Option ARMS (neg ams) are a dirty business. The only time somebody should be using one is if they are in sales or commission based work and are actually putting over 20% down themselves. It gives them the flexibility they need if they have a bad month (like many mortgage brokers have had as of late ), and they should recognize that they should still be aiming to pay a fully amortized payment. If you are a salaried borrower and are trying to keep your payment down because it is all you can afford, this product should not even be a consideration. This is where predatory lending should be looked at seriously.
what is wrong with stated income? My wife and I are both self employed. State income make it very easy for self employed people in terms of paper work and proving income!!! We have use Stated Income to refinance 3 time in the the last 5 years for our house in Los Angeles. We refinance all the way from a 6.8%/30 years loan down to a 5%/15 years loan. We have use stated Income to buy a house and a condo in Las Vegas for the last three year. Of course we paid 25% down each time. If you really cannot afford the payment for the house and lie about your income, whose fault is that!!!
If a "recession is coming", why can't the Fed just lower interest rates a touch to stave it off? They've got their foot on the gas pedal, and they can push as hard or as light as they choose, right? SM
Ping, If you're looking for a nice "safe" loan, but you need to keep the payments low, check into a 30-year fixed "LPMI" loan. They will add an extra half percent to the rate in exchange for waiving the requirement for PMI because you can't ever drop PMI. Ultimately, it is a disadvantage since you can't drop it, but if it means the difference between getting your dream home or not getting it, I think that 5 years from now, the rate you're paying will still look low anyway. You'll find that right now, an LPMI (fixed rate) loan is cheaper than a 80/20 loan or a "normal" 30-year fixed loan with PMI added in. SM
The main problem is that it is not explained right to the buyer. Option Arms are good for the borrowers b/c it puts them in the driver's seat of the loan. They determine how much money to pay towards the principle. If the buyer is a semi smart investor investing in other real estate or index funds (which the s&P 500 has averaged 12.5% over the long haul) then the buyer is in a better situation. The broker's are just selling it as a 1% mortgage and that is downright fraudulant and in my opinion an arrestable offense. You stress to the client ot make the interest only payment but to onlyl make the minimum payment if times are hard. You also mention that it is advisable to make an additional payment towards the principle at least once every quarter. I do agree tho, if you are W2 and salaried and not educated on smart investing, Option Arm shouldn't be an option..
Bottomline our country's debt to income ratio is just astronomical and there needs to be a correction. Debt has reached similar numbers to the Great Depression days. At this point, it doesn't matter if the Fed lowers rates or not, debt needs to be paid and the only way is with higher interest rates... I read an article on here a few days ago that said that nearly 60% of the GLOBAL debt in 2006 was created by the United States.. That's just mind boggling. I know that rich people are borrowers but it's out of control. If you can borrow $1 million from Harry at 5% interest and move it and make 15% interest you're netting 10% interest and that is great. However, the problem comes when you are spread too thin and you owe Harry, his family, and 20 other families money and they all want their money back at the same time because they've realized that you're handling money irresponsibly and they are scared that they might never get their money back.
Absolutely, blended LPMI are STRONG right now. Although I never suggest using a 30 year fixed mortgage. We teach families how to invest properly and suggest that it is asinine to put all your eggs in one basket in your house and struggle trying to pay it off. There's good debt and bad debt.. I do agree, prime rate will get near 10% within the next few years in order to pay back all the debt and accumulate enough assets for the central banks.
Problem is that most people taking this loan are not semi smart investors. They also do not have the kind of money necessary to balance out a return that is beneficial to offset leveraging the money. Unless you are talking about someone who is refinancing and pulling the equity out of the house they already own. New buyers would not have the cash in hand as is suggested. You are absolutely right that this loan is not properly explained to people. Of course, they for the most part do not want the reality of it explained to them either. Look at the ads on the internet for lower my bills.com. Borrow $150K for $400 a month. The only people answering that ad are people who can not afford to take on a loan like this. I agree that this loan does put the borrower in the driver's seat which is why it can be good for someone who is commission based, but there is a cost to have that flexibility. That being a higher interest rate on a fully amortized or interest only payment. Someone who qualifies for a 5.875% 30 year fixed will have to pay on a 7% rate in an option ARM.