Know anyone getting hosed in Cash-Uut Refinancings?

[ESRBob]

I know our Young Dreamers are a responsible lot, but does anyone have any friends or acquaintances who have done cash out refinancings or other forms of interest-only or other non-standard mortgage arrangements (I think they are officially called negative amortization mortgages) who are now getting pinched? (Business Week is working on a story and for some odd reason I got a call asking for comments)

I have one friend who I know is living above his means (LAYM? Sounds more fun!) who refinances against his appreciating home equity to get money to pay his property taxes and other current expenditures. (A good thing he loves his work and has no interest in ER!). So far he's kept his job and it's all working out for him. But I understand foreclosures are up and the interest adjustments are starting to kick in and people are starting to get hosed, (pretty soon banks are going to get hosed, I suspect). Anyone with some good war stories, share them here or PM me and I'll get Business Week to call you instead!

 

[justin]

I did a cash out refinancing. Then I promptly "wasted" it on mutual funds. They are up a good bit more than the interest costs I paid. Guess Businessweek wouldn't care to talk to me since I didn't fail in this endeavor (yet?!). It is a variable rate loan and it just adjusted 8/1/06 to 4.75% for the next 2 years. I'm "drowning" under the burden of a $603/month mortgage payment. Let BW know I'm available for comment if they want an example of what to do!

 

[Andre1969]

I have a co-worker who kept refinancing and taking cash out of her condo almost every time it appreciated in value. I know she paid about $90K for it initially back in 1992. I don't know what her total mortgage is up to now, but I know she last refinanced to a fixed loan around 2003-2004. She rolled a minivan loan into the mortgage and other things, I'm sure. I remember thinking it was kinda sad that here she was, starting over again at 30 years on a condo that she'd already been living in for 11-12 years.

She thinks it's worth about $290K now. But I have a feeling that it's going to be a hard sell if she decides to put it on the market. Especially since she has one of those dogs like a cocker spaniel or something, that'll piss on the floor if you look at it the wrong way. And she tends to collect cats, too. :

 

[ESRBob]

Yeah, that's the big question with these mortgaged-to-the-hilt properties: will they be worth the debt on them when "cat lady" loses her job and runs through her savings...

Justin -- glad to hear it is working out fine for you,though: do you have a rule of thumb about what % of your property's equity you'll mortgage and invest? Is it most of the equity or is there a decent chunk left in there? 4 3/4 in your latest adjustment doesn't sound bad at all -- is this likely to go lots higher a few years from now if interest rates stay about their current rates? I any case a sub 1,000 per month mortgage is not exactly putting you behind the 8 ball 8)

 

[brewer12345]

Bob, the mortgage product you are thinking of is usually referred to as an "option ARM". These thins let you pay as little as 1% a year (sometimes even less) and tack the rest of the interest onto the outstanding principal. Most of these things only allow you to get to 110% of the original mortgage balance, then the loan "recasts" and you will have to make fully amortizing P&I payments. Since these are invariably floating rate loans, a recast of a loan made in 2004 or 2005 could easily double or triple the minimum required payment. Needless to say, it isn't going to be pretty when large numbers of these loans get to the 110% point.

 

[rs0460a]

other non-standard mortgage arrangements

Sure - 30 yr mortgage; paid it off in 5.5 years...

About as "non-standard" as you can get  : : :

- Ron

PS:  I know that wasen't what you were looking for, but I could not resist...

 

[Andre1969]

I had taken out an HELOC in early 2005. They approved me for $175K. I took out $75K initially and invested it, and then took out another 25K a few months later. On an HELOC you can't write off the interest on anything over $100K, so that's why I didn't go any higher. Now that rates have risen though, I've been paying it down. Once the check I just sent in clears, it'll get me down to about $76K.

The HELOC was fun back when the rate was only 5.5%. But as of the last bill it was 8.25%, and will go to 8.5% as of the next one. Now I just want the damn thing paid down.

 

[justin]

Justin -- glad to hear it is working out fine for you,though: do you have a rule of thumb about what % of your property's equity you'll mortgage and invest? Is it most of the equity or is there a decent chunk left in there? 4 3/4 in your latest adjustment doesn't sound bad at all -- is this likely to go lots higher a few years from now if interest rates stay about their current rates? I any case a sub 1,000 per month mortgage is not exactly putting you behind the 8 ball 8)

I owned the house free and clear prior to the cash out refi, but I needed a little money to pay off some other debts. I figured if I'm already paying all the closing costs, I might as well get as much as I can from the property and invest it. I probably won't refi again in the future.

