I completely agree with the sentiments expressed in this article, which appeared in the Detroit News on July 7, 2006. A little background: Realtors, as a group, are probably the most greedy, self-centered people you will ever encounter. The ONLY other collection of individuals that may be WORSE? LENDERS! I can sum up the mentality of the average mortgage company like this: "What arcane, illogical, unconservative, risky mortgage concept can we come up with to squeeze even MORE money out of the ignorant public? And, once we come up with the latest sham, let's ADVERTISE IT on every billboard, radio station and TV station we can find!" I've been telling my clients for several YEARS that these exotic loan packages were poison, but many have ignored my advice and are now paying the price. Unfortunately, most people think like sheep. The simplistic analysis goes like this: "Well, if these interest only loans were bad, they certainly wouldn't be spending so much money on all this advertising that I keep hearing over and over and over every day. Everybody else is doing it. What the heck, I'll do it too!" Don't be a sheep!
Little equity in alternative mortgages
Borrowers pay no or low down payment, but in a falling market, some owe more than home is worth.
Brian J. O'Connor / The Detroit News
With the dearth of home buyers in Metro Detroit, lenders are touting different types of mortgage loans to help make the sale.
Virtually unheard of five years ago, alternative mortgages have soared in popularity since the late 1990s, offering consumers a way to buy homes with no money down, low introductory payments or both.
The downside of these mortgage "products" is that the homeowners will hold very little equity in their property, leaving them no financial cushion if they have to sell, finance a major repair or re-mortgage the home.
Worse, if property values fall -- as they have now -- borrowers can end up owing more on the mortgage than the property is worth. In the case of an adjustable mortgage, borrowers could find themselves trapped in a home they can't afford to sell, but with their monthly payments rising by hundreds of dollars.
In fact, part of the glut of homes on the market is caused by homeowners trying to sell houses they no longer can afford, thanks to adjustable rate loans. Some of that problem comes from homeowners who have siphoned off all their equity through repeated refinancing and home equity loans, and now owe more than the home is worth, making it impossible to refinance to a more affordable mortgage.
Borrowers pay no or low down payment, but in a falling market, some owe more than home is worth.
Brian J. O'Connor / The Detroit News
With the dearth of home buyers in Metro Detroit, lenders are touting different types of mortgage loans to help make the sale.
Virtually unheard of five years ago, alternative mortgages have soared in popularity since the late 1990s, offering consumers a way to buy homes with no money down, low introductory payments or both.
The downside of these mortgage "products" is that the homeowners will hold very little equity in their property, leaving them no financial cushion if they have to sell, finance a major repair or re-mortgage the home.
Worse, if property values fall -- as they have now -- borrowers can end up owing more on the mortgage than the property is worth. In the case of an adjustable mortgage, borrowers could find themselves trapped in a home they can't afford to sell, but with their monthly payments rising by hundreds of dollars.
In fact, part of the glut of homes on the market is caused by homeowners trying to sell houses they no longer can afford, thanks to adjustable rate loans. Some of that problem comes from homeowners who have siphoned off all their equity through repeated refinancing and home equity loans, and now owe more than the home is worth, making it impossible to refinance to a more affordable mortgage.
Here's a look at the types of mortgages on the market today:
- 30- or 15-year fixed-rate mortgage: Offers a predictable and stable loan and rate, currently about 7 percent. Requires a down payment of at least 20 percent, or additional mortgage insurance charges are tacked on.
- 40-year mortgage: A recent invention that extends the length of the mortgage by at least 10 years, slightly lowering the payment but increasing the total interest paid.
- Adjustable-rate mortgage: Rate is typically low for the first three or five years (currently as low as 4.8 percent in this area) then adjusts every year, usually up to 1 point with a limit of 5 points over the introductory rate.
- Zero-down/low-down adjustables: These loans offer an adjustable-rate mortgage with a low down payment amount, or no down payment at all.
- Interest-only and option adjustables: Another adjustable loan where the buyer can pay only the interest during the initial period, usually up to 10 years.
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