Sweet Mortgage Deals Turning Sour

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

[RockinRight]

In the insane other-world of California. See my comment a few posts up.

There are no houses in CA for under about 300k.

[RockinRight]

Not necessarily. See my post 120.

[Toddsterpatriot]

I bought my first house in 1993 with an ARM. It adjusted once a year, maximum adjustment, up or down, was 1% per year. The subjects of some articles posted by doom and gloomers have loans that can adjust every month. I bought as rates were beginning a long term drop. If the people you know with ARMs had a loan like mine, they will pay more, but have some time to refi. If their loans can adjust every month, they could be in for some pain.

If everyone was good with numbers, we wouldn't see so much consumer debt in the US.

You think it's too high? Based on what?

[RockinRight]

Just go with a FairTax. Eliminates all of the deduction BS.

[RockinRight]

Plus you can do whatever you want with it, since it's yours.

Well, I won't get into the HOA's...that's a topic for another thread...

[RockinRight]

That's exactly the problem. It creates a paradox. No investor would buy the house just to rent it, since they would never get enough out of it to pay their mortgage, let alone any profit. The people renting houses now are those who bought them years ago. So, either they will eventually sell since they'll make a huge chunk or change, and then rents will go up since there will be a shortage of rentable properties, or, the market will crash since renters can't afford to buy and there will be nobody to buy these homes.

Here in Ohio, you can still buy a single family home and get enough rent out of it to pay the mortgage and make a small profit, especially if you hang on to it for a while.

[steve-b]

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.

Yeah, if only those darn bankers would quit burying the money in Mason jars as soon as it comes in and start, oh, maybe investing it....

[freedumb2003]

Not necessarily. See my post 120.

Yes, there are rare conditions that it might make sense. But they are very, very rare.

In general, if you can only afford an interest-only loan, you can't afford the loan.

[CORedneck]

I have seen POS houses in Monterrey, CA for $600k !

[RobRoy]

>>Yeah, if only those darn bankers would quit burying the money in Mason jars as soon as it comes in and start, oh, maybe investing it....<<

I heard many years ago that real estate and the stock market compete for many of the same dollars and to some degree,when one goes up the other goes down.

But the economy needs people to frivolously buy STUFF to keep going. Invested money (savings) does not stimulate the economy. Blowing money does.

[M0sby]

Broadview Area Home

Property 1 of 86

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Price:	$550,000
MLS#:	26145074
Bedrooms:	3
Bathrooms:	2.25
Status:	Active
11041 2nd Ave NW Seattle, WA 98177

Comments
A lovely, well maintained home, close to everything, quiet neighborhood in the Broadview area. A large house, with possible mother-in-law downstairs. A separate enterance, with bath, kitchenette, ex.room and family room. Upstairs is a well kept, one owner home, Hardwoods under the carpet!! Peek-a-boo water view. A spacious kitchen and living area, with a great floor plan. 3 bedrooms, 1 1/2 bath upstairs, and a 3/4 bath downstairs. Very large, covered deck!! Landscaped, low maintenace yard!!
General Property Information
SQFT: 1950 Year Built: 1961 Lot Size: 6098.00 SQFT Fireplace: 2	Views: Yes Garage: Garage-Attached Roof: Composition	Heat: Forced Air Fuel: Natural Gas Taxes: $2,997
Floors: Hardwood, Vinyl, Wall to Wall Carpet, See Remarks
Interior: Bath Off Master, Dining Room, Pantry, Security System
Exterior: Brick, Wood
Site: Cable TV, Deck, Fenced-Prtl, Patio, Sprinkler System

  

[Toddsterpatriot]

Invested money (savings) does not stimulate the economy.

Didn't take any econ classes, did you?

[RobRoy]

>>Didn't take any econ classes, did you?<<

Heh, heh. I wanted to pull that one back as soon as I sent it. I was attempting to make a point but was too brief to make it.

Maybe it is better to ask a question: Would you say that credit (the borrowing of money) has been a major stimulant to the western economy for generations? And normally wouldn't interest rates be controlled by supply and demand? That is, the more people are saving, the lower the interest would be because there would be more money to loan, and fewer takers. Yet that doesn't seem to be what is happening now. People are simply not saving but borrowing (more often than many are comfortable with) from their home equity to buy stuff, be it a remodel or a motor home.

Where is all this money coming from to support such low rates. I know I am being somewhat naive, since the textbook rarely applies to manipulated markets, but it still makes one wonder what is proppng up this house of cards.

[Toddsterpatriot]

Would you say that credit (the borrowing of money) has been a major stimulant to the western economy for generations?

Yes. Hernando de Soto wrote a book, "The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else" that explains why a lack of property rights and the inability to borrow against your house in many 3rd World countries inhibits economic growth.

And normally wouldn't interest rates be controlled by supply and demand?

You bet.

That is, the more people are saving, the lower the interest would be because there would be more money to loan, and fewer takers.

Almost. More savings would reduce rates to the point where there would be more takers.

People are simply not saving but borrowing (more often than many are comfortable with) from their home equity to buy stuff, be it a remodel or a motor home.

Some are borrowing more, some are saving more.

Where is all this money coming from to support such low rates.

Some from overseas. Some of the home equity really was used to pay down other, more expensive debt.

