Jmaster911

Or don't and let peoperty investers make a fourtune when they buy your house for 75% less than what its worth

Its just the usual cycle, boom & bust, it always has happened and always will. Some people shouldn't lend, some people are just unlucky (being laid off, etc).

Whatever happens, why does it annoy or hurt you!!!!

Steerpike

Adjustable Rate Mortgages are not all bad - but you have to fully understand what you are getting - a discounted intro at the expense of a increased payment later. The first 3 mortgages I had were all ARMs and they worked to my advantage.

The KEY is to understand all the variables and know what the downsides are, and plan for them. If you have a basic grasp of maths, and the ability to run scenarios in excel, you can play them to your advantage.

The first concept is that all ARMs have a final 'target' rate this is simply some published, independent rate (eg, 'Federal Cost Of Funds' index) plus a margin (eg, 2%). So you should look at what that rate is today, and be sure you could afford it if you really needed to pay it. Then you need to look at what the 'caps' are; ARMs may have a 'cap' on annual increases, such that your annual payment can't increase more than 'x'% - so even if the target rate is high, your cap may limit your exposure. But then you have to really be careful of those mortgages that allow for negative equity - where the payment may be capped, but the 'cost accumulation' is not capped, and your payment is not even covering the interest component. Even these mortgages can be attractive IF YOU FULLY APPRECIATE what this means. You also need to pay attention to the underlying index on which the ARM is based; some indexes are quite stable, while others are very volatile. If you have an ARM based on a stable index, your exposure is more controlled. If you know how to research all this, and plan for the worst, you can take full advantage of a heavily discounted intro rate.

The recent problem is that the intro rates became so heavily discounted as to be unrealistic, and people completely ignored the fact that the fully adjusted rate would be much higher, assuming they could sell or refinance to get out of trouble. Selling or refinancing is not always an option in a bad market; you MUST be ready to pay the full freight if the worst comes to the worst (as it has recently).

I'm now on my 10th or 11th mortgage (can't keep track) and I have a fixed, but I would still consider an ARM in the future if the parameters were appropriate.

Regarding 15 year mortgages, and paying off a mortgage - I'd recommend most people get a 30 year mortgage and then over-pay it - pay as if it were a 15 year mortgage. Why? because if you hit bad times, you are not FORCED to pay that higher amount - you can drop back to the lower monthly minimum. These days, I have a 15-year mortgage and am paying it off on a 7 year schedule, but that's because my mortgage is very small.

Finally, don't ignore the tax-deductibility of the mortgage interest ... my mortgage is almost paid off and I'm now considering ways to get a better tax deduction.

fatbrit

Good post. Perhaps a qualification for an ARM should be a simple math test?

Steerpike

Sorry ... for the sake of accuracy, I have to correct this - I should have said, 'negative amortization'.

cindyabs

We'll let you off this time, but don't let it happen again.

tonrob

That's ok, but I'll tell you what we can't let go...

Steerpike

We are living in the US, and it's called 'math' here I grew up calling it 'sums' ... or is it 'rithmatic' (as in, the three "Rs").

fatbrit

I used an "off of" on here the other day. Luckily, nobody noticed.

cindyabs

That's what you think.

Giantaxe

What many folks don't realize with these neg-am "pick a payment" loans is that once the unpaid balance reaches a threshold (usually something like 115% of the original principal) they convert into an normal amortizing loan over the rest of the term. This can result in a huge bump in monthly payments and is one of the reasons why these loans are so problematic and have predictably large default rates. It's too bad that ARMs in general get tarred with the same brush. Also note that almost all UK mortgages are "ARMs" of some description.

tonrob

The U.S.? You're JOKING ME, right?

I was wondering where all the kangaroos had got to. I never could figure out all those bloody screens at Heathrow... :curse:

Kaffy Mintcake

We actually recently decided to do that very thing. The key is being disciplined enough to pay extra when you're able to shorten the time, but we figured kids might come in the future, and who knows if our earning potential may change. This way we have a payment we're comfy with and we can decide when/if it makes sense to put more down.

Steerpike

The only thing to note is that, all other things being equal, a 15 year mortgage offers a slightly better rate compared to a 30 year; so you will pay slightly more going with a 30-year and paying it 'as if it were' a 15 year, compared with signing up for a 15 year. A small price to pay, though, for the flexibility of paying less if you want/need.

Jetlag

You do realize that many people in the US were given mortgages at affordable rates which the lender then escalated to deliberately make them default so they could foreclose? The idea was they could get all these super cheap properties and make a killing by reselling them. Problem is that they foreclosed on so many properties that they flooded the market. There are entire neighbourhoods empty because greedy financial institutions raised interest rates by as much as 20%. Perhaps you've heard the term "sub prime"??

The entire western world is feeling the crunch because of that little stunt.


Your comment was quite unfair and a little shortsighted.

Manc

bollocks.
it is entirely fair.

a) don't buy a house you cannot afford
b) don't hock yourself up to the eyeballs

if I, a simple man with only a C in GCSE maths can understand I can't afford a 5 bedroom house with attached garage, plus 2 car payments and $30,000 in credit card debt...... then I fail to understand why half of America cannot do the same thing