|
Is there anything in an ARM that protects you from a sudden massive rate increase? Even though i'd never get a loan for as much or more than i can afford,if poo poo hit the fan a year or two after i got an ARM, would it be possible for my payment to go from a safe place to pushing or exceeding my budget?
|
#
?
Jun 1, 2011 21:20
|
|
|
|
| # ? May 31, 2024 20:27 |
|
|
Ozmiander posted:Is there anything in an ARM that protects you from a sudden massive rate increase? Even though i'd never get a loan for as much or more than i can afford,if poo poo hit the fan a year or two after i got an ARM, would it be possible for my payment to go from a safe place to pushing or exceeding my budget?
|
|
#
?
Jun 1, 2011 21:25
|
|
|
gvibes posted:An ARM is fixed rate for a given amount of time, like 3, 5, or 7 years. During that time it does not move. So, even if the interest rate environment poo poo hits the fan, you are fine for the that 3, 5, or 7 years. After that time frame, your rate can move, but the maximum annual move and maximum rate are governed by the agreement, and generally mean that you aren't completely hosed unless you really stretched to make the purchase in the first place. Awesome. I've been avoiding quotes for an ARM mostly because of horror stories. Guess the people telling them just bought way more than they could really afford during an artificial low.
|
|
#
?
Jun 1, 2011 23:24
|
|
|
Ozmiander posted:Awesome. I've been avoiding quotes for an ARM mostly because of horror stories. Guess the people telling them just bought way more than they could really afford during an artificial low. Pretty much hit the nail on the head. People were sold on ARMs with low lock-in rates and told to just refinance before it starts to reset. The poo poo started to hit the fan when ARMs reset and people couldn't afford them, and then when prices started to slide and people could no longer reliably refinance out of their ARM, setting them up to have it reset and become unsustainable. UrbanFarmer: Why are you asking us for help? I wish I had your problems.
|
|
#
?
Jun 1, 2011 23:49
|
|
|
The biggest risk to ARM buyers during and before the crisis was that they were planning to sell the house before the initial rate unlocked, knowing full well they'd be unable to afford the payments after the rate unlocked. Their plans hinged on the idea that "real estate always goes up". That is, they were essentially speculating, on a 3-5 year time scale, with the intention of cashing out before the rate ever started to adjust. They then got screwed and we had massive forclosures because they were unable to sell (underwater on the loan) and, despite really low interest rates, they were also unable to re-finance (underwater on the loan). Many buyers compounded their problem by borrowing against whatever equity they'd managed to produce during the fixed-rate period. ARMs have been around for a long time, though, and are not purely a tool for speculators to use to gain larger leverage. They are a useful tool in certain situations. For a buyer who could pay all or nearly-all cash, but who wants the flexibility offered by a mortgage, an ARM can be a great way to get a lower interest rate up-front, with a "bet" that in the worst-case scenario, down the line when the rate unlocks and starts to rise they can then go with other options (paying off the loan with cash, say) rather than pay the higher rate. In UrbanFarmer's situation, he'll already have the bulk of the house paid off. With a much smaller principle financed, a reasonable ARM that, after the initial period, caps the rate at no more than +1% per year, will not cost him very much in cash at that point even if he decides to continue with the mortgage rather than paying it off at that point. Or, since he won't be underwater on the property, he could at that point re-finance, if he preferred a fixed rate to the uncertainty of an adjustable one. The reason I recommend a commercial loan at all is because I think it's generally a bad idea to borrow large sums from family or friends. It puts a strain on relationships, and runs some risk (no matter how small) of the lender having to pursue the borrower in court if things don't work out the way they were supposed to. Much better to go with the commercial loan, as an impersonal business relationship with (one would hope) well-vetted and standard loan agreement documents, etc. Throw in the fact that he can certainly also get a better interest rate, and to me it's a no-brainer.
|
|
#
?
Jun 2, 2011 00:02
|
|
|
Are resetting ARMs actually a problem now, given the interest rate environment? Seems like you wouldn't see huge jumps. Certainly the potential for disaster though.
|
|
#
?