[technochick99]

And if you are in a single family home, you have no one living on the other side of the wall (floor/ceiling). That is heaven. In the Chicago metro area, property taxes have caused the rental rates to go up. I could be renting a 1 bedroom apaertment for what I pay for my going-on-8-year-old house I bought new. Of course, I wouldn't have a fenced in yeard, I probably couldn't have 2 dogs that bark at people, nor could I have room for my business. If I wanted to live in a bigger (more than 1 bedroom) place, I would need a roommate. There are so many good reasons (and non-financial ones at that) to buy versus rent in certain areas, but they don't surface in generalizations like this.

[Polybius]

an interest-only ARM is a ticking financial time bomb that will explode in your face when the interest-only grace period expires.....Polybius

********

Seven years is not a grace period. There is plenty of time to refinance if rates are trending up or down.

The current inflated prices on houses are possible only because interest-only ARM's make the monthly down payment affordable by allowing the buyer not to pay any principal for 7 years.

Even if interest rates stayed the same, the monthly payment would still go up a hefty sum once you are forced to finally pay the principal and the amount you have to pay off is compressed into the remaining term of the loan.

If you couldn't initially afford the house at that price without resorting to such a gimmick, what type of loan are you going to "refinance" into to get you around the simple fact that you could not initially afford the principal plus interest at a lower interest rate than you have available now?

Interest-only mortgages were designed for wealthy families who used the loans as cash-flow management tools and could, if necessary, pay off the entire sum by liquidating some stocks and bonds. .......Trouble is, the sheer numbers indicate that the loans are also being taken out by a much bigger sector of the public -- people who are struggling to get into a rising housing market and feel that they couldn't get the properties they want any other way. ........Often, interest-only borrowers argue that they will refinance or sell their homes before the principal payments start coming due. But the risks are high. If they refinance, the new payment could be higher than the old one. And if they sell, they need to hope that prices have kept rising. Otherwise, they won't even recoup all of their down payment. ........But even some parties that benefit from the rage for interest-only mortgages, like homebuilders, are wondering if the trend may have gone too far. "In most of those cases, buyers have no idea how they're going to pay" the higher payments that will be owed once principal payments begin, says William J. Pulte, founder and chairman of Pulte Homes

A five or seven year interest only ARM is the way to go. No one in my area stays in the same house more than seven years. Take the lower rate and pay down your principal faster.

What does a "lower rate" (referring to an ARM) have to do with "paying down your principal" (the exact opposite of what an interest-only loan does)?

The whole point of an interest-only loan is that it lowers your payments because you don't pay off any of the principal at all for 7 years.

That gimmick allows a burger flipper at McDonald's married to a shelf stacker at WalMart to be bidding $250,000 for a dump of a house that is not worth anywhere near that amount if the buyers who buy such dumps were forced to pay prices they can actually afford with fixed rate conventional financing.

Once the burger flipper gets pregnant and wants to stay home with the baby and the interst-only grace period expires and they now have to pay principal on top of interest, and the supply of "greater fools" not willing to pay artificially inflated prices to take the house off your hands runs out, there will be a foreclosure sale on that house.

If nobody in your neighborhood sticks around for more than 7 years, that means that the neighborhood isn't exactly prime real estate and it will be the first to tank when the interest-only foreclosures begin and you have to ditch your property at a price nobody is willing to pay.

Right now, I am living in a rented house and the waves of the ocean are 15 yards from the windows of this room. I also own two houses, free and clear, one in the red hot San Diego market and one on Puget Sound. Both houses are paid off as I bought them at good prices that were set at a time when buyers could only buy what they could afford without resorting to interest-only loan gimmicks.

I have not bought this house, although I could with cash, because it is not a good value at this point in time.

If there is no good value around, it is better to rent than to acquire a financial time bomb.

Once your neighborhood starts sprouting FORECLOSURE signs, I may be one of the vultures flush with cash buying the properties that your neighbors can no longer afford the monthly payments on and I will be buying those properties at fire sale prices far below what they paid for it.

Interest only loans are great of you have enough cash to pay off the entire principal and you are using them as a cash flow tool.

If you are using interest only loans to barely afford the monthly payments on a price-inflated house, you are a financial train wreck waiting to happen.

[LetsRok]

You are supposed to take the lower interest rate and use the savings in interest to pay down you principal at a faster rate. Your interest payment is calculated on the outstanding balance. By the time the 7 years is up, I can pay down at least 30% of the principal before it converts to a 1yr ARM. I agree you should not use this program if you can't afford the house with conventional financing.

[LetsRok]

By the way, I live in Loudoun County, VA. This is the hottest place for housing in America right now. As long as their is a federal government, there will be people needing to move here to support it.

Thanks for the sound advice.

[Polybius]

You are supposed to take the lower interest rate and use the savings in interest to pay down you principal at a faster rate.

You have just described an ARM. That has nothing to do with the interst-only gimmicks that so many buyers are now using to be able to barely afford the monthly payments on houses priced at levels that they should never touch.

Your interest payment is calculated on the outstanding balance. By the time the 7 years is up, I can pay down at least 30% of the principal before it converts to a 1yr ARM.

The whole point of an interest-only loan is that these people don't pay off a single penny worth of principal until 7 years have passed.

I agree you should not use this program if you can't afford the house with conventional financing.

However, as the link I provided said, that is exactly what most buyers who take up these loans are doing.

That not only hurts them at the end but also hurt us who pay off interest at an accelerated pace. If we buy into this current market, the prices are inflated by the easy money put into the hands of people who cannot afford these prices in the long run. We are therefore buying at an inflated price.