lone rates (interest rate) as av 28 Des 07 (bankrate.com)
30 yeer fixed lone=6.31%, 15 yeer=6.07%, 1-yr ARM=5.51%
30 yeer jumbo =7.3%
fixed rate lone assume yu put down 20%; if yu dont, yu pae more
*********** skaeree stats from 2003-2007
2003 0.3% av nu morgages was ARM
2006 39.3%
2005...32.6% av nu morgages was interest only
43% no munee down
2006...70% av yu hu got adjustabel lone last yeer R underwater (oe more than hous werth)
10% av last yeer's biers hav <= 0 equity in the hous now
15.2 % hav lone balans >= 110% av hous value
in 2005 & 06, 1.3 milyun got adjustabel lones with a teeser start rate <=2%.
but the reel interest rate is bout 6.5%. So yer paement dont pae the interest.
Yu oe banker more $ evree month. Theer is a time limit on the teeser rate.
Resent zampel: San Diego, Kalif...paement go from 2,900 tu 4,200 $/month
(up 45%). Yu kood be in the same boet.
if yu hav 1 yr ARM, look at chaenj it tu a 5-yr ARM (% stae same for 5 yeers)
2007: All the skaeree lones av past 2 yeers kum home tu ruest
Forkloes=banker take bak the hous kauz yu didnt make the paements
2005... 887,000 or 846,982 (different soers)
2006...1,260,000=1 in 92 (up 42% from 05)
2007, tentativ...first 11 months=1,082,712 homes entered the forkloes proses.
up 93% from 559,750 in 2006
526,936 homes...banker took it bak=up 41% from 2006
1 Des 2007: 1.48% av housholds R in middel av "preforkloes"
1. 2-step lone
2-step...lone is fixed for preset num yeers, yuzyually 5 yeers.
Then it bekum variabel % (ARM). Oft kalled "5-1"...legally it is
variabel % interest, but % stae konstant first 5 yeers, then it "adjust"
every 1 yeer. Wen it adjust, Banker set nu rates based on a index
(basket av lones av 1 tipe). I.e. % interest depend on market rates.
The lone papers shood hav limits on how much the interest rate kan go up.
1 limit on step size with eech adjust, and a max % interest the lone kan hav.
Yuzyually yu kan konvert such lones tu regular fixed rate morgage.
This will hav the yusyual kosts...banker want his kut.
Beware...many lones hav a penaltee if yu konvert in the first 5 yeers.
2-step is better than a baloon lone & appli tu same folks.
2. 5/25 lone
5/25...Wen banker sae this, him meen fixed % & fixed paement the
first 5 yeers, then it chaenj tu variabel % interest & paement.
If yu thank this sounds like a 2-step lone, yer rite...same thang.
3. 125% lone
Sum bankers will lone yu up tu 125% av hous "value". If yu even
thank bout it, yu must be a krook or nuts. Banker will appli thumbskru
tu yer nuts if yu get behind on paements. Talk bout risk.
4. Baloon lone
Baloon lone=short time, fixed interest rate, fixed paement.
Yu gotta pae off lone at the end av the "term"...3-7 yeers.
But the monthly paement is set for a 30 yeer morgage. Bi the end
av the "term" yu stil oe almost as many $ as yu borroed.
Most folks spekt tu refinas then or konvert tu normal lone.
The riteups yu find klaem this is fine if yu thank yer gonna inherit
a big forchun in a fyu yeers. Not in the reel werld.
Or em klaem "if yu spekt tu muve in a fyu yeers". If this is true,
yu dont wanna bi, yu shood rent.
Others sae if yu thank interest rates will go down, yuze this.
Nonsens: yu spekulate on interest rates???? Bankers hav lot more
speerens at that. Besides, % interest=0 now...never be loer than this.
If yu konsider a baloon lone, yer a gambler hu thank yu kan make
a fast buk bi flipping houses. Yer nutz. The hous bubbel went bust.
3-7 yeers is shorter than normal morgage, so maby yu kan get cheeper
% interest. If yu kan find a banker that offer baloon lones, make
shuer yu get lo rate.
The web has a lotta sites with calculaters. Sum sae em will kalk
a baloon note paement. Yu dont need it. Em all yuze the numbers for
a standard 30 yeer fixed rate morgage. Yuze program 3 tu get paement,
kost, & interest. Get opshunal print tu sho yu wot yer balans will be
at the end av evree yeer, so yu will no the size av the baloon=$ due
at the end av the "term". Thats wen yu gotta pae up or refinans.
Similar lones...fixed for n yeers, then em bekum sunthang els...
