Mortgage Lies and Truths

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Submitted by NorthCountyMan on August 1, 2007 - 1:51pm

I was a mortgage broker back in early nineties. All I did was refi's and relied mainly on traditional 15, 30 year fixed and a scattering of ARMs. It was all pretty simple.

Now I find myself in the market for a home (no choice really) and am confused about all of the different lending products out there. My broker tells me that everyone has been getting no interest loans and 30 year fixed are just not popular these days.

Granted, I do have to say I trust my broker (for very good reasons I must add) but I want to feel better about non traditional mortgages.

Let me first ask, what questions should I ask the lender before I jump into something like an interest only loan.
FYI - I'm looking to stay for 7+ years in 1M or so house in N. County.

Submitted by JWM in SD on August 1, 2007 - 2:01pm.

You're kidding right??? Have you read the bubble primer yet?? What don't you understand about all of this yet?

No choice in whether or not to buy? Why? Pressure from the wife? Get a clue man.

Submitted by GoUSC on August 1, 2007 - 2:12pm.

There is no such thing as "no choice really". And I don't care how much you trust this "friend" of yours. Any kind of creative financing right now is a bad idea. Period.

Submitted by JPJones on August 1, 2007 - 2:33pm.

Those are some harsh responses, but it's the truth. Read through the bubble primer, as I think it will give you the answers you are looking for and help you to ask the right questions.

Submitted by Arraya on August 1, 2007 - 2:52pm.

Just because something is popular does not mean it is a good idea....

I/O loans are rarely a good idea and an absolutely horrible idea in a down market.

Surely your broker must have better reasoning than it's "popular" for this choice. What is his reasoning?

If you are going to be in your house for 7yr+ then I assume he has you looking at 7 or 10 yr arm. correct? If it is anything less that could be suicide in this market.

Today the 30 year is a lower interest rate than the 7 and 10 year arms. So I can not fathom what he is thinking...

Submitted by JWM in SD on August 1, 2007 - 3:08pm.

"Those are some harsh responses"

Yeah I know, but Harsh Times call for Harsh Responses.

Come on, you think that was legitimate post??? Oh no, that was troll. That guy just about used every cliche in the book in that post.

Submitted by SD Realtor on August 1, 2007 - 3:08pm.

Don't fall for any of the hype you hear from anyone. People used exotic financing vehicles because the majority of them were buying homes that they could not afford.

There is a small segment of homebuyers who are savy and they CAN make a better return on their money then the average joe. For these savy people it may indeed make sense to use leverage and not tie up money in a home when they can make a better return. If you are one of these types then more power to you. If not then don't risk it.

No matter how great all of your friends are, when you are making an investment as substantial as a home, I STRONGLY advise you to shop with several mortgage brokers... compare programs, rates, and do what is best for you, not what other people do.

Personally, I am risk averse and stick to the old 30 year fixed rate, fully amortized loans and I buy the rate down. If I was savy enough to make a better return on investments I would possibly try a 10 year interest only loan but I am not.

SD Realtor

Submitted by CMcG on August 1, 2007 - 3:12pm.

I understand trolling, but usually isn't there some benefit, some agenda for the troll to push that will be advantageous to him? If so, I can't figure out this one's motive. Maybe he's just having fun with us?

If it isn't a troll, I'm with some others here: Don't go interest only unless it's for at least 10 years on a fixed 30-year rate.

Submitted by NotCranky on August 1, 2007 - 3:51pm.

The gut instincts of the ever hyper-vigilant Rustico. This purported "Troll" is a saboteur of a recent new poster or it is that same recent new poster who wanted to see responses to the topic "Interest only loans". My apologies in advance to all suspected parties if OP turns out to be legit and in that case Rustico opines,if you really have to have that house, "no choice" rob a bank.

Submitted by FormerSanDiegan on August 1, 2007 - 3:51pm.

Kid: "But Mom, everybody's doing it. Even Jimmy"

Mother: "If Jimmy jumped off a building, would you do the same ?"

Kid : "I guess not."

Mother : "Well then why would you go jumping into a mortgage product because everyone else did ?"

Kid: "I don't know"

Mother: "You're grounded. Go to your room and don't come out until at least 2009."

