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Mortgage
Rate-Why Yesterday's Answers Won't Solve Today's Problems
Ahhh the good old
days, when rates were low, applications were a breeze, money was
flowing like water and homes were selling like hotcakes. Remember
those good old days? Well they may be gone for now but they will
return…..someday. In the meantime we have to live with the cards we
got. And a lot of folks have some pretty bad cards.
Interest rates are up, home
prices/values are falling, lending requirements are tightening up,
ARM's are tightening and foreclosures are up. My home state of
Colorado continues to lead the country in that category. Not a
pretty picture.
There were four mortgage schemes that were just fine until…..the
cows came home.
1. Interest Only Mortgages-For many first time buyers this
looked like an attractive deal until….Home values start dropping and
the borrower finds out he has very little if any equity. If the
borrower makes it thru the interest only period of the loan and he
finds the real payment with a slight premium may break their piggy
bank-causing possible default. When it comes time to sell the
borrower may be upside down-he owes more then the home is worth.
2. ARMs These were just fine as
long as rates stayed the same and low. Problem is they don't and
won't. After the initial year or three year period owners of ARM's
were subject to the whims of a highly volatile market where rates
can and do change like the wind. Having your rates and payments
change regularly is not only stressful on a budget but can be a
backbreaker and may be the biggest cause of high foreclosures.
3. Cash Outs Wow, you mean we
can buy the home of our dreams and get money back too-up to 25% of
the value. How cool is that? Well Mr. Naïve borrower it is cool as
long as values keep going up and you can afford the payments. There
is a price for everything. Again when time comes to sell for
whatever the reason the borrower is more than likely going to owe
more than the home is worth. How cool is that?
4. Fixed Rate Loans Whoa you
say, the staple of the biz. I am not talking about the 30 year fixed
rate loan. How about the 40 and 50 year garden variety. This brain
child has come a close second to the interest only loan in terms of
equity build up-close to zero. So in a market where values are
falling with no equity building, the borrower ends up in trouble.
Moral of the story, there are many ways to finance the purchase of
your home but only one way to make the payments. It is much better
to play safe than loose and fancy free when it comes to your biggest
asset-your home.
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