Bankers luv thees, but dont spekt him tu luv yu.
5. Bi-down
Sumwon pae xtra $ up front tu banker tu get smaller monthlee paement
for first 1-3 yeers. Yuzyually yer paements go up eech yeer for 1-5 yr.
Also kommon for % interest tu go up eech yeer.
Thees thangs R yuzed tu sell "nonmuving" hous tu marjinal biers.
Most kommon is big nashunal bilders hu tri tu sell houses that ben
sitting emptee 1+ yeers. Bilder want his munee. Him borroed $ tu
bild the thang, gotta pae banker evree month, got cash flo probs.
Him want out. So him & banker get tugether tu "sweeten" lone terms.
Em sell lone tu trusting soles hu dont no better. Em emfasize the
lo paements & gloss over how kosts go up evree yeer. BIER BEWARE.
Reed the fine print. Most such lones hav hier % interest than a
normal lone...bout 1/2 % hier if em R onest. Ski hi no limit if em R
krooks. Banker is legal "entatee" hu offer lone. So him spekt a bribe
tu offer such goodees. Seller bribe him with $ up-front. But bilder
spekt tu get bak the munee. Em hav an "arrangement". At the lone
"kloes" banker get $ from yu, then him send $ tu seller. Sumweer in
the papers will be stranj hid "fee" for sumthang yu never herd av.
Thats so banker get xtra $ from yu for him tu channel tu seller.
Underhanded? Yu betchum. legal? yu gessed it, its legal tu.
6. Cash Out
Cash-out refinans=yu refinans the morgage & inkreez the balans
(the $ yu oe on the morgage). Yu get munee from the morgage kumpanee.
Yu borro more than yu oe on morgage; thus yu inkreez yer debt. Many did
this in resent yeers wen hous "value" went up like a ski rokket. Even
folks hu never paed down the morgage balans had xtra borro-power.
Em take kash out & spend it. Liv hi on hog. Akt like em R rich.
Then kame the krash. Suddenly hous pries go down, not up. Yu then
diskuver yu oe more than the hous is werth. Then yu luze job & kant
make the monthly morgage paements. Then bank take hous outta yer skin.
Bak in the old daes, kash-out refi was a resunabel opshun. Zampel:
yu need kash for a big hospital bill. Wen yer short av kash & need it
fast, look at possabel soerses. First chois is idel munee...in cheking
akkount or savings akkount that pae almost nuthing in interest. If yu
hav sumthang av value such as stoks or bonds, sell sum tu raes kash.
If yu gotta borro, look for loest % interest. Thats weer kash-out refi
kum in. Yu probably get loer interest rate on the morgage than sum
other tipe av lone. Definitely kost less than a personal lone, or a
paechek lone.
Other reesun tu refi was tu "konsolidate debts"...yuze the kash from
refi hous tu pae off other debts. Zampel=Kredit kard debt. Kredit kard
interest rate is alwaes hier than morgage rate. If yu redues other debt
& keep it down, this is wise. But if yu pae off kredit kard debt, &
then go bak & run up big debt agin...yu luze. Yu now hav more debt
& hier monthly paements tu make.
Wen yu refinans, yu gotta pae banker "kloesing kosts"+profit.
This kost bout 2-5,000$. Thats hi overhed for a lone. Other tipe lones
dont hav kloesing kosts, tho a fyu mae hav sum "fees".
The interest on the nu morgage depend on interest rates tudae...mae be
loer or hier than wen yu got the hous. Yer morgage paement mae go down
or up. Av koers, yu inkreez yer debt=$ yu oe.
warning...if yu redues "equity" in hous belo 20%, yu gotta pae PMI.
If hous prieses drop in yer area, yu mae oe more on the hous than yu kan
get if yu wanna sell it. 2007: hous pries go DOWN. Yer stuk. Hous sales
R down...yu kant sell the hous, or yu gotta kut pries wae belo wot yu thot.
7. Hybrid lone
Hibrid lone=fixed % interest for 5 yeers, then bekum baloon or
ARM lone or convertabel, or wotever els the finans wiz kids kan invent.
Beware av the fine print...Sum bankers hide many triks tu appli wen
the fixed period ends. Him mae hav opshun tu "kall" the lone.
This meens yu gotta pae off evree $ yu still oe on the lone, rite now!
Thus, same as a baloon lone. & the rules tu pute the nu % interest
at this time mae giv banker a gun pointed at yer hed.
8. Interest only morgage
2005...32.6% av nu morgages was interest-oenlee
This is a resent fad. A "market guru" (kon man) put on a "seminar"
& sweet talk yu intu "invest" munee in a hous yu then rent out. Sins
yu dont put a penee toward the morgage, yer monthlee paement is smaller.
