CNN Money has an interesting article on the expected "shock" to the mortgage world when about $1 trillion worth of adjustable rate mortgages enter the adjustable portion of the loan.

About 3-4 years ago, I worked as a mortgage broker out in Long Island. I spent most of my day on the phone, relentlessly calling anyone who would listen until I could not dial anymore. The interest rates were so low that I could bring almost any one's monthly payment down by at least $150/month. This may not be worth the $7,000-$9,000 they had to pay in closing costs but I didn't tell them that part. I even convinced some people out of their 30 years fixed mortgages and into a 2 year-arm (the rate is fixed for 2 years at a much lower rate than a 30 year fixed, then goes adjustable and is based on the prime rate at the time, also known as a 2/28.). The 2 year arm gave them time to "fix up their credit and get some equity out of your house to pay of those pesky credit cards are stressing you out so much". You might say this sounds crazy and can't be true, but the sub-prime borrowers we were targeting would tell a different story. As long they heard the words, "This will cost you nothing out of pocket, everything is rolled into the mortgage" or "After we pay off $10K in credit cards, I'm still giving you $30K to do whatever you want with" or even "I can close you in 3 weeks if you send me everything I need today, and we'll do it at your house so you don't even have to leave. You get your check that same day" they were happy.

I'm not tooting my salesperson skills at all, I actually hate sales, I'm just trying to showcase the mistakes people agree to when they make uninformed decisions. After awhile, this job made me feel pretty lousy about myself. I was making good money, but I felt morally wrong taking advantage of people this way. Not to say that all mortgage brokers are evil people/companies, most actually do a good job of getting good people into good homes, I'm only describing my personal situation.

Needless to say, as young man with a little money in my pocket, a decent job, and a desire to "be somebody" in this world, I thought "damn, if Johnny can get a $300,000 mortgage for a new house, making only $45K/year, with no money down and a 530 middle FICO score... dammit so can I". Luckily for me and those who love me, I never followed through with this. The typical Johny only qualified by using a 2/28 (2-year fixed) or 3/27 (3 year fixed) with interest-only payments for the first year. He had to get the monthly payment low enough to qualify for the loan. Johnny had the same thought as some of the people in the article, that his house would continue to go up in value, he would "find a way" to make the payments and hold it together for two years. At that point he could cash out and even move to a bigger house if he wanted to. Laugh if you want to, but I use to listen to these plans all day.

I got a call one day from a man who had refinanced 2 years earlier with someone else and was now looking to refinance again to avoid going into the adjustable period. This is exactly the kind of "return customer" mortgage banks love. The guy would again have to pay closing costs, have to pay for an appraisal, and go though the whole process again. He tells me that he can barely make the payments he has now, so he is afraid of any rate increase that may occur and put him behind on his mortgage. His house was worth about $200K when he last refinanced and the young man he spoke to told him it was bound to be much higher when the fixed rate expires. Turns out, his house was actually worth only $205K (he got a second appraisal that actually came in at $190K). He did not have enough equity to do the refinance with us. He was stuck, nothing he could do. His only option was to sell the house and rent for the short term, but he was not about to give up his house. I never heard from him again.

This was what convinced me that this was not the way to go. I had to understand what I could afford, and go that route. The reason I remember this story is because this man may now be homeless, and my company helped him get there. If I had not spoken to him, I could have ended up homeless myself. I would have gone for the big house, found a way to get the loan approved, and would have no money to buy furniture and absolutely no way of keeping up with the payments or even putting gas in my car (that I would have bought to match the beautiful house I now had). Dont try to keep up with the Combs', make your own path and make everybody follow you.

Think it through before you make any big decision in life. I many not have my house yet, but when I do get it (and I will dammit), I won't going crazy trying to "hustle" to make my monthly payment, only to get it again the next month. Creative financing is all well and good, as long as you know what your doing. If you know for sure that you will not be living in a house for more than 2 or 3 years, then use those teaser rates to get in and get out. If your into flipping properties for profit, then go interest only because you won't need a loan for too long. Just know what your getting into. I'm all for taking chances in life, but some things should not be left to chance, like having a roof over your head.

Thanks for reading

I love you baby

15 comments:

  1. Moneymonk said...

    I had an IO loan at first and then we financed to a fixed. Good thing we stayed away from opening new accounts and our income increased!! So something bad turned good. But for some, IO can go from bad to worse, if your fico score has declined are you opened more accts since buying the home and your income may have decreased it can be very bad.

    I know someone that re-fi every two years. Every two years they renew the loan and tack on more closing costs fees. They do this to avoid the adjustment.

    I say avoid any extra debt and continue to pay your current bills on time and you can re-fi w/o a problem. I honestly cannot see how people sleep at night knowing they are skimming people, putting them into more debt.  

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  3. Sistah Ant said...

    A few years ago, I thought about getting a house too, because I knew I had the credit to qualify, even though I didn't have the money. But I decided to wait and prepare myself the right way. I'm glad I did. I might have a foreclosure on my hands by now if I did... This is a great post!  

  4. Rad said...

    Thank you sistah. I had the same temptations so I know how relieved you feel right about now. Hopefully we'll both be financially ready soon. Too many people think it's only about the credit, finances come second.

    Like Money said above, theres nothing wrong with an I/O loan or one of the other loans available, as long as you know what your getting into and not letting the bank/broker squeeze every dime out of you.

    Good luck and thanks for the comment.  

  5. plonkee said...

    Interestingly, the most popular mortgages (and competitive) in the UK are the 2 year fixed rate deals. But I think thats because you have to pay quite large exit fees if you want to sell up before the end of a fixed rate term (including a 30 year fix)  

  6. Rad said...

    Plonkee: Thanks for the comment. There is a pre-pay penalty even on 30-year fixed loans in the UK? I've never heard of that. On most of the 2 year fixes there is a pre-pay penalty of exactl 2 years, some even have a 3 year pre-pay. People don't read the fine print and find this out when they are trying to sell the house or refinance. Im curious, how long are the exit fees in place for in the UK if you have a 30 year fixed? If I decide to sell at year 20 of the loan, is there still a penalty?  

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