Jun 2, 2011 00:06
|
|
|
A normal one, no. There were some terrible sub-prime ARMs out there from the early to mid 2000s, though; horrible balloon mortgages, zero-interest loans, liar's loans, etc. I'm not sure if all of those things fell under the general umbrella of "ARM" but you get the idea. We have been hearing talk of the impending inflation and corresponding interest rate increases that are just around the corner, for a couple of years now. I will not comment on how much weight should be put on those predictions, but it is certainly something any home buyer should be aware of, if they are considering non-fixed rate loans. Everything depends on factors like when you hope or plan to re-sell, how much down-payment you plan to make, your local market conditions, your income level, your tolerance of risk, and so on; enough so that a general statement that one should avoid or embrace ARMs is difficult to make categorically.
|
|
#
?
Jun 2, 2011 00:13
|
|
|
My fortune cookie today said "You will do better in real estate than in stocks." 
|
|
#
?
Jun 2, 2011 01:16
|
|
|
UrbanFarmer posted:I realize the chance of interest rates going up substantially in the next 3-5 years is low, but still. Rates are at historical lows right now, usually they tend to be around 4-5% in "normal" times...so its likely rates will rise quite a bit from where they currently are. Ozmiander posted:Awesome. I've been avoiding quotes for an ARM mostly because of horror stories. Guess the people telling them just bought way more than they could really afford during an artificial low.
|
|
#
?
Jun 2, 2011 03:01
|
|
|
Ozmiander posted:Awesome. I've been avoiding quotes for an ARM mostly because of horror stories. Guess the people telling them just bought way more than they could really afford during an artificial low. Another problem was Option ARMs, which often had the potential for negative amortization. Think of a credit card with a minimum payment that's less than the interest charge, and apply that concept to a mortgage. Except with a mortgage, you eventually HAVE to start paying down principal (unless you refi), so it was possible to see a situation where x dollars borrowed for 30 years at some tiny teaser rate turned into 1.2x borrowed at a much higher rate that had to be paid down in 25. The payment shock when the rate adjusted and the NegAm period ended could be enormous. Needless to say, someone who bought with little or no down payment at the height of the bubble, and then proceeded to keep borrowing against their (non-existent) equity by paying less than the interest could end up extremely screwed when the bubble burst and they couldn't refi out of their horrible loan that suddenly had payments several times as high as they were allowed to pay initially. I was working in the mortgage insurance industry in 2007 and 2008 and I did studies on products we were insuring that would absolutely blow up to the extent that the required, amortizing payment was two or three (or maybe even more, I've blocked some of that time out) times the initial NegAm payment if the borrower exhibited the worst possible behavior (paying the minimum allowed until the NegAm limit was hit). With that said, I recently bought using a more conventional 5/1 ARM because the rate during that initial 5 year fixed period was just so good that even in a worst case scenario where the rate adjusted upwards at its maximum amount every year until it hit its cap and for some reason I couldn't refi, it would take until year 12 for me to be back even with where I would have been with a 30 year fixed.
|
|
#
?
Jun 2, 2011 03:18
|
|
|
senor punk posted:UrbanFarmer: Why are you asking us for help? I wish I had your problems.
|
|
#
?
Jun 2, 2011 15:59
|
|
|
UrbanFarmer posted:I'm not sure what you mean. I knew I would get some fantastic advice and be taught things I had no clue about. For example, I'll be talking ARMs with my broker next time I speak with him. Just playing man. You're basically saying you're going to buy way less house than you could potentially afford, pay down a large part of the cost with the down payment, and then be able to comfortably pay it off within 5 years or less... if you want to. That's a pretty nice spot to be in.
|
|
#
?
Jun 2, 2011 16:19
|
|
|
senor punk posted:Just playing man. You're basically saying you're going to buy way less house than you could potentially afford, pay down a large part of the cost with the down payment, and then be able to comfortably pay it off within 5 years or less... if you want to. That's a pretty nice spot to be in. It's the loving twilight zone in these parts is what it is!
|
|
#
?
Jun 2, 2011 18:09
|
|
|
Seriously Urban Farmer, go buy a Maserati or two and come back when you're insolvent, then we'll talk real estate 
|
|
#
?
Jun 2, 2011 18:27
|
|
|
I'm not considering this, just curious, but is an ARM in any way appropriate in a situation where you expect your future income to be higher than it is now, and thus future you can afford a higher payment, but right now you can't. Obviously that's a bit of a gamble either way, but I'm just curious.
|
|
#
?
Jun 2, 2011 20:21
|
|
|
FISHMANPET posted:I'm not considering this, just curious, but is an ARM in any way appropriate in a situation where you expect your future income to be higher than it is now, and thus future you can afford a higher payment, but right now you can't.
|
|
#
?