This is spozed tu max the "profit" yu make renting the plaes yu borroed $s
tu bi. This is leverajed beyond the hilt. If NE-thang go rong (such as
renter disappeer in the ded-av-nite), yu R stuk with paements & no inkum.
The hukstler pitch is based on hous prieses alwaes go up, so him klaem
yu kan alwaes sell the hous if yu need munee. But wot if reel estate die?
Wot if interest rates go up? Wot if ekonomee die? Wot if it takes yeers
tu sell the hous but yu need $ now? Just waetin fer the fall.
Interest only lones R like 5/25 kauz the banker limit the interest-only
tu the first fyu yeers...up tu 5 yeers. Then yu gotta konvert it so yu
will pae off the lone like a normal morgage.
Sum sites sae em will calculate the payment for interest-oenlee lone.
yu dont need it. payment=interest...interest=(interest rate)*($ yu borro).
The interest is konstant, kauz $ borroed is konstant, kauz yu dont pae down the $ yu oe.
zampel...In April 2005, 30-yr morgage interest rate=6%.
6%*100,000=6,000$/yr=500$/month...yer paement=500$/month.
But lender mae charj hier % interest for this tipe lone, maby 6.15%.
Thees lones R more risky for banker, so him want more.
Yer paement is not as far belo a standard morgage as yu spekt.
100,000$ lone at 6%, 30 yr fixed...paement=599.55 $/month. Interest only
is 500 $/month. Yu pae 99.55$/month less or 1194.6$/yeer for max av 5 yrs.
But banker insist yu konvert tu a regular lone aft 5 yeers. Him mae insist
yu then pae it off in 25 yeers (30 yrs from lone start). If % interest
still=6% then, paement=644.33 $/month. Thus yu pae 144.33 $/month more for 25 yrs.
Du 5 yrs av 100$ less offset 25 yrs av 144$ more?
Or diff look...yu pae 7452$ more tu hav interest-only the first 5 yeers.
And then theer is the risk interest rates mae go up at the end av 5 yrs.
"interestfirst"=speshal werds from Fanee Mae. Em packaej 30-yr lones
intu 2 parts=2 15-yeer terms. First 15 yeers is interest oenlee. Next 15yr
yu pae it as a 15-yr lone.
The last fyu yeers, a lotta home biers bi interest-oenlee morgage for
a hous em plan tu liv in (not a biz tu rent it). This is danjerus.
yu dont pae tu redues the debt (morgage)=yu dont hav NE "equity" in the hous.
This meen yu rent the hous. But yu hav all the problems av oener & nun av the
advantages av a renter. A renter kan leev if em dont like the plaes.
Yu as a bier R stuk with it. Yu hafta pae all the xpenses av a landlord...
taxes, maentenans, all yutilitees, repaers, inshuer. If yu wanna muve out,
yu gotta sell the hous. That kost a lot if yu kan duit. But sumtimes,
hous sit on the market for yeers. So yu get desperat & rent it. Now yer a landlord.
Plus, most such lones R interest oenlee for up tu 5 yeers. Then yu gotta
konvert em tu a normal morgage. That meen yu refins the morgage then.
Maby interest rates will be hi then, so yer monthly paement dubel.
wot cha gonna du then?
9. Jumbo
Jumbo lone=yu wanna borro more $ than the max set for "normal" lone
("Konvenshunal" lone). guvt-baked bodees set max & lenders yusyally
yuz em. Most yuzed=VA (Vetrun Affaers), Fannee Mae, Freddy Max.
2007: 417,000$...abuv that it is a Jumbo.
Banker charj hier % interest for jumbo lones...maby 0.5% in good times.
This spred=1.8% as av March 2008 (in the krash after the housing bubbel).
The werd "jumbo" is oft yuzed in a jenral sens for NE big lone.
If yu want a zilyun $, that is jumbo. NE ski-hi pries is Jumbo.
Evree hous in Kalifornya is jumbo.
Jumbo lones...late tibits
As part av the housing bubbel, theer was 870,000 ARM Jumbo lones in
2005-2007. Most was in Kalifornya, kauz hous prieses R so hi theer.
10. Jumbo-Dumbo
Yu borro more $ than the hous is werth. This is opposite tu normal=
giv banker a down paement tu sho yu R sereeus. Tu get a jumbo-dumbo,
yu will pae hier % interest & banker insist on BIG down paement (25%).
This is no kin tu yu borro > 100% so yu get xtra $ from banker so
yu kan gotu Vegas & luze it all overnite. NE won hu lone yu that wae
speks yu tu go bankrupt. Him get his profit out up front, so him kan
skip town. See yu in Vegas.
