Nightmare Mortgages

[celeb_2006]

http://news.yahoo.com/s/bw/20060901/bs_bw/b4000001

Gordon Burger is among the first wave of option ARM casualties. The 42-year-old police officer from a suburb of Sacramento, Calif., is stuck in a new mortgage that's making him poorer by the month. Burger, a solid earner with clean credit, has bought and sold several houses in the past. In February he got a flyer from a broker advertising an interest rate of 2.2%. It was an unbeatable opportunity, he thought. If he refinanced the mortgage on his $500,000 home into an option ARM, he could save $14,000 in interest payments over three years. Burger quickly pulled the trigger, switching out of his 5.1% fixed-rate loan. "The payment schedule looked like what we talked about, so I just started signing away," says Burger. He didn't read the fine print.
After two months Burger noticed that the minimum payment of $1,697 was actually adding $1,000 to his balance every month. "I'm not making any ground on this house; it's a loss every month," he says. He says he was told by his lender, Minneapolis-based Homecoming Financial, a unit of Residential Capital, the nation's fifth-largest mortgage shop, that he'd have to pay more than $10,000 in prepayment penalties to refinance out of the loan. If he's unhappy, he should take it up with his broker, the bank said. "They know they're selling crap, and they're doing it in a way that's very deceiving," he says. "Unfortunately, I got sucked into it." In a written statement, Residential said it couldn't comment on Burger's loan but that "each mortgage is designed to meet the specific financial needs of a consumer."

[AliceInWonderland]

um yeaaaah; I would never go for adjustable rate anything! and Interest only can be dangerous too; unless u live in L.A. where you're almost sure to sell for more than you paid w/ in months even.

[Lobelia]

Um, AGAIN, I was told that there would be no math on this board.

I'm confused. Why is he going in the hole on this?

[AliceInWonderland]

omg ^ I just LOLed so fuckin' loud Lobes much to the chagrin of my bitch sister sitting nearby nibbling her stupid bf's ear

[Lobelia]

You laugh, but I have a certifed Math Anxiety Disorder, as well as Generalized Arithmetical Retardation, and I get a hefty guvment check because of it, so I laugh LAST.

[western]

Sort of the same thing happened to my sister. This energy company told her if she signed on with them her hydro bill would go down by 25%. Instead she ended up getting double-billed by both the old & new companies and to cancel the policy with the new company will have to pay $700.

If it sounds too good to be true, it always is.

[louiswinthorpe111]

As a loan officer, I'm getting a lot of business from people that have these ARM's. They are risky for people that don't know what they are doing. In 2-5 years, if you have problem, lose job, medical, whatever, have a problem makig payments so your credit goes down, you can't refinance into a loan with the same interest rate. I see this a lot. So you payments are automatically going up a minimum of $200 per month, depending on loan amount. For some people that financially strapping. This is going to increase the number of foreclosures. I try to stay away from ARM's at all costs, unless it's an investor that will be selling within 2 years.

[darksithbunny]

I have MAD too, Lobelia! And probably GAR as well.
This is so why I am not buying a house until something gives in this market! This is just fuckingridiculous!

[sjankis630]

Option ARMs are the latest in the world of the housing boom (bust?) Typically these loans offer the borrower 4 levels of payments based on a formula. usually they are the following: minimum payment, interest only , 30 yr payment, and 15 year payment. The borrower can pick any one of these payments based on how he feels his financial situation is that month.
The interest only is the typical ARM that some of you are familiar with (you pay only interest and make no reduction (defer paying down) in principal for a fixed period ) and the 30 and 15 yr options are the equivalent of a fixed 30 or 15 yr mortgage.
With these Option ARMS - the minimum payment option is very much like a credit card - and is typically the only payment 80% of the people who take out these loans make. With this payment you are paying neither the principal nor the entire amount of interest due on the loan. The interest that does not get paid gets added back into the interest due on the loan and this increases your actual loan balance - This is called NEGATIVE AMORTIZATION, OR DEFERRED INTEREST.
You all know that recently the US Govt has made the credit card companies increase the minimum payments on credit card debt because of the deceptive nature of the thought of having reasonable payments to the customer, but in reality greatly increasing the amount the person will pay over the life of the loan.
Banks are giving a premium to loan originators on these type of loans for a couple of reasons. They don't typically originate these loans - typically a mortgage company will do this - but pay a premium to the companies who bring these into their banks. Why ? Because while most of the customers pay only the minimum payment, the bank can count the higher payment option on their books for the month due to accounting rules. This means more revenue to the bank even though the full payment hasn't been received. As the article states usually the borrower is doubly screwed on this type of loan as they cannot re-finance out of it without paying a stiff penalty - sometimes as high as 10,000 - 15,000 dollars.

