Sweet Mortgage Deals Turning Sour

The Press Democrat (Santa Rosa/ Sonoma) ^ | 9/23/2006 | Michael Coit

[ex-Texan]

I posted this editorial because it takes the position (like many naysaying posters) that option ARMs are useful tools. It also seems to praise the interest only loan as temporary financial compromise. Note that there was no mention in the article about negative amortizing loans. Loans that add to the principal balance every month apparently are not an issue to readers in pricey Sonoma, California. Oh, well. Yada, yada. "Nothing to see here. Time to move on."

[ex-Texan]

I should have said the editorial did not mention the term "negative amortizing loans." The author did mention the concept in general terms at the end of the article.

[stylin19a]

none of the examples are in dire need...in fact, one is in real good shape.

In little over a year ago...Gren Clarence bought a $500,000 home and put 25 percent down...

125k down you don't walk away from.

you are slipping....we need DIRE examples...

[operation clinton cleanup]

What is the difference between an interest only loan and renting?

[what's up]

Possible cap gain when selling.

[jocon307]

It seems to me to be pretty risky to have 2/3 of an areas borrowers in these non-equity gaining loans. I work for a law firm in the NYC metro area and I don't know any legal secretaries who could afford to buy a $500,000 home on their own, even with 25% down. The California housing market really does seem to have become a bubble, based on this article.

[ex-Texan]

The author takes the view that exotic loans are useful tools. I posted this particular editorial because that is the author's view. "Nothing to see here. Time to move on." Unless, of course, real estate falls more than 25% in value in Sonoma, California. And everybody knows that real estate always goes up.

[operation clinton cleanup]

gotcha.. thanks!

[Moonman62]

I work for a law firm in the NYC metro area and I don't know any legal secretaries who could afford to buy a $500,000 home on their own, even with 25% down.

Yeah, a $125,000 down payment, but with an interest only loan.

We're doomed!!!!!!!!!!

[Kewlhand`tek]

what is so wrong with fixed mortagages? when I looking at my first home arm didnt look good to me then either. I ended up with an 8.5 for 30 years, 4 years later i refi 5.5 for 15

[RobRoy]

>>What is the difference between an interest only loan and renting?<<

In my case (I rent) about $1,400 a month. That is one reason many see this as a bubble. But I think it is a credit bubble as opposed to a housing bubble. As loans reset, even those who don't lose their homes are going to have an impact on our economy as the money they use to make the higher payments is not used to buy stuff.

[quienyo]

"A little over a year ago, Gren Clarence was looking for a Petaluma home to shorten the commute to her job as a legal secretary in San Francisco. She decided the low monthly payment of an interest-only loan would help her save money.

Gren Clarence bought a $500,000 home and put 25 percent down. By using an interestonly loan, her monthly payment is $1,640 rather than $2,218 for a fixed-rate loan requiring payments toward both principal and interest."

In what world does a legal secretary have a $500,000.00 home?

[operation clinton cleanup]

I can see an interest only loan if the property value is expected to rise, but I would rather gamble my money elsewhere.

[Sybeck1]

So it's Bush's fault they financed a house they couldn't afford?

[gridlock]

All the while when folks were signing up for these loans, there was a chorus of prople saying they were stupid and dangerous and a bad deal. Well < DING DONG > it's the Piper at the door, and it's time to pay the man.

[Moonman62]

Perhaps she got the money from the sale of a previous home, or from a divorce settlement.

[freedumb2003]

What is the difference between an interest only loan and renting?

Given the choice, intelligent people rent.

[RobRoy]

Exactly! And expecting values to rise much right now might be a big mistake. I just talked to a friend that is in home construction in the Seattle area. He is VERY upbeat but when you really drill him he admits that things have "flattened".

I think of this flattening as what happens to the trajectory of a model rocket when it's fuel has expired and it reaches the peak. It seems to just sort of hover there for the briefest of moments and then...

[IncPen]

So...

If you have a $300,000 loan

And that represents 40% of the property value

in an area that's seeing huge ups in the market

would it not make sense to get a 10 year interest only loan

because

your payment is fully tax deductible (as opposed to renting)

and

in 10 years (at 3% inflation)

your loan principal is 1/3 less than it was when you started.

Why exactly is this a bad thing?

[AlaskaErik]

I bought a new home earlier this year. When I told the loan officer I wanted a 15 year fixed rate, she said hardly anyone goes that route. But she never tried to talk us out of it. Had I done this with my last home, I would have owned it free and clear, since I had it for 15 years. Instead, I had to pay off the remaining 90k owed on it. The new home will also be a long term proposition, since we plan on it being our retirement home. With a 15 year loan, it'll be paid off when we retire. And that will make us really well off financially to not have that burden.