11. Limited-Documentation
(lo documentation, expidited lone)
Banker dont ask for & dont chek on evreethang under the sun like em du
on a normal lone. Hopefully yu fill out a short-form=banker oenlee ask for
the most portant numbers. Banker will chek yer kredit report. Banker chek
online. Him access komputerized kredit rekords on the web.
This lone is for yu hu R in a big hurry...gotta muve in yesterdae.
Normally, yu gotta hav a perfekt kredit report...NE blak marks=no lone.
banker will charj hier interest rate, so it kost yu more.
12. option lone
finance 600,000$ hous for less than 1000$/month
Hav yu seed ads like this? The latest siren-song from bankers
desperate tu lure in sukkers. this is "option" lone. Bankers yuze many terms
such as "pik-a paement" or "cash-flo", but most kommon is "option".
Less kind folk kall it "negative option" kauz it is negativ amortization.
Ads klaem tu offer yu the opshun av 4 or more paement tipes. But the oenlee won
NE-won want is smallest paement...smallest $/month. This is badder than bad.
This is even more risk than interest-only lone. It is a variashun on
a variabel interest rate lone (ARM). The opshun yu get is tu pae a "minimun" $
eech month for a start period...up tu 5 yeers. The kikker is the minimum
is tu small tu pae the interest on the lone. Thus yu oe the banker more $
evree month. Yer debt gro & gro. This is negative-amortization...the
opposit av a normal "amortized" lone (a morgage). With a normal lone
part av eech paement go tu reduse debt (& part is interest). This is kalled
amortization kauz yu "kill" the debt wen yu pae it off at the end av the "term".
(mort is French for die, "term" is banker-talk for time span).
Banker mae kall thees nu fansee "instruments" names that dont sound as bad
such as "deferred interest". The selling point is the paement in yeer 1
is less, so yu thank yu kan afford it...yu kan bi that hous yu koodnt otherwise.
But theer R xtra rules. The "opshun" minimun paement go up evree yeer.
For zampel, yeer 1 paement mae be 1000$/month, yeer 2=1200$, yeer 3=1400$, etc.
But even then, yu still oe banker more money evree yeer...yu dont even pae the interest.
At the end av this "intro" period (2-5 yrs) the banker will insist yu pae.
Yu gotta konvert the lone tu a standard morgage such as fixed % & fixed
time span lone(morgage). Yu will hafta pae interest & pae down the lone.
This meen yer monthly paement inkreez...big time. That 1000$/month paement
bekum 2200$/month (assuming % interest stae the same). If interest rates go up
it kan be ever more, maby 3000$/month. Weer ya gonna get the xtra 2000$/month?
Sumtimes the bank papers spesifi a "start paement rate" (initial rate).
This is an artifishal number the banker plunk from emptee aer.
Tu konfuze yu even more, this rate inkreez at regular steps such as evree yeer.
This is all gibberish...not related tu NE-thang. Oenlee purpus is so banker
kan point tuit & sae "see...yu get a very lo rate". Its a pak av lies.
Sumtimes the banker yuze it like a kredit kard minimum paement...
the min pae ($/month) on KK mae be 2% av yer balans. So banker sae...
yer paement is 1.5% av $ yu borroed. The oenlee purpus for this is so
banker kan sae sumthang that sound reesunabel or smoothing. Sumtimes him
feel an erj tu justifi wi his "rates" R so lo. Him mae tri tu kompare it tu a KK.
Banker mae menshun "rekast". This meen him rekalkulate the $/month
paement. The lone papers will alwaes inklude a "rekast" at regular time steps
such as 6 months or start av evree yeer. But theer kan be more reesuns
tu "rekast". For zampel...if the total $ yu oe tu banker >= 120% av the
$ yu borroed, banker mae send a letter saeing yu gotta pae more now.
A kikker the banker wont menshun...wot if yu gotta sell the hous?
But yu oe more $ onit that wen yu got the lone ("morgage"). Tu sell,
yu gotta pae banker evree sent yu oe him. How R yu gonna pae wen yu
koodnt afford tu bi the hous in the first plaes? Banker mae menshun
"equity gap". This is how much yu oe on lone minus the $ yu kood get
if yu sell the hous. With opshun lone, yu alwaes oe more than yu kan get.
The equity gap is how much more. With opshun lone, the gap get bigger
& bigger all the time. Remember, reel estate kommishun=6%, plus yu
gotta pae other kloes kosts. Even if hous "value" go up evree yeer,
it wont go up fast nuff. Yu will alwaes be in the hole.
underwater...this meen yu oe more on the morgage than yu kan get if
yu sell the hous. With opshun lone, yer alwaes underwater.