Submitted by cr on August 1, 2007 - 5:04pm.

I don't get the impression this guy is a troll so at the risk of looking naive I'll state the obvious:

Any Non-Traditional mortgage, Adjustable, interest only, or (the now defunct) negative amortization is essentially designed to do one thing: get you into a house you could not otherwise afford.

It may save money in the short term, but then what? If you don't have a bulletproof answer to that, than you should go traditional. And "I will take my equity, pay off the loan, and buy something else" is not a bullet proof answer in today's market.

Submitted by NotCranky on August 1, 2007 - 5:14pm.

First of all my apolgies for insinuating that any regular poster here would be deceiptful(until it is more obvious at least). I think this person is a troll because it would seem that anyone who ever had been anywhere near the business, as OP claims to have been, would know a lot better.

Submitted by NorthCountyMan on August 1, 2007 - 7:01pm.

Hmmm. I've never been called a troll before. And for your information, I'm not a troll. Maybe a better response would be to comment on the number of "reputable" lenders out there still pedaling these exotic mortgages.

When I was in the business, I never saw them so they are new to me. And I agree on the trust issue. I tell people make sure you trust your lender and your broker....so there.

Submitted by HLS on August 1, 2007 - 7:16pm.

I am in the lending biz today, and just happen to know what ethics and integrity are AND I have them both.

Depending on you overall financial situation, I strongly suggest everybody CONSIDER an interest only loan. It's a lifesaver for some, when understood.

Some people are just stubborn, and you can't teach an old dog new tricks.

It makes no difference to me. I don't make more on either.

Generalizations such as never and always that don't address a borrwer's overall specific situation are nothing short of irresponsible.

Submitted by CMcG on August 1, 2007 - 7:57pm.

NorthCountyMan, I apologize for thinking you might be a troll. I personally have a 30-year fixed at 6.25 with the first 10 years interest only. I pay a little bit extra each month. Every person's situation is different. I did this kind of loan because my financial situation will change dramatically (in my favor) in the next couple of years. Please don't be scared to post again.

Submitted by Arraya on August 1, 2007 - 7:59pm.

That is true HLS, DEPENDING on your overall financial situation. However its very hard to justify an I/O arm in a down market on a purchase.

One justification is a definate income improvement or a large some of money coming you way.

The only other justification could be using the money that you would normally put down on principle and putting it into a very very safe investment that returns yields that are greater than the interest paid on the loan.

How likely are they?

Submitted by NorthCountyMan on August 1, 2007 - 8:08pm.

Great response CMcG. Another reason I love this sit.

Submitted by HLS on August 1, 2007 - 8:31pm.

Arraya, I TOTALLY disagree with you. Your thinking is archaic to me.
I can assure you that I don't need an explanation from anyone on the advantage of paying principal

So little principal is paid in the beginning, I advise taking the I/O loan and stashing the difference in the bank.
Don't worry about a yield return that beats the mortgage rate OR justification.
Yes property does go down. You already bought it.
Owing a bit less doesn't change that.

I'd rather have a client with $10,000-$20,000 CASH in the bank, safe and secure instead of lowering their loan balance by $20K.. There are other factors to consider, which I CLEARLY explain to my clients.

In a few years, they can always pay down the balance IF they choose. I also NEVER tell people that their house will be worth more someday.

I can guarantee you one thing, I never lost any sleep by having a liquid cushion of cash in the bank, regardless of my mortgage balances.

I have clients that did what you say to do, and they have some "equity" but they cannot get to it for various reasons, and they need it.

Up market/ Down market is doesn't matter. I've studied this stuff 7 ways from Sunday. You owe what you owe and the house is worth what it's worth. Too many people are going to owe a little bit less on their mortgage, but have no cash in the bank. It's NOT a good thing.

Many people are also a slave to their mortgage and will die with a house that's paid off. Yipee for them.

We can agree to disagree.

Submitted by NotCranky on August 1, 2007 - 8:49pm.

