Home Loan advice

[Zeke74]

Hey Guys,
I'm a longtime follower of this board and I'm looking for some advice. I think some of the insight I read here is better than anyplace else. I'm seriously considering getting a 5 year ARM loan for around 4.5%. I'm in a 30 year fixed at 6% right now. I know these ARMS have gotten a bad name but my mortgage guy said, and I happen to agree with him, that it's not ARMs that got people in trouble. It was SUBPRIME ARMS, sold to people with bad credit who could not get out of them because they couldn't get another loan when the rates reset. He also told me that these loans are the way to take advantage of what the government is doing to pump up the economy, because they can't directly change long term rates. Anyway my credit is around 800 so the product would be considered a prime ARM without prepayment penalties, teaser rates, etc... My question is what risk am I really taking? If I had this current loan and it "reset" right now it would be in the 3.5% range because the government is keeping rates so low, and I guess I just don't see that changing any time in the near future. If they raised rates it increases service on the debt which might break the US, so I'm thinking the system will collapse before the government lets the intrest rate climb. Am I correct on this?

[abs]

I think you will be taking a lot of risk. The outlook over the next few years for banking system losses, credit access and real estate overall is very poor. You can read one of the best summaries I've seen here: http://www.geocities.com/cyclepro2/Char ... utlook.htm

I think refinancing right now is a terrific idea since rates are truly at historic lows (thanks to the Fed) however, I would only consider a fixed rate loan and a relatively long loan term of no less than 10-15 years or 30 years depending on your desires.

You need to ask yourself what happens in five years if you can not access the credit markets to refinance the loan? Likewise, although many of us are anticipating deflation for the foreseeable future, after the bubbles unwind, it is not clear if we will see stagflation (I think a possibility). Do you want to be caught in a high interest rate environment when you have to re-fi?

Take advantage of the current situation and try to refinance into a position of increased safety and lower risk. On the other hand, some would recommend selling your real estate, moving into a rental, and parking your cash for the next few years as real estate could easily drop another 25-40% from here . . .

Andrew

[gerald]

What Andrew says is true. I have been in the real estate business for over 30 years (Owning Income property-apartments inner city Chicago) homes however are a different animal, so take what I say from that perspective. A short term loan is really rolling the dice and is something I would prefer to avoid whenever possible. When you have to refinance an investment loan at 20% (yes 20%) due to circumstances (this was in the 1980's) you never forget it. I am not saying this will happen again but when someone tells you something can't happen they may be wrong. Three years ago while trying to decide where to place some cash I was at a MAJOR bank and talked to investment advisers about various options. I raised the issue of municipalities going bankrupt and banks failing, they then laughed and thought I was crazy, not so today, they are in trouble. ( I remember my grand parents telling me stories of just such things happening in the 1930's, including a story of when they were in Germany and people were paid TWICE a day , they would go out a buy anything so they could barter it later for something they wanted. Sorry if I digress.) Some of the things you have to think about are, what is the debt ratio on your house, do you like living there, and what do you think the long range projection is on appreciation in your area. A large portion of the housing decision is emotion and life style. The house that I am in has appreciated over the last two years so statistics have to be taken with a grain of salt. And remember, real estate is Location, Location, Location, wish you the best.

[tobyguy]

Hey Guys,
I'm a longtime follower of this board and I'm looking for some advice. I think some of the insight I read here is better than anyplace else. I'm seriously considering getting a 5 year ARM loan for around 4.5%. I'm in a 30 year fixed at 6% right now. I know these ARMS have gotten a bad name but my mortgage guy said, and I happen to agree with him, that it's not ARMs that got people in trouble. It was SUBPRIME ARMS, sold to people with bad credit who could not get out of them because they couldn't get another loan when the rates reset. He also told me that these loans are the way to take advantage of what the government is doing to pump up the economy, because they can't directly change long term rates. Anyway my credit is around 800 so the product would be considered a prime ARM without prepayment penalties, teaser rates, etc... My question is what risk am I really taking? If I had this current loan and it "reset" right now it would be in the 3.5% range because the government is keeping rates so low, and I guess I just don't see that changing any time in the near future. If they raised rates it increases service on the debt which might break the US, so I'm thinking the system will collapse before the government lets the intrest rate climb. Am I correct on this?

