Sweet Mortgage Deals Turning Sour

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

[GodGunsGuts]

So the extra money banks make on a loan that adjusts is pure profit?

[GodGunsGuts]

So banks are free to charge whatever interest they please? Why not 20, 30, 40 or 50%?

[ChildOfThe60s]

Also, if the real estate market tanks and your job with it, you can drive off to somewhere else and look for a job.

IIRC, after the Dot com dive, a lot of people lost jobs but at the same time couldn't sell their homes for anything near their mortgages.

At least with rent, you don't have the baggage.

[Toddsterpatriot]

No.

[Toddsterpatriot]

So banks are free to charge whatever interest they please?

No.

[Petronski]

So the extra money banks make on a loan that adjusts is pure profit?

Irrespective of the answer, hypothetically speaking, so what?

You have a problem with pure profit?

[GodGunsGuts]

OK. If banks are not free to charge what they please, what factors determine the interest they are allowed to charge?

[Alex Murphy]

Ping to read later.

[Toddsterpatriot]

If banks are not free to charge what they please, what factors determine the interest they are allowed to charge?

If you sign a contract for a 6% fixed rate 30 year mortgage, your bank can charge you 6%. If you get an ARM, the terms of the contract determine what they can charge.

Besides that, competition limits the rate a bank can charge.

Do you have any other silly questions that have nothing to do with the point I was making?

[Alex Murphy]

I posted this editorial because it takes the position (like many naysaying posters) that option ARMs are useful tools.

IMO there's nothing wrong with an ARM, Interest-Only, or any other oddball loan so long as the borrower understands full well what they're signing into, and if they still have the financial means to afford the property, under more conventional, fixed-rate loan guidelines.

Most borrowers who go for these low-entry loans are gambling their future - literally - that their incomes will change to match the inflated payments when they hit later. If lenders would deny loans to those who cannot meet the higher payments now (or at least demonstrate how they will meet those higher payments), these types of loans wouldn't be a problem.

[GodGunsGuts]

So when it comes to mortgages, would you say that banks mostly keep pace with long-term rates, or do they on average charge whatever they wish?

[Toddsterpatriot]

There is too much competition for banks to "charge whatever they wish".

[GodGunsGuts]

So competition means banks pretty much make the same amount of profit on home loans no matter what the interest rate?

[Toddsterpatriot]

Where did you get that idea?

[GodGunsGuts]

I'm basing my questions on your answers. Do banks make more profit (income minus expenses) on mortgages when interest rates rise? Or does their profit margin on mortgages remain relatively constant regardless of the overall interest rate environment?

[Toddsterpatriot]

It depends.

[GodGunsGuts]

It depends on what?

[Toddsterpatriot]

Cost of funds. Types of mortgages. Lots of things.

[GOPJ]

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

The renter takes treats the property as if he owned it...

[Petronski]

Be careful of his rapier cross-examination!