Pshaw!
“Here are your payments if it goes up to X”
“Here are your payments if it goes up to X+1”
I think lenders should be required to illustrate various scenarios, before people sign on the dotted line. Dangling this 3-yr teaser rate and nothing else is misleading (although I agree, buyers have an obligation, too). But when you see those ads everywhere, it starts to seem “normal”, like something that Everyone’s doing. Which is, of course, WHY those ads are everywhere.
Agreed. The lender eventually gets a McMansion that they’ll sell to another unsuspecting buyer who wants a piece of a dream he can’t afford. I wish they’d teach this stuff in high school so kids would have an inkling of the unscrupulous world they’re about to be launched into. It’s the “something for nothing” attitude that so many people fall prey to.
My lender did this. I don’t about you guys but one of the forms that they had us look at when we were applying for a mortgage told us what our payments would be under the various possible scenarios. We knew what our payments would be under a thirty year fixed rate, under a 3 year ARM and under a 7 year ARM. We knew that the rates would go up after the initial period and how much they would go up to given a certain set of scenario. We did all this before we started looking at houses.
Most of the people I know went with fixed rate loans, with the exception of two friends. They both went with ARMS because they weren’t planning on staying in the homes for longer than 5 years.
The reason that this doesn’t work is that it is impossible to predict when and by how much the rates will go up.
ARM’s are re-evaluated on a periodic basis (monthly, quarterly, annually, etc), and are usually tied to some external rate, such as the prime interest rate or some other factor. Your adjustable rate may be Prime + 1.3% or something similar.
To provide a payment schedule with every possible scenario would take boxes of paper and would be totally useless.
They wouldn’t have to detail every possible payment option over the 360 months of the loan. Just a table which says when your interest rate is X, your payment is Y. ARMs usually have a max interest rate that they can rise to.
I remember when we bought our house our realtor brought up ARMs. His reasoning was that when the rates go up, the house values also go up. According to him, we would either have a low rate and not need to sell or else the rate would go up and we could sell for a profit. Is that true? I don’t know. He’s the professional–I had no reason to doubt him. We eventually went with a fixed interest rate.
Why would people lose their homes just because of a 30-year mortgage and no down payment? If they are afraid of rates going up, they can always get fixed rate loans.
I thought that the point of these extremely low introductory rates is that they’re NOT available when fixed.
No down payment also = no equity, which has a variety of implications.
Placing the blame on the individuals involved misses the point. What the lenders did was to lend money to people without regard to their ability to pay it back. Let’s remember that interest rates, while they have gone up, have not exactly rocketed up. Even if rates had not gone up at all, many of the people would still be in foreclosure. While a lot of news stories focus on the individuals who are in foreclosure, that is not the real story. The real story is that all these foreclosures might have the capacity to tighten money (already has) depress a soft real estate market even more (probably already has) and perhaps drag us all into a recession (hasn’t yet, but who knows?).
What many of the lenders were apparently betting on was not that these people would be able to pay the mortgage, but that they would be able to sell the house and cover it.
Regulating this industry is not about protecting individuals from getting in over their head, but about protecting you and me from the unforseen consequences of “irrational exuberance”.
Those folks who made a bad decision in purchasing a house with a mortgage they could not afford will suffer the consequences. You and I may suffer some consequences as well.
About 20 years ago, the (ex) Mr. Hall and I were looking into buying a house and the person from the bank was attempting to talk us into ARM. Even then, as an idiot high school drop out without much of any formal education at the time, I said, “You can’t tell us what our house payments will be? Sometimes it will be higher, but you can’t tell us how high?” There absolutely no way I was going to be locked into something that long term, with that much money at stake (and our home), but without any type of outline as to how much it was actually going to cost. We backed out, which was just as well because we divorced shortly there after…at which point, I got my GED, went to college, graduated, etc., while he knocked up some barely out of high school chick and they bought a house…with an ARM more than likely. :dubious:
I was offered a what they called a fixed rate mortgage. As the closing neared I finally got the paperwork. It was fixed for 3 years and then became an adjustable. That was dishonest and wrong.
I’m pretty sure that’s exactly the opposite of how it works.
When rates go up, the money supply for new borrowers is reduced, and housing prices drop. One way to think about it is this: People have about the same amount of money they can afford to spend on a monthly basis for housing, regardless of what interest rates are. If rates are low, they can afford to borrow more money, so house prices go up. If rates are high, they can’t afford to borrow as much, and they have to buy cheaper houses, so house prices go down.
Obviously, it’s more complicated than that, since interest rates affect the economy, etc. But that’s the first approximation.
I went househunting about seven years ago. I had crappy credit but was approved based on my income at the time for a loan of 115K. I knew that was too much to handle and found a house selling for 80K. I took advantage of a first time homeowner program that was zero down and rolled all the closing costs into the loan, which was then all tax deductible to the seller–a big advantage to them since the house I bought was a second dwelling (they’d been renting it out) and they had about 90% equity in it so the approximately 5.5K tax deduction worked out very nicely for them. I’ve refi’d twice since then and brought my interest rate down from 8.5% to 6.5% on a 30 year fixed. Both the refi’s were simple no-cost options through my lender (James B. Nutter, very solid, doesn’t sell their paper, excellent to work with.) My payments have gone from $850/month to $675, my house is now worth 120K according to the county assessor, and probably closer to 175K in real world value. I couldn’t rent this house for less than $900/month. Yes, I pay PMI but it’s fairly low and the last time I checked I couldn’t get a low enough rate to drop my payment enough to make a refi to a conventional 80% loan worthwhile–but as soon as rates drop enough I’ll be all over it. Creative financing made my house possible for me and being conservative has made it a better value every year since then. I could sell this house in a day for 150K and walk off with a 75K profit, but then I’d have to sink all of it back into another property–I’d only do it for a five-plus acre chunk out of town, though. It’d be a liveability issue at that point.