Personally, if I were in a situation where I needed anything more than 5 year left to pay off my home, I'd probably try and sell it and rent instead.
You should not only be concerned about interest rate going up, but also about employment for the term of your mortgage (and after of course).
If you believe a depression is coming, that means ALL asset prices will drop much further (including home prices). That also means it's going to be that much harder to remain employed.

There will undoutedly be a time when interest rates go through the roof, but that will be after deflation runs its course. You may be fine for a few years during deflationary times (assuming you remain employed), but there's little doubt that inflationary pressures will surface some time later (when people start spending rather than saving - like they are doing now). Either way, I'd hate to be holding any kind of debt during either phase.

Tobyguy

[Zeke74]

Thanks for the input guys. I'll give you a little update. I did end up doing the loan, and here is my reasoning. I'm locked in at 4.5% for 5 years. After that it can go up no more than 2% per year or a maximum of 5% over the life of the loan which is ammortized like a standard 30 year loan. Basically I have a stop loss at 9.5% but honestly if the libor goes that high it will mean our government is broke. Another factor is that I'm in the home I will retire in and I got it for a steal in July '08 after the market "crashed". I used " because I live in Omaha,NE and we did not have the explosion nor the pullback much of the country did. I bought for 183K and the house would resell in this market for at least 200K. I bought from a military owner who was transferred and they panicked, they could have gotten more and still moved the house. In the good times it would have sold for 230K. As you can see Omaha just hasn't been as volitile as other markets. My in-laws live in the sub-division in a nearly identical house and they bought in 1991 for around 145K.

To get the benefit we will have to be disciplined, but if we pay what we plan to we will have paid down the loan enough to offset any rise in interest rate, saving thousands in interest. It should be doable because we have no other debt, cars are paid for, etc...

I'm as doom and gloom as most on this site, but I must admit I'm surprised at the ability of the market/government to hold disaster off, I think we are looking more at a Japanese style "lost decade" rather than a "hole up with an AR-15 and a pantry full of SPAM" situation.

[tobyguy]

I'm as doom and gloom as most on this site, but I must admit I'm surprised at the ability of the market/government to hold disaster off, I think we are looking more at a Japanese style "lost decade" rather than a "hole up with an AR-15 and a pantry full of SPAM" situation.

IMO, you are giving the government far to much credit. Arguably their actions are just making things worse. The Market is just a culmination of peoples attitudes and how they feel. It doesn't go in a straight line (never has). Irrespective of what the government has done, the market will continue to go in the direction it wants to. Funny thing is, all those people claiming that the governement programs or bailouts has lead up to the recent stock market highs, fail to remember the very same programs did nothing to stop it from going down to 6500 in the DIJA (and yes, the programs started well before the low in the DIJA earlier this year). Much of the reasoning is the belief that people are rational and respond to events or react to news. Watching the stock market the last few years shows otherwise. And yes, I know this is very counter-intuitive to a lot of people - but if you step back, watch, and drop all asumptions of how things ought to work, it really is something to consider...

Remember, even in 1929, there was a run-up in the stock market. Newspapers printed off front pages indicating the worse was behind them (sound familiar)? They too failed to see the worst was yet to hit.

I don't know about AR-15's and SPAM, but either way, it'll be something none of us living will have ever experienced. I'm sure we'll be telling our grand children about the 2000's and the great crash.

Lastly, there is some indication, this next down phase has begun. Hold tight, if true, this one is going to be a lot worst then last years/earlier this year's crash.

Tobyguy

[Morgan]

According to me to get loan is always risky and not considered a good decision and the mortgage loan will make you suffer more than that of others because we will lose the much expensive property of yours. But i case you really need it . then you have check all the banks with their interest rates.

[Warfield]

Hi,
Loan is always risky and not considered a good decision, and the mortgage loan will make you suffer more than that of others because we will lose the much expensive property of yours.

[CrosstimbersOkie]

Man, I've got a nice house in Kansas City with an assumable mortgage. I would love to un-ass the place and ride out the storm in a rental or a cheap trailer house on a lake in southern Missouri or eastern Oklahoma. The problem is, I doubt I can get what I owe.

DON'T GET A MORTGAGE!!!!!!!! Now is not the time to buy or get into debt. Now is the time to rent, save, and retrench for the storm ahead. After the storm blows a while and today's $250,000 house can be had for $50,000, that will be the time to think about buying. Hopefully by then you won't even have to take out a loan.

Did I mention that my mortgage is assumable??