Histree...thees thangs started round 1985 as "paement-kap" lones.
Bak then, interest rates was hi...bout 10%. ARM rate was bout 7%.
but folks still had trubel tu make the paement, so bankers looked for
more gimiks tu make the lone "affordabel", i.e. reduce the paement.
ARM's was nu then & borroers ignored the risk av rising interest rates.
But rates went up & up, so theer paements went up & up. So em yelled at
banker..."we need releef". Banker sed...yu want it, yu got it.
The names for it chaenj from yeer tu yeer, the detaels mae chaenj, but
the basik idea is the same...yer in deep shit.
13. piggyback
piggybak lone is 2 lones. lone 1=morgage, lone 2=2nd morgage or wotever
finans wiz kids invent. Also kalled HELOC. Purpus is tu avoid PMI.
This is a variashun on no down paement.
PMI...private morgage inshuerans. If yu put down < 20% av hous pries,
banker insist on pmi. It inshuer the banker ginst the chans yu dont pae
off the morgage. The less yu put down, the more risky the lone is for banker.
On averaej, pmi add 0.5 % tu the lone interest rate, but is bigger for no down
& is smaller for bigger down paement.
Zampel...if lone rate=5.75%, yu spend 210,088$ on a 100,000 $ lone.
Add 0.5% for pmi, rate=6.25%, kost=221,656$...yu pae 11,568$ for pmi.
So the wiz kids invented waes tu get around pmi...yu borro 80% from
banker & also borro lone 2 from sumwon els (kant be same banker).
lone 2 is "subordinated". That meen it is more risky, so yu pae hier
% interest onit. How much hier depend on how risky yu R...yer kredit histree.
This tipe lone is for folks hu kan put down 10% or 15% but not 20%.
Yukan save munee if lone 2 is small & the interest rate good. Yu kan
pae off lone 2 in maby 3-5 yeers. Then yu hav a normal morgage.
But most hu duit du so kauz it is the oenlee wae em kan get a lone &
bi a hous. Most dont hav a dime for down paement, so em finans (borro) 100%.
Note...with 2 lones tu pae evree month, the sum yu pae eech month
mae be more than if yu got a regular lone (If yu kan). The total $ yu pae
(assuming yu eventually pae off the lones) mae be more.
Most hu get a piggybak lone put 0$ down, bekauz that is the oenlee wae
em kan get a lone. This has bekum kommon the last fyu yeers.
Risk...yu hav 0 or very littel equity in the hous. If NE-thang go rong,
yer in trubel. If yu luze yer job, or hav big medikal bills...yu kant
make the hous paements. 3 or 4 missed paements & banker forkloes & yu
luze the hous...yer now homeless. Hous pries goed up so fast in sum
plaes the last 5 yeers that sum kan sell the hous & get kash out & thus
save self.
Many hav kum tu depend on the "garanteed" hous "value" go up evree yeer.
Em thank em kan alwaes sell hous or refinans & keep spending if em get in trubel.
Not so. Hous pries dont alwaes go up. Em kan stae bout the same for
as long as 20 yeers. Sumtimes em go down. If yu sell, yu gotta hav a
plaes tu liv, so yu bi a nu hous at pries as inflated as the old hous.
All yu get is bigger morgage & bigger paements tu make evree month.
If yu stae & refinans, yu gotta pae tudae's interest rate. Wot if it go up?
A lot av the hous boom av the last 5 yrs was kauzed bi loer % interest.
But evreethang that go down will go up. Morgage rates kood go bak up tu 9%.
So yu hav 5.7% & wanna refi at 9%...no wae hoza.
14. simple interest
simple interest...interest on a lone=(% interest rate)*($ borro)*(yeers).
Theer R sites on the web hu klaem tu offer "simple interest" lones. Em dont.
All lie. All R a fraud. Wen yu look at theer numbers, em yuze standard
rules tu kompute interest=kompound interest.
Maby yu kan get such a lone from kinfolk, but not from the web or from a bank.
15. zero down paement
Zero down paement=no down paement. This bekame kommon the last fyu yeers.
Just nuther wae tu get yu tu borro munee wen yu dont hav NE kash.
Em mae not menshun yer paement is bigger bekauz yu borro more $.
Risk tu bank is bigger, so em probablee charj hier % interest.
If a respektabel banker offer no down paement, him add PMI=more %
which is spozed tu gotu him bi inshure tu protekt banker inkase yu default.
piggybak is a variashun on no down