Jun 2, 2011 20:23
|
|
|
FISHMANPET posted:I'm not considering this, just curious, but is an ARM in any way appropriate in a situation where you expect your future income to be higher than it is now, and thus future you can afford a higher payment, but right now you can't. Why would you even do this? For that matter, why would any bank allow you to do this? If you can afford the house later on...buy it later on. The way our economy is going right now, housing prices are going to be stagnant or barely keep up with inflation for quite a while. Why risk default later on so you can try to buy at a slightly lower price now (with the corresponding increase in your interest rate wiping out the cost advantage because you can't afford a traditional loan)?
|
|
#
?
Jun 2, 2011 20:27
|
|
|
Shipon posted:Why would you even do this? For that matter, why would any bank allow you to do this? I'm years away from buying, if ever, and have no plans on doing this, I'm just curious.
|
|
#
?
Jun 2, 2011 20:45
|
|
|
"Your income will be higher in the future" is often listed as among the main reasons why young homebuyers are sometimes advised to buy "as much house as they can afford". Yes, you can only just barely afford the payments now, but you'll be happy you bought a McMansion and lived on Ramen for years when you're 40 and you have a house worth twice as much!!! That is of course bad reasoning. A mortgage already represents a huge commitment of future earnings. One should not over-leverage as-yet unearned income by doubling-down (so to speak) with a huge house, balloon mortgage, or whatever. Good advice is to buy what you can afford today, and if you are making more money in the future and decide you want more house, you can always move on up by selling and moving into a more expensive place at the time. Likewise, a fixed rate mortgage is the default best advice for most typical buyers, because it lowers the risk (from rising interest rates). Since housebuying already represents a huge risk, anything you can do to lower that risk is usually a good idea.
|
|
#
?
Jun 2, 2011 22:20
|
|
|
UrbanFarmer posted:Here is my fiance and my situation. I've been trying to figure out what to do but thought I would ask all of you since you're all far smarter than I am regarding this stuff. If you want the best possible deal, buy in the winter. Each year prices rise from January to June, with June being the worst time to buy. Then (for the last five years) prices fall for the rest of the year. Prices bottom out each January. Here's a graph showing housing prices monthly over the last 5 years: http://i56.tinypic.com/2zp1rnt.jpg Also, as prices have been dropping every year and still haven't bottomed out, waiting seems a good decision to me. The only real reason I can see to buy now is if you want to lock in low interest rates, which doesn't seem to be an issue for you if you want to pay the house off quickly anyway.
|
|
#
?
Jun 2, 2011 23:56
|
|
|
senor punk posted:Just playing man. You're basically saying you're going to buy way less house than you could potentially afford, pay down a large part of the cost with the down payment, and then be able to comfortably pay it off within 5 years or less... if you want to. That's a pretty nice spot to be in. Orange Sunshine posted:If you want the best possible deal, buy in the winter. Each year prices rise from January to June, with June being the worst time to buy. Then (for the last five years) prices fall for the rest of the year. Prices bottom out each January. With that said, we're not really interested in trying to time the market. If we buy and our house loses 10-25%, that's fine. We just want to set up roots for the long term, let me do some small scale farming, and have a family. But again, I appreciate you taking the time to respond 
|
|
#
?
Jun 3, 2011 00:01
|
|
|
UrbanFarmer posted:With that said, we're not really interested in trying to time the market. If we buy and our house loses 10-25%, that's fine.
|
|
#
?
Jun 3, 2011 00:09
|
|
|
UrbanFarmer posted:From what I understand, South Florida is a bit different as the poo poo time of the year there is Summer. But if someone has information to prove me incorrect, please do! The patterns seem pretty clear to me - prices definitely fall in the winter and go up in the summer.
|
|
#
?
Jun 3, 2011 00:31
|
|
|
moana posted:This is great, but if there are clear cycles in your market and you have the luxury of time, why not buy at the trough? Like they say, buy minifridges in June, sell in September.  gvibes posted:Case Shiller has non-seasonally adjusted numbers for Tampa and Miami - http://www.standardandpoors.com/indices/sp-case-shiller-home-price-indices/en/us/?indexId=spusa-cashpidff--p-us---- *edit* I see it now. Hmmm, I'm not seeing that pattern except this past year. UrbanFarmer fucked around with this message at 00:44 on Jun 3, 2011 |
|
#
?