I have used interest only to my advantage and have made the recommendations that HLS is making. That was when it was a good time, I mean fool proof, time to buy or leverage property.
I also had 50% equity at the time, spread through a few properties. There were practically zero foreclosures in the market.Right now the only reason to go interest only with very little down is if you have 50% above and beyond the purchase price in a relatively safe investment or if you don't mind the risk of foreclosure or if you planned on cashing out and going to Mexico.IMHO

Best wishes

Submitted by Arraya on August 1, 2007 - 8:52pm.

I am not going to argue that you should have money in the bank for a cushion. Of course you should that is kind of a no brainer.

However, if you have to rely on not paying principle to have that cushion you should NOT go into a mortgage that big. You can't argue that.

How is that archaic?

Submitted by NotCranky on August 1, 2007 - 9:26pm.

Is your real estate license still active North County Man? Please forgive my incredulity. My wife who is a teacher said she thinks she would have a difficult time finding a peer who doesn't know what an interest only mortgage is. This broker that you are touting and trust so much hasn't explained it to you?( I get the feeling you have known him for a while to have such trust).

Submitted by PerryChase on August 1, 2007 - 9:44pm.

just to play devil's advocate here, Rustico. If you have 50% equity of one house spread over several properties, that wouldn't be 50% equity anymore.

Good for you that were able to use leverage to profit during the boom. Since you're a general contractor as well as a real estate agent, you must have a beautifully built house.

Submitted by NotCranky on August 1, 2007 - 10:30pm.

Good catch Perry . I meant the overall indebtedness was half the value of the combined property . I sold the
leveraged property in spring 2005.Don't tell anybody but I used a interest only ,liars loan, I mean low doc loan.

I must admit the house is average or a little above.2300 sq. feet. It is stout.The kitchen is pretty nice. My favorite part, the covered front porch looks to the east and is shady from about 11AM and on through the day.The goal was getting closer to modest financial independence.

Thanks for your help with understanding downtown condos on the other threads. BTW, as learning aids those links are way better than the MLS.
If you want to email me at rustico7462@hotmail.com we can spare our buddies here the pleasant conversation, which they might rather avoid, and I can get back to raising hell :).

Submitted by SD Realtor on August 1, 2007 - 10:43pm.

HLS perhaps you can sleep. I try to not generalize and imply that my habits or feelings match my clients. I have several friends who have paid off their homes with standard fully amortized loans. Some of them paid their loans off early and some didn't. Other people I know have 15 year mortgages.

They all not only sleep very well, but they enjoy the homes they have that are paid off, AND they still have quite handsome portfolios.

They are nor have they ever been slaves to their mortgages. I am not saying one or the other is correct, I am saying that not everyone thinks the same.

SD Realtor

Submitted by Pasadena Broker on August 1, 2007 - 11:13pm.

First of all, if you were in the business a few years ago, why are you asking what type of loan you should be committing yourself on a faceless blog?

Early nineties were wrought with balloons, and not the ones that are filled withe helium. I think you're a troll. A newbie homebuyer that might/might not be already in escrow and is wondering if that 7/1 ARM is the best choice. Let me give you some free advice from someone that lives and breathes this market, and not a cubicle gopher that post on this blog hoping the market tanks (and affecting the economy as a whole)...go with the traditional mortgage. The 7/1 or 5/1 versus the 30 year isn't that big of a difference. If $100-$150 is going to put a crimp in your budget then you're better off renting.

I've posted on this blog in the past, and I read it for kicks, but to ask for advice on a blog is beyond what I call sound advice. There's no accountability. Just faceless people giving their 2 cents...like walking down a street and asking random people for financial advice.

Submitted by Arraya on August 2, 2007 - 8:46am.

Pasadena,

There is a bigger difference than just monthly payment on an arm vs 30yr fix. You will have to deal with the adjustment and prossibly will not be able to refinance out of it in the given time frame depending on what you put down. An adjusment on a 700/800K loan is well over 1K.

Also, I think advice from people that do not have a financial interest in your decison is not a bad idea... Don't ya think?

Submitted by NotCranky on August 2, 2007 - 9:32am.

I think we collectively are a pretty good resource for information and opinions , to act upon or not, at our own discretion. The fact that we are argumentative is to a degree an extra plus because it brings out multiple angles. People come on here and thank individuals or the group, all the time , for good direction on various topics. We have covered the loan stuff pretty well on various threads. HLS has brought stuff we haven't disected like the yield spread premium, rebates and double dipping, although he did not call getting paid on the front and the back just that exactly.

