Homestead mailing list

["Lisa K.V. Perry" <lisakvperry AT gmail.com>]

On 7/21/06, Clansgian AT wmconnect.com <Clansgian AT wmconnect.com> wrote:
> The problem for some people in the burst isn't that housing values will
> drop, but rather that they will fail to continue rising.  Many a poor dope
> has bought real estate with questionable financing based on the idea that it
> doesn't
> matter how much it costs to float the loan, the price of the house is
> going up so fast he's covered no matter what.  In a burst or even just a
> vigorous slow-down, the interest and fees on the loan keep piling up but the
> house stays the same value.


Yes.

In the last few years ARM loans (adjustable rate mortgages) and believe it
or not, Interest only loans were very popular.  I did one ARM loan in three
years and despised interest only loans--to a couple who cashed out of the
stock market (they figured their house was going to be their best investment
for years to come) and put the $$ on their house and the rest to be paid off
with the ARM loan in three years.

Many people took ARMs because at .50 less interest rate than a fixed rate
loan (that was the average difference between a 30 year fixed and an ARM in
my area), the person could afford to purchase more house.  These people
didn't bank on when the ARM period was done (many are for three years) and
it adjusted to today's rate--anywhere from 1 to 2% higher at first bump--and
their monthly payment increases accordingly.  Then add to the larger house
payment the fact that gas used to be expensive when it hit $1.50/gal. and
now it's nearly double.

As far as interest only loans, it's worse.  The people often put down as
little as possible--many are 100% loans--and they hope to get equity in
their home by the value continuously raising over time as most homes did in
the last ten years or so.  They are not working on the principal, just the
interest for most of these people (though they have the option of making a
larger payment, but the whole purpose of this stupid loan is to pay the
minimum and purchase more house.) If the value stagnates and doesn't rise,
or heaven forbid, if it falls backwards--you are in the precarious position
of owing more than the home is worth.  Then defaults and foreclosures
happen, why pay the mortgage when it's not worth what you decided to pay for
it?

But in the case you describe, Bev, I'd think there's not much to worry
> about.   With only 11 years to go on a mortgage and no plans to sell unless
> you have to,  a housing bubble will not affect you at all.

Yes.  You're in a good situation, Bev.  You intend to stay put, don't owe
much and don't have much time left to pay.  If a real bubble happens, future
homesteaders can buy low and get a great deal.  The bubble could be good for
those who are ready  to pay less for a house.  Yours is a long-term, perhaps
life-long investment and that's the key.

You know, the mortgage industry began offering 40 year amortization terms in
the last couple of years--to again let people have the absolute lowest
payment possible to afford to buy more house.  My husband and I would laugh
about it, we called them have-a-mortgage-payment-until-you're-95 loans and
other appropriate names.

I truly did not belong in the mortgage business.  Or maybe I did as one of
the ethical ones.  Just thankful I don't have to do it full-time anymore.
Whew.

Lisa