Jun 3, 2011 00:38
|
|
|
UrbanFarmer posted:Thanks. But which specific download did you look at?
|
|
#
?
Jun 3, 2011 00:42
|
|
|
gvibes posted:The non-seasonally adjusted home price index levels. . I'm not seeing that pattern you speak of but it's hard to as it seems more like: 2002-2006 UP UP UP 2007-2011 down down down I DO see the seasonal pop last year though.
|
|
#
?
Jun 3, 2011 00:43
|
|
|
UrbanFarmer posted:Just figured that out, sorry about that  You can chart the different years yourself and see if you can see any patterns.
|
|
#
?
Jun 3, 2011 00:48
|
|
|
UrbanFarmer posted:With that said, we're not really interested in trying to time the market. If we buy and our house loses 10-25%, that's fine. We just want to set up roots for the long term, let me do some small scale farming, and have a family. But again, I appreciate you taking the time to respond I loving love this guy. He's the poster child of a well-managed and reasoned financial lifestyle.
|
|
#
?
Jun 3, 2011 01:39
|
|
|
UrbanFarmer posted:Oh, and the one we definitely do like is a short sale
|
|
#
?
Jun 3, 2011 02:01
|
|
|
UrbanFarmer posted:
You may well be right. In most of the country, there are lots of buyers in the summer and few in the winter, which affects housing prices. It may be different in Florida where the winters are not cold and snowy. However, in terms of timing the market... this isn't like the stock market, where it can suddenly jump up unexpectedly by 10% in a short period of time. After housing prices truly hit the bottom, they won't suddenly shoot up by 10%, they'll just stay there and go nowhere, or begin going back up at the rate of inflation. So, given that... why buy a house today, which might drop in value by 10+% over the next few years, when you could wait?
|
|
#
?
Jun 3, 2011 02:15
|
|
|
Orange Sunshine posted:So, given that... why buy a house today, which might drop in value by 10+% over the next few years, when you could wait? 1. We're financially stable and able to afford a house with the specifications we want, now. We could afford much more house, especially if I liquidated some assets, but we don't want or need more house. 2. We want to start a family next year and feel there are many benefits to owning a home that you stay in for the long term when starting a family. We're looking to buy a house we spend the rest of our lives in. My parents have owned the same home for over 30 years now so I have literally felt the value of that. 3. It is EXTREMELY important for my sanity (and my fiance and my belief system) to be able to raise the majority of our own food. I want a gigantic garden, chickens, ducks, (more) dogs, and to plant well over 100 fruit trees. 4. I don't care if the price of the house drops 10 or 20 or 30%. I really don't. In fact, that'd be great as it would mean lower property taxes. We plan to have the house paid off in 3 years so even if something unforseen happens and we're forced to move or refinance, we could. I view a house as a place to live and grow old, not a short term investment. 5. I hate renting and dealing with landlords. 6. I like to build stuff, do construction, remodel things, etc. I plan all kinds of fun stuff from building my kids sweet tree houses (I'm thinking a pirate ship or castle tower) to converting the kitchen to an open floor plan. Can't do that in a rental. 7. We're both in our 30's and know what we want. 8. We're tired of moving. We want to setup roots in a neighborhood and get to know our neighbors and work to bring together our area in a manner where neighbors know and trust neighbors, hangout, trade, hold events, etc. I've already purchased and setup an online forum for the area we plan to buy, in fact 9. Plenty more. I could go on all night TraderStav posted:I loving love this guy. He's the poster child of a well-managed and reasoned financial lifestyle. But if you knew some of my investments, you might change your mind, most Goons sure disagree with me. For example, 20%+ of my assets are in physical precious metals.moana posted:Eeesh, good luck! My mom did a short sale on a condo and it took 8 months before she heard back, but the positive side is that you can get great deals if you're patient enough. UrbanFarmer fucked around with this message at 02:59 on Jun 3, 2011 |
|
#
?
Jun 3, 2011 02:48
|
|
|
UrbanFarmer posted:6. I like to build stuff, do construction, remodel things, etc. I plan all kinds of fun stuff from building my kids sweet tree houses (I'm thinking a pirate ship or castle tower) to converting the kitchen to an open floor plan. Can't do that in a rental. Will you adopt me? Real content: I just finished buying a house via short sale. It was listed at $139k. After the open house I had to bring my bid up to $141 to win it. Got a response within a week from the seller and owners, and now have the keys after under five months from starting the process. This is my first house so I'll probably complain in this thread in the near future. And, yes, I can confirm - there are tons of hidden costs, and my wife also showed me that granite and tile are expensive. Joy. Skychrono fucked around with this message at 15:44 on Jun 3, 2011 |
|
#
?