So one that note, I will ask a question.

Are there cases were the mortgage broker "double dipping" is appropriate?

Submitted by HLS on August 2, 2007 - 10:22am.

Double Dipping is NEVER OK in my opinion, but it is exactly what most do...

Actual example, It's easiest to use interest only loans, but it applies to ALL loans.

$400K loan PAR 6.625% = Interest= $26,500
You are told 6.875% is the best rate,Interest=$27,500
(just a tiny quarter of a point)

You pay $1,000 more a year for life of the loan.
Lender paid $3000 commission in YSP.

You keep loan 10 years,
1) costs you $10K extra
2) LO got $3,000
You probably didn't know about either 1 or 2.
Keeping loan longer costs you even more, up to 30 years.

IF given the choice, paying $3K more up front would save you $1,000 a year.
I would just tell you how much I needed to make on the loan and give borrower the choice of how to make that happen, but I don't "double dip" (Makes me look bad, been told that I don't charge enough)

If you only plan on keeping loan 2 or 3 years, a "no cost" loan could make total sense, but that ISN'T double dipping either.

In above example, 7.25% would yield a $6500 rebate, which would cover about all closing costs from a fair originator, but still leave you short with others. This "no cost" loan would cost you $2500 more per year in payments.

That's how the NO COST loan works. People think it's free.

Submitted by cr on August 2, 2007 - 10:27am.

I've got some questions on this now:

Sounds like most of us argue exotic mortgages are bad, so let's just look at ARMs. To me the open-ended ability for rates to increase is a recipe for disaster but HLS is arguing it can be better if you invest that money.

I'd bet most people don't have any discretionary income, thus the need for an ARM, but let's assume they do.

I know it depends on the rates, but let's use what they are are today.

Over the 30 year life of a loan, what costs more: ARM or fixed? Say it's a 3-year ARM that started 3 years ago, and just reset. If I recall, a 30yr fixed ends up costing around double the purchase price. What about an ARM?

Won't the difference come down to what the adjusted ratepayment becomes, and won't that rate be higher than if it was fixed?

Now I've gone crosseyed.

Submitted by HLS on August 2, 2007 - 10:49am.

Hi COOP..

Let's get those eys uncrossed, when I was a kid I was told that wasn't safe!

BIG, HUGE, MONSTER difference between ARMS and interest only.
ARMS should NEVER be used if you intend to keep the loan long term. That's just gambling on rates, which I DON'T recommend. ARMS are short term solutions OR band-aids if needed.

You CAN lock a fixed rate today for 30 years, and have an OPTION to pay interest only for the first 10 or 15 years.
For SOME people, depending on their overall financial situation, my statement is/was that it should be CONSIDERED.
I don't say that it's right for everybody.

I could easily spend 30 minutes discussing the potential benefits.

Most ARMS will continue to adjust every 6 or 12 months up to the maximum, which is always an index + a margin.
There are a few different indexes that could be used, and an unlimited number of margins.

I type too slow to give a lengthy explanation, and do actually have some loans to work on. Let me know if you'd like to be contacted privately.

Submitted by SanDiegoDave on August 2, 2007 - 11:02am.

HLS wrote: "In a few years, they can always pay down the balance IF they choose."

That is the very "push-off-my-problems-until-tomorrow" mentality that has contributed to the housing bubble and massive consumer debt load in this country. It is an entirely irresponsible thing to do with one's money, and no ethical financial adviser is his right mind would advise someone to sign on to that kind of agreement.

And I don't buy this B.S. about a lending agent not making more one way or the other on interest-only vs. 30-year fixed. There is a reason they all keep pushing interest-only: because interest-only mortgages benefit only the lender.

Interest-only mortgages should be illegal.

I had to tell a lender on the phone a few weeks ago that if she said "interest only" one more time in emails, quotes, or on the phone with us that we'd move on - would cut all all considerations for using her, and that we'd warm other people to steer clear of her as well. And this was after repeatedly saying from Day 1 we are only interested in 30-year fixed. At this point we're moving on from her anyway. She blew it pushing this kind of crap over and over in the first place.

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