Both of my kids have bought houses in the past six months. Both of them purchased for substantially less than they were approved for, both went for conventional 30 year fixed mortgages, both of them went for no-down 80/20 loans. They’re both aggressively paying off the second mortgages as fast as they can in order to free up equity in case they need it, but the houses they’ve bought will serve them for at least the next ten years and the areas they bought in are undergoing substantial upgrading, including special tax abatement programs and such which are pretty much guaranteed to raise the property values. They can afford their payments handily, and will be able to do so even if they suffer income losses–not terribly likely as they’re both in good solid fields and they’re young and healthy. They were offered all kinds of bizarro “creative” financing options, including insane interest only schemes and ARMs with no set upper limits, but they’re both smart enough (and had me telling them NO!) to have passed on those in favor of conservative, sensible financing options.
To a large degree, people make their beds when they get into these weird subprime loans, and it seems to me it has a lot to do with wanting to live beyond your means. Get a cheaper house, go to a less desirable (at this time) area, consider a fixer, but don’t buy into all these retarded financing schemes.
If you don’t mind my asking, what part of the NW are you in? (I’m wondering where around here you can still find houses for 150k!!)
Portland–the house across the street is listed at 160K, but it’s a complete teardown on a dividable lot… What I meant was that I could sell my house very quickly, priced under market. It’s a very small house, though, about 720sf 2/1 with no garage in Southeast. There are still a few around for that price range, but again they’re very small houses or in pretty bad condition. There are brand new rowhouses up the street priced at 180K at the moment, too, but I can’t see them as a good value, myself. I like having a bit of land around my house! The kids houses were 235K and 190K, respectively about 1450sf and 1350sf not counting unimproved attic space–about 2200 if you do count it (but in a less desirable location.) Home prices have gone through the roof around here! A house I was considering buying almost ten years ago for 63K just sold for 250K, and there has NOT been a substantial renovation involved! Just craziness…
I used to work for Countrywide, and though I am sure they do wonderful things for some people I will NEVER get a mortgage with them and I will NEVER refer them to anyone else for anything, ever. They were horrible and gave piss poor financial advice to consumers, abused my personal information, lied to me about the job I was being hired to do, and broke more than one federal law in the 3 months I worked there. I used to sit in my car and cry every day before work because that job hurt my soul so badly that I dreaded each moment I spent in that building. I won’t go into specifics here but if someone is thinking about getting a mortgage with them feel free to email me and I will be glad to answer any questions you may have.
There is some sense in it, although it is not the sort of thing to tell a tyro.
Interest rates normally rise to follow or cool off inflation.
Inflation (general price rises) is normally in tandem with house price rises.
The clincher is that there are two types of ‘inflation’, prices and wages
Personally I would only recommend a fixed rate, but one with transfer/getout clauses that are not onerous.
My current mortgage is a 15 year fixed. I couldn’t fathom not knowing from one quarter to the next what my payment would be. And at 4.25%, it was an incredible bargain. I did have mortgage insurance for the first year, since I only put 10% down, but the second year they automatically cancelled it, and it was only $25/mo. That was almost worth it for the peace of mind.
StG
My parents lived in a neighborhood where a number of homes are being foreclosed on. Unfortunately, too many of these homes are being bought by as rental properties by landlords who don’t do maintenance. The combination of foreclosures and badly-kept up rentals has drastically driven down property values in their neighborhood. They were hoping to sell their house and move to my town, but right now it looks like they can’t afford to. Subprime lenders don’t just affect the people who take their crummy deals.
The current delinquency rate on subprime loans is about 14%. So a little more than 85% of borrowers are in decent shape. Let’s be generous and assume that rate doubles. That would still leave about 70% of subprime loans that won’t default. And that’s defaulting, not foreclosure and losing a home.
So who would you suggest that the government restrict from getting a home? Its easy enough to say the poorest 20% shouldn’t get a loan or the 20% with the highest debt to income ratio shouldn’t get a loan?
Would you suggest an analysis by mortgage companies on a borrower’s company to make sure that it won’t close a plant where the borrower works? Would you suggest that the government try and predict the top of the real estate market and restrict loans in those areas?
If people want to require more disclosure, I have no problem with that. But if you are going to restrict mortgage lending, just remember that the dirtbags will always find a way to con people. Somehow people are still getting scammed by investment cons and home improvement cons. The people who will lose are the ones who won’t be able to buy a home ebcasue of the new restrictions.
I am a big believer in fixed rate mortgages too and have a 30 year fixed. I was offered an ARM and it worked differently than you have described. The rate could only change once a year. It could go up by no more than one point a year and it was capped at five points above the initial rate for the life of the loan. In this case you would know the worst case scenario in a given year.