Jun 3, 2011 15:38
|
|
|
moana posted:Eeesh, good luck! My mom did a short sale on a condo and it took 8 months before she heard back, but the positive side is that you can get great deals if you're patient enough.
|
|
#
?
Jun 3, 2011 15:40
|
|
|
I had no idea when I bought a house of the sheer amount of junk mail about mortgage insurance. "Feel confident your love ones will be safe and warm in your house".....after you are cold and dead in the ground.
|
|
#
?
Jun 3, 2011 15:48
|
|
|
Thwomp posted:I had no idea when I bought a house of the sheer amount of junk mail about mortgage insurance. Seriously. Although I did the same thing by buying a loving term life insurance policy...
|
|
#
?
Jun 3, 2011 15:52
|
|
|
UrbanFarmer posted:4. I don't care if the price of the house drops 10 or 20 or 30%. I really don't. In fact, that'd be great as it would mean lower property taxes. Not always... Where I live, they assess values based on the prior 3 years of sales and comparable figures. In 2011, I paid $95k for my house. My home was last sold in 2010 for $185,000, and prior to that in 2007 for $208,000. My assessed taxable value is $186,000 and I was told to go pound sand when I filed an appeal. I'm literally paying taxes on a home value worth twice what I paid. However, at the low price, relative to your income, that you're buying at the taxes really won't matter at all. It's like pocket change for you. The Shep fucked around with this message at 06:22 on Jun 4, 2011 |
|
#
?
Jun 4, 2011 06:19
|
|
|
UrbanFarmer posted:3. It is EXTREMELY important for my sanity (and my fiance and my belief system) to be able to raise the majority of our own food. I want a gigantic garden, chickens, ducks, (more) dogs, and to plant well over 100 fruit trees. Are you really going to eat your dogs? I'm really liking these posts otherwise, it's nice to see things like this after marathoning the majority of the cornholio thread.
|
|
#
?
Jun 4, 2011 16:44
|
|
|
Why are ARM loans so feared in the US? Is it because of their systemic misuse and lack of education of the consumer? I'm trying to work it out, because here (Australia) they're the most common sort of loan and everyone just 'gets' them. IDK if yours are tied to different indicies, but the way ours work are by being tied to the official cash rate (the base interest rate, as set by the reserve bank (your Fed)), so that you have [x]% set from the official cash rate, but then some extra on top of that set by the lender that determines their profit. This is known as the standard variable rate of the bank and that's what they advertise as their interest rate. On the other hand, if you want a fixed rate it's kind of like how a term deposit works - you can lock in a fixed rate for your entire loan or some period of time, but they'll be set at an interest rate some amount above the variable rate to absorb that extra risk. What it means is that everyone pays attention to the monthly reserve bank meetings because mortgages go up and down based on what they do to the official cash rate, but that's a simple enough concept to understand. It's just considered normal here, and fixed rates are the odd ones. Basically, I've seen a lot of fear and avoidance directed towards ARMs and for the longest time I just assumed that 'ARM' stood for some crazy mortgage scheme concocted by Wall Street that only you Americans had and that it was a super-risky and fueled the whole crisis, but a while ago I decided to actually learn about it and was completely surprised because as said earlier, they're the 'normal' style of mortgage offered here.
|
|
#
?
Jun 5, 2011 03:38
|
|
|
Nam Taf posted:Why are ARM loans so feared in the US? Is it because of their systemic misuse and lack of education of the consumer? Yes. I could write a ton about it, but it's already been said.
|
|
#
?
Jun 5, 2011 03:44
|
|
|
|
| # ? May 31, 2024 20:27 |
|
|
Nam Taf posted:Why are ARM loans so feared in the US? Is it because of their systemic misuse and lack of education of the consumer? Systemic misuse, lack of education, and also we did have some crazy mortgage schemes concocted by Wall Street, such as NegAm (negative amortization) loans - purely insane variants of the standard ARM you've described. So normal ARMs are tainted by association with ridiculous exotic ARMs that lenders marketed as "affordability products".
|
|
#
?
Jun 5, 2011 14:49
|
|