The End of the Bull Market in Real Estate is Near...

[Another Reader]

From an e-mail solicitation an agent friend received...

Extra-Extra, Read All About This... Exciting News!

The 40-year mortgage is back

Are your clients struggling to get into the housing market?

Can’t get their dream home because the monthly payment is just a little out of their reach for the short term?

Now they have an option to afford the home they want and have a lower monthly payment!!!
Purchase or Refinance
10 years of interest only payments
Year 11, it converts to principle and interest
Rate is determined upfront
Minimum FICO 600
Minimum Down payment 10%
Self-employed...Don’t show enough income on taxes? It's ok too!!!
More Info Please!

According to National Association of Realtors (NAR)
The average length of time people stay in their home, is 10 yrs.
Why not try and save during that time?


Shades of 2006...

 

[Just_Steve]

Shades of 2006...

Let the good times roll

 

[bobandsherry]

People always say never forget, that is until there's a couple of bucks to be made by forgetting.

 

[ckelly78z]

WOW, 10 years of interest only payments ? That will ruin some young lives, and cause another 2008 style collapse at some point.

Schools need to teach personal finance to prevent scams like this from getting big.

 

[joeea]

You can tell it's good by how many exclamation marks they use!!!!!

 

[joeea]

WOW, 10 years of interest only payments ? That will ruin some young lives, and cause another 2008 style collapse at some point.

40 year mortgages with 10 years of interest only payments aren't going to be the cause of any collapse. It would take a lot more than that.

 

[Christine]

Just saw the movie The Big Short. Have anyone seen some nice Credit Default Swaps recently?

 

[Carol1862]

As soon as I read “10 years of interest only” I shuddered.

 

[jazz4cash]

As soon as I read “10 years of interest only” I shuddered.

I agree. Way more damaging than the 40 yr term.

 

[Stonewalker]

40 year mortgages with 10 years of interest only payments aren't going to be the cause of any collapse. It would take a lot more than that.

True, but it is a sign of a certain mindset that causes people to walk into that kind of financial deal. It is that renewed mindset that makes me think the OP is on the right track.

Let's face it - most people on this forum are wise enough to at least see the financial cliff and try to hang glide from it instead of drop off it.

 

[Andre1969]

I never understood the allure of a 40 year mortgage, since in the early years, your payment is mostly interest anyway. It's not going to reduce your overall payment much, versus a 30 year.


For instance, I just refinanced my place to a 30 year fixed at 3.875%. $472,500. Principal and interest is $2221.87/mo.


A 40 year, with everything else being the same, would be $1938.19/mo, a savings of around $284 per month. That seems pretty inconsequential to me.


However, a 40 year, where it's interest-only for the first 10 years, and then it basically goes to a 30 year? Well, with the same terms (3.875%, 472.5K), the interest payment on that is $1525.78. A savings of $696.09/mo.


Now, I wouldn't want to do something like that, because I'd hate the fact I wasn't building equity. But, I could see some people being seduced into that. Especially, if they think real estate prices will rise in the near future, so they'll build equity that way.


However, I have the feeling that a 40-year mortgage, or one of these 10/30 or whatever they call it things, would have a higher interest rate than a straight-up 30 year?

 

[Another Reader]

Not likely to be conventional mortgages... Someone is looking to make these and then sell them somewhere. MBS, anyone?

 

[Chuckanut]

One thing I have learned from consumer information services over the years is that the same scams come and go, seeking new victims every time they return. They may be dressed up in different clothing and with new 50¢ words to describe them, but lipstick on a pig..........

 

[Nick12]

+1. / reminds me of the junk mail I get with companies promoting too good to be true agenda.

 

[jkern]

I can see the 40 year mortgage having an application. The difference between the 30 yr and 40 yr can provide an additional $50K in purchasing power. Here in the SF Bay Area, that could be the difference needed to get your first home. While I hate to 10/40, it could have an application too. It could be the difference maker for some people.

 

[ziggy29]

One sign is when a critical mass of buyers define "affordable" in terms of their initial monthly payment, and little else.

 

[Sunset]

....

For instance, I just refinanced my place to a 30 year fixed at 3.875%. $472,500. Principal and interest is $2221.87/mo.
....

.... I'd hate the fact I wasn't building equity. But, I could see some people being seduced into that. Especially, if they think real estate prices will rise in the near future, so they'll build equity that way.

.

Why would you do that if you hate building equity ?
Previously, I've done the opposite, and go for a shorter term, so that the place is paid off faster.

 

[Andre1969]

Why would you do that if you hate building equity ?
Previously, I've done the opposite, and go for a shorter term, so that the place is paid off faster.

