I’m not sure I understand this. Of course, I can’t think of an instance in which I was subject to “irrational exuberance” that significantly impacted my financial situation. Or are you suggesting that I need to be protected from the effects of others’ irrational exeberance?
How stupid does someone have to be to not realize that if they don’t understand something, it’s probably not a good idea to bet their life’s savings and financial future on it?
What seems like common sense for a lot of people just doesn’t hit home with some. When the phrase “mortgage rates are at historic lows” means “refinance to a fixed rate NOW!” for most people others must just be clueless as to how the system works.
My wife wasn’t very financial savy but became a quick study when she tagged along during our house buying.
The Lender: “I see you need a loan for $150K. You have great credit. We can lend you up to $350 if you like.”
My Wife: “Why don’t we buy a bigger house then?”
Me: “Just because they’ll lend it to you doesn’t mean you can afford it.”
The Lender: “You are going with a 30-year fixed at 6%. We can get you a lower rate with an ARM and your payments will go down to this.”
My Wife: “That sounds like a good deal. Lower rate. Smaller payments. Less money. What’s not to like?”
Me: “Lower rate, smaller payments, less money now. Bigger rate, bigger payments, more money later.”
(One year later)
The Lender: “You are here to refinance to a 20-year fixed at 4.75%. Your payments will go up to this.”
My Wife: “But I thought we were doing this to save money? Why are our payments going up?”
Me: “Cause we just shaved 10 years off our mortgage and saved $91,000 in doing so.”
The Lender: “We can get you an even lower interest rate with an ARM and smaller payments.”
My Wife the Quick Study: “Fool me once…”
My little sister and her then-fiance, now-husband got one of these loans in 1/06 - no money down, 10% more than the cost of the house. By 1/07 they were actively and deliberately defaulting in the hopes of foreclosure followed by bankruptcy. Her claim is that nobody warned her (except the whole family) that this was a bad deal and the mortgage broker is the brother of her husband’s brother’s wife so why would he give them a bad deal. But, really, what kind of moron thinks that a mortgage given to a person who can’t even have a debit card is on the up and up? She also thought she couldn’t walk away when, during the closing, it was revealed that she’ll have a $130K balloon payment after forty, yes forty years. I think it doesn’t occur to her that it’s possible to save up for that balloon payment either. Oh, and she just discovered that they’ll only have 10% in equity after 30 years.
Meanwhile, her house is a shack for which they paid twice what it’s worth and she’s since made it worse with her pets.
Sigh! Once upon a time Sargeant Shriver thought she was retarded. I think he might have been a little right.
Interesting thing though: they’ve never made a timely payment and used to get some nasty calls from the lender (she thought that was very mean of them) but now that they’ve stopped paying altogether the lender hasn’t called. I think it’s all the bad press that has these lenders regrouping.
On a related note, what is a typical first adjustment like on an ARM? eg: that two or three year honeymoon ends, and the rate goes from X% to Y%
Just wondering as I’m looking at a roughly 1.6% increase in July, depending on what the 6-month LIBOR does in the next few months. After that, the semiannual adjustments are capped at 1% with a 12.something% max rate.
Ironically, I looked into refinancing, and at the moment, it will make more sense for me to stay with the ARM than to refi as the fixed rate offering (plus closing costs) is higher than what the ARM will adjust to.