez.....I heard the same doom and gloom in the 70's....."
And if you think about it a bit the doom and gloom actually occurred in the late 70's and early 80's.
what's a mortgage?
No one is noticing the distinction between an ARM and an Option ARM. Except the unlucky stiffs mentioned in the article, who now understand the difference all too well.
Which helps explain the high prices in California.
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