Toxic Adjustible Rate Mortgages
by Evan Vanderwey on 09/02/10 at 7:11 am
The title of this post is the name that has been given to the type of loan that many unsuspecting homeowners found themselves bound to in the past few years. Many were told that this was a “fixed” product but were never informed that the word “fixed” was used to describe a very short period of time that – under certain conditions – might apply to their payment, even thought their interest rate was only fixed for a matter of months – if that. They further found that their loan balance was rising when they made that “fixed” payment. Very unsettling information to stumble upon AFTER a closing, indeed.
As a lender during the past 15 years I have written many such loans. The marked difference between my clients and the general public is that not one of my clients were surprised by the terms, and all who are still in the loan are enjoying a mortgage rate that is around or below 3% right now. For the record, the way I wrote and sold the loans I do not think “toxic” is the best name to give it.
Never-the-less, the question still remains, what do we do now?
Lets face it, these loans have more moving parts than a swiss watch and most of them should never have been written – I will even include some of the ones I wrote. Not so much that the product is so scary, but because the uncertainty is more than many want to live with day to day. Be that as it may, some are still in this deal and we should keep a level head about things. They still need good advice.
So, I will write this post to MY CLIENTS – and others can listen in – but make sure if you did your loan with another lender, the terms of yours may differ and sometimes quite a bit – I’d be glad to tell you how this advice might change in your situation – just email or call. First, a few facts:
I still have this loan on my home. I don’t have plans to get out of it. I am not afraid.
The rates on these loans are VERY VERY low. The rates can rise quickly. The one month LIBOR is what they are tied to – this tracks closely with the Federal Funds Rate (which is Prime minus three). Both are around 1/4% right now. Thats 0.25%.
The Fed is “saying” that they will keep this rate unchanged for “some time”. Many on the board have speculated that they will not raise rates in a meaningful way for two more years. We cannot know what next month will bring. Inflation is the real enemy and the Fed will raise rates to keep inflation at bay.
The US Bond Market is currently pricing into its bond yeilds a 10 year inflation rate of around 2.7%. Many fear that inflation will “have to be high” in the future because of all of the spending in Washington. The bond market disagrees with “many” who ever that is. High productivity in business coupled with high unemployment are making a great case for a slow recovery and a low level of consumer price inflation. Re-read the previous fact to remember why this is important.
Many home owners would refinance out of the loan they have, but can’t because they owe more on their mortgage than their home will presently appraise for. Join the crowd on that one. Most 30 year fixed type mortgage holders are in the same boat.
So Evan, what should I do now?
1. Eliminate all of your other debt. Car loans, Credit Card balances, Student loans, etc. This is one reason I recommended this loan – to aid in “other debt” elimination. If you eliminate your car loan(s), and credit cards then you will no longer have those payments to make. The amount of those payments almost always exceeds the worst case amount that your mortgage payment could rise if rates went up.
2. If you have no other debt (and you did your loan with me) then you are investing the difference of what your old payment used to be and the new lower payment that this ARM created. You can either keep investing the difference, or start paying the difference to the mortgage. I have yet to meet with a client that has been keeping this up, that has not gotten great results from this system.
If you have no other debt, you actually have one more option. You could take some of your invested dollars and pay down the mortgage to the amount necessary to qualify for a low 30 year fixed rate. You may feel more comfortable in a fixed rate loan – who knew 30 year rates would hit 5%!? Locking in may be right for you.
3. So you have not been able to invest and are having trouble eliminating other debt. We should talk about a cash flow plan and whether a refinance is doable for you. You might feel more comfortable in a fixed rate loan.
4. Some of you have moved out of that home and are renting the home out. This is a great investor loan. Rents and Rates tend to follow each other. Over time, as rates may rise, so will the rents you receive – these will offset each other a little bit. Make sure you have a good side fund of cash for emergencies. This is wise no matter who you are, but if you are an investor, even more so.
So to wrap up:
Whether you think I should have done these loans or not, I may be the most qualified lender in Michigan to help you through it. I have more experience than most in terms of years and I also did one thing that almost all loan officers who sold these loans did NOT do – I wrote the loan on MY home. For great, level headed, and well informed advice, call me. I’m always learning and I’ll always be here to help.