[A*O]

Unless you are in dire financial straits, it's always better to pay a (carefully chosen) mortgage on a property you will own outright one day than pay rent on a property the landlord probably already owns and you are funding his kids through college or his holiday villa in Cancun.

The old rule applies when it comes to buying property - Location Location Location. You can buy a palace in a crappy part of town or a dreaded McMansion, and you are doomed. You can buy a run-down semi-shack on a prime piece of land in a great location and you will probably do OK. The intrinsic value of a property isn't the number of bathrooms, the pool or the marble hallway - it's the LAND it's built on and where that land is because God isn't making any more land.

[AliceInWonderland]

most the ppl losing their houses now should've never bought in the first place and they're also the reason why the market got so ridiculous and prices so high so i dont feel too sorry for them.

[LynnieD]

I have a friend that has an 'interest only loan', and because I am also math challenged, I am unsure if it's the same as what we are talking about here (because I couldn't understand what the hell the article said). But she's getting hosed.....and will never actually own her home. Though, she HAD TO HAVE this huge, gorgeous house and the only way she could do it was the interest only thing. But, come on.

[AliceInWonderland]

yeah interest only is what you would have wanted at the beginning of the boom in L.A. where you buy an investment for say $500,000 and you only pay the interest well then in 2 year or so you sell it for 1.5 million and you pay back the loan and the interested added up over those few years equals less thean the 1.5 mil so you'd made a profit making both you and the bank happy, but interest only is only good for instances like that where you're buying an investment for only a small amount of time and you know that you'll be able to sell it at an inflated profit to ensure a profit. Its risky, but works well in Southern California or worked well for some i should say... Commercial properties are still booming here but the housing market is leveling off where there's still appreciation in your homes value but its not shooting up to the levels they were before.

[Tati]

It's similar here now as well. The market has certainly levelled off, though it's still "healthy" ie. a good time to buy, but not so easy to make a quick flip. So much of the new growth is in the condo market, where it can be very difficult to improve the value, since new condos are typically "perfect" from the get-go, with no real room to add value.

We bought an old, small house in a not-quite-stellar but improving area. We simply couldn't afford a better area, but it is improving - there's some new construction, and a lot of renovations going on on the exisiting buildings, both residential and commercial. It already looks a lot prettier than it did a year ago when we bought, and luckily, some of the most dramatic changes have been right on our street.

I think we made a good purchase: we paid $15 000 below asking price, have a 4% mortgage (not one of these kooky ones), and were lucky to find an old house that still has a cohesive design - so many of them are rather makeshift with renos piled on top of other renos, clashing styles, weird features, etc. So it's a "normal" looking house, but with lots of room to improve as well, and it doesn't need any serious work, so we'll be able to make a big visual impact without spending too much $$.

We went from "maybe we should look into buying a house" to signing the papers very quickly, but a year later I still feel like we made a good choice. We did find our "dream" house along the way for an extra hundred grand, but sometimes you just have to be realistic and stick to what you can afford. I shudder to think of the state we'd be in every month had we talked ourselves into buying that house. People need to have some foresight.

[LynnieD]

4% is damn good Tati! And you have to start small (usually) and work up to the good stuff. You're doing it the RIGHT way. Build your credit, don't get sucked in by these wacky loan things and get some equity. THEN, when you can afford to, go get that dream house.