Sweet Mortgage Deals Turning Sour

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

[operation clinton cleanup]

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...

LOL! Being a former model rocketeer, I can relate. The area I live in never benefited from the bubble, so property investment was never on the table.

[MSM Hater]

Mortgage interest is deductible on your Fed return, apartment rent is not.

[steveo]

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

Depending on your tax situation you can write off mortgage interest but can't write off rent. AND if you pay rent you get no benefit if the value of your landlord's property increases in value.

[Luke Skyfreeper]

These people need to break their ARM before their ARM breaks them, and get a SmartChoice loan from Quicken loans!

You can pay interest-only mortgage payments for 10 years!

The interest rate can only adjust every 6 months after the fixed-rate period!!

Finance up to 100 percent of the home's value!!!

So after then next 10 years of payments, you own...

...a mortgage!

[gogeo]

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.

1) Option ARMs can be useful tools, but I believe they should be limited to financially savvy, well off borrowers. I believe that if a client can understand the risks and benefits to a proposal, it should be the choice of the client to say yes or no. Unfortunately, I think few if any Option ARM borrowers understand their mortgage. I'm a financially savvy, well off borrower, and I understand Option ARMs. I've never been able to put together a presentation to fully explain the risks, so in 6.5 years in the mortgage business I've done a total of one. That was to a client who had a neighbor who had one, and said they would rather get it from me than someone else, but they would get it.

Option ARMs, BTW, are much different than other ARMs.

2) An interest-only mortgage is a great temporary compromise. Like many other areas where there are choices, there's the potential for making poor ones. Clients need to have the alternatives spelled out and the dangers clearly explained; they then get to make the choice.

3) The article does mention NegAm loans.

Other than these (few) area, your statement makes sense...for some poeple. You seem to know enough to get yourself (and others) in trouble, but not enough to really talk intelligently about the subject. Readers should be aware that advice, like anything else, is generally worth what one pays for it...and everyone has an opinion. There's a lot of studying, experience, and temperment that separates opinions from advice.

That's something that many mortage brokers seem to have in common with you...they have no business calling what they offer, advice or service. It appears many of these borrowers are poorly served, as are those who take what you post at face value.

[gogeo]

Possible cap gain when selling...

...amd deductibility.

[RobRoy]

>>Mortgage interest is deductible on your Fed return, apartment rent is not.<<

That is one reason to buy. Another is that property taxes are also deductible.

However, the values are so lopsided where I live that even if you have a good income, renting is far cheaper even AFTER you consider the tax deduction for interest and property taxes.

FWIW, I would like to see the interest deduction eliminated, as they do in Canada. It would stop people from buying for the false reason of saving taxes. It is amazing how taxes govern peoples purchasing decisions in homes as well as investment instruments.

[IncPen]

It is amazing how taxes govern peoples purchasing decisions in homes as well as investment instruments.

It's another unintended consequence of government intervention in the markets.

[Jacquerie]

It is amazing how taxes govern peoples purchasing decisions in homes as well as investment instruments.

Uncle Sam is the evil silent partner of every productive citizen.

[Lizavetta]

I'll bet the same people who are complaining about this stuff now are the same ones who praised these loans for allowing people to buy homes who otehrwise could not.

In other words, chronic complainers.

[Flying Circus]

In the San Francisco bay area that is a low end home. If the same house were located in almost any other party of the country the $125K down payment would probably buy it outright, mortgage free and have money left to do home improvements.
This area is completely out of whack- by traditional lending rules the median home sells for more than twice what the median income can afford.

[toddlintown]

"an interest-only loan"

For morons

[goldstategop]

Some people buy two homes. One as their principal residence, the other as a rental to provide an on going source of income. Of course they could accomplish the same end by buying a duplex and renting half of that out to provide income to pay off the mortgage.

"Show me just what Mohammed brought that was new, and there you will find things only evil and inhuman, such as his command to spread by the sword the faith he preached." -Manuel II Paleologus

[goldstategop]

In California. Most middle class suburban homes will be priced between $400,000 and $700,000 with the median average around $580,000.

"Show me just what Mohammed brought that was new, and there you will find things only evil and inhuman, such as his command to spread by the sword the faith he preached." -Manuel II Paleologus

[ex-Texan]

A brand new duplex was the first real estate I bought back in 1972. After that, I bought other duplexes, houses and apartment buildings. Nada por nada.

[Toddsterpatriot]

Oh, well. Yada, yada.

Oh, well. Fearmongering blogpimpery .

[goldstategop]

People in California know they'll never pay off the home, so why not just enjoy as long as they can. That will work as long as the home keeps appreciating in value so when it comes time to sell, they'll be able to pay off the mortgage on sale and have some cash left over. But if the home's value decreases, they're stuck.

"Show me just what Mohammed brought that was new, and there you will find things only evil and inhuman, such as his command to spread by the sword the faith he preached." -Manuel II Paleologus

[Toddsterpatriot]

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.

Who gets the extra money the borrower pays? The bank. What does the bank do with it?

[Polybius]

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

When you are renting and cannot afford a hefty increase in the monthly cost of the rent, when you walk away from the deal, you don't lose a down payment totalling 20% of the price of the house.

[Arthalion]

They account for two thirds of all purchase and refinance loans in Sonoma County

These numbers can be a bit deceptive, because there ARE useful IO loans out there and the people using them (like me) are getting lumped in with people who bought into risky ARM IO's.

My home, as an example, is a 30 year Fixed with a 10 year I/0. My interest rate is and always will be locked at 5.9%, but I took the IO option as a way to pay off some other debt early (instead of simply refinancing it though equity as many others have been doing). I am in an interest only for the first 10 years at $1660 a month, and when my mortgage resets in eight more years that number will go up to $2250 for the remaining life of the loan. Why did I do this? Because I couldn't really afford to pay $2250 a month when I bought the home, and I'm gambling that my income will increase by at least $600 a month before 2014. Unless we have some kind of severe economic collapse, I can't forsee any situation where that won't happen. In the meantime, I'm basically deferring about $70,000 worth of payments until the last 20 years of the loan. The final numbers will be a wash however...I will ultimately end up spending the exact same amount on my home as someone who took out a traditional 30 year fixed at 5.9% for the same amount on the same day. The only thing I really "lose" is a bit of equity for the first decade since none of my payment is applied to the principal. That loss is partially worthwhile to me because of the tax benefits of the mortgage interest deduction.

Is it for everybody? Nope, but since I have no plans to sell the house for at least another 20 years, it will work out pretty well in my situation.

Not every IO being reported in these statistics is an unstable 3 year IO ARM handed to people with bad credit and poor income potential. For some of us, the IO choice actually makes sense. Keep that in mind when the looking at these statistics.