I, personally, just refinanced because I had just bought the place in September of last year, and was at 4.75%. I was only 7 months into the mortgage. This refinance dropped my monthly payment by around $250.


And what I said was was that, in reference to that 10/40 mortgage, I wouldn't like it myself, because of the fact it WOULD NOT build any equity in those first ten years. But, I could see that attraction, for others, who are only focusing on the lower payment.



At 3.875%, I'm not in a huge hurry to get the place paid off. But at the same time, I don't want that big balance hanging over me forever!

 

[Vacation4us]

This is a great loan for the lenders. Much like payday loans, and other legal loan sharks. Notice how a FICO score of only 600 is required. At any level this loan is a bad idea for the borrower.

 

[BigNick]

I remember an earlier housing downtown in the UK, when a commentator said (approx) "The problem is that we have a 10-year cycle and people have 8-year memories".

 

[Vacation4us]

I, personally, just refinanced because I had just bought the place in September of last year, and was at 4.75%. I was only 7 months into the mortgage. This refinance dropped my monthly payment by around $250.


And what I said was was that, in reference to that 10/40 mortgage, I wouldn't like it myself, because of the fact it WOULD NOT build any equity in those first ten years. But, I could see that attraction, for others, who are only focusing on the lower payment.



At 3.875%, I'm not in a huge hurry to get the place paid off. But at the same time, I don't want that big balance hanging over me forever!

Did you look at a 15 year mortgage? Usually a double win at a lower interest rate and a shorter term. What will you do with the extra $250/month? In 30 years that 472 k loan will still cost you almost 800k.

I am down to the last 47,000 on my house loan when it's paid off I get to retire. Not having a 2.5k payment a month in retirement.......priceless!!! And the difference between having to work and retirement for me.

 

[Andre1969]

Did you look at a 15 year mortgage? Usually a double win at a lower interest rate and a shorter term. What will you do with the extra $250/month? In 30 years that 472 k loan will still cost you almost 800k.

I am down to the last 47,000 on my house loan when it's paid off I get to retire. Not having a 2.5k payment a month in retirement.......priceless!!! And the difference between having to work and retirement for me.

I wouldn't have been able to qualify for a 15 year mortgage, at least not with a loan amount that big. As it was, they made me put down 25% on the house, rather than 20%.


Just out of curiosity though, I checked loan rates. About the cheapest I can find now is 2.875%. That would be $3234.67 in principal/interest, compared to the $2221.87 my 3.875% 30 year is. Even if I could qualify for that, I wouldn't be comfortable paying it.


As for the extra $243/mo (turns out it wasn't quite $250), I'll probably just invest it, or find some way to blow it. Also, by the time you throw the escrow payment in, my mortgage is about $2700/mo. The 15-year would be $3712. I want to retire in a few years, depending on how things go financially, and I think I'd be comfortable retiring with a $2700/mo mortgage. I wouldn't be comfortable with the $3712/mo. Even if I could do it, mentally, I'm not ready for that! The 15 year mortgage would most likely keep me w*rking longer. And, I might have to reduce my 401k contributions, to cough up that extra $1000/mo.


I just ran some other numbers, and calculated that if I paid the mortgage down to around $325,000, my monthly payment on a 2.875% 15 year term would be about what it is now. But, I'd rather have that extra $147K invested, and working for me.

 

[Vacation4us]

If you still paid the $243/ month towards your mortgage you would still cut 7 years off the loan. Over 7 years that's an extra $20,412. Even if your a great investor I doubt you could turn 20 k into a savings of $184,800 in mortgage payments.

Food for thought.

 

[Vacation4us]

Oops fuzzy math...over 23 years your cost is 67k

 

[Andre1969]

I just ran the numbers in an excel spreadsheet, and it's actually paid off in 300 months. Total interest paid is $265,276 vs $327,373,35. Total payments are $737,776.13 vs $799,873. Plus, I guess you gotta figure out the time value of money and all that fun stuff, but to me it just seems like a draw, more or less.


Now, back when interest rates used to be higher, refinancing could be a no brainer. My first home, a condo, had a 9.625% interest rate when I first bought it back in 1994. I was only 24, and while I didn't have bad credit, I didn't have much of a credit history. I refinanced, in 1999 to something like 7.25%. I would have refinanced sooner, but in that timeframe I went through a bad marriage and expensive divorce, and had to get that sorted out first. And, even at 7.25%, I was over-paying a bit to get the mortgage down. I refinanced again, in 2002, maybe 2003, to a 15 year at something like 5.5%. I forget how much I owed at the time; probably around $77K or so...a pittance today, but at the time I was only 32-33, and it seemed like a lot of money at the time. I remember at the time, going from the 7.25% 30 year to the 5.5% 15 year did raise the monthly payment, but not by much.