At the time, I obtained a 90% loan to value loan. But that LTV ratio was based on some price the bank found from an online database which was about 40% more than the purchase price 1 year earlier (non-bubble area). So I really had one of those 130% of value loans since I wasn't really sure of the price I could get if I sold the house.

I've paid down about 10 years worth over the last 2 years. The rate adjusts every 2 years by a maximum of 1%. It started at 3.75% 2 yrs ago. I figure worst case I'll have it at most for 10 more years and at the end of that period I'll be paying a max rate of 8.75%. If rates get that high though, I might just pay it off completely since I get zero tax benefits. The rate is tied to the 1 year constant maturity treasury rate (plus a 2.5% margin). If we threw all of our savings into the mortgage instead, we could pay it off in 1.5 yrs.

 

[brewer12345]

I guess you could say that we did a cash-out refi, sort of. In October, 2002 we sold our condo and got proceeds of about $140k (I think, can't remember the exact amount). When we bought our house for $300k, I chose to put down only the 20% required for a conventional 15 year fixed rate mortgage. I figured I could beat 5.5% less the tax deduction pretty easily (turned out to be very much true). We later refi'd to a 4.99% 15 year fixed loan about a year later, but we didn't take any more cash out.

OTOH, I have pulled about 70k out of credit card 0% balance transfer offers and invested it in money market funds and some bonds...

 

[ESRBob]

Brewer, thx for the options ARM info, and well-done on the 0% credit offers. Yikes, that is worth several thousand a year in interest, though I guess the offers won't be repeated next year.

Andre Ron'Da and Justin-- thx for the stories -- I think we just don't know enough deadbeats around here. BW will have to call somebody else 8)

 

[Rich_by_the_Bay]

We took a 1 month option ARM last move. The reason was that house #1 didn't sell before we moved, so carrying two mortgages we wanted to keep payments low short term. The 0% option along with a very low adjustable rate was just the ticket, got us through the 6 month crunch, and the house sold.

Fast forward 2.5 years, now interest rates were approaching those of a current 30 yr fixed and rising fast. We paid off the option ARM mortgage in full last month. Average interest rate over the 2.5 years: 4.18%.

I think these are very dangerous mortgages for those with little discipline or incomplete understanding. Easy to get in over your head.

We did it very tactically and it worked out fine.

 

[brewer12345]

Yikes, that is worth several thousand a year in interest, though I guess the offers won't be repeated next year.

I'd be shocked if they stopped these offers. The credit card business for prime grade borrowers is extremely competitive and companies have been cutting each others' throats for years with these offers. I see no obvious signs that this will not continue.

 

[justin]

I'd be shocked if they stopped these offers. The credit card business for prime grade borrowers is extremely competitive and companies have been cutting each others' throats for years with these offers. I see no obvious signs that this will not continue.

I'm doing the same 0% deals as you in similar amounts. Do you have a particular "rollover" strategy when one card is due? Pay it off, cancel it, then sign up for a new card? I've got a big batch coming due in 3 months and I'm trying to figure out the best approach.

Have you ever managed to swing a second year of 0% credit from the same card by negotiating with the retention dept. when you attempt to close accounts?

 

[brewer12345]

I'm doing the same 0% deals as you in similar amounts.  Do you have a particular "rollover" strategy when one card is due?  Pay it off, cancel it, then sign up for a new card?  I've got a big batch coming due in 3 months and I'm trying to figure out the best approach. 

Have you ever managed to swing a second year of 0% credit from the same card by negotiating with the retention dept. when you attempt to close accounts?

Nope, I am still in the first year of this. I take the position that this is opportunistic for me and I don't actually need the money. So when they come to the end of 0%, I will simply send in the cash and wait. I've little doubt that the card companies will start bombarding me with more 0% BT offers shortly thereafter.

 

[unclemick]

I chickened out at 20k - paid off the debt this month - part of my new get simple phase - although I'm leaving free money on the table.

One on my desk(Citi) - will roll for 3% of balance capped at $75. Haven't gone looking though.

heh heh heh heh heh - passed on  HELOC/refinancing the 30 yr fixed also. Will I pay it off - hmmm - don't know yet.

 

[Nords]

BW will have to call somebody else 8)

After our last refinancing, NFCU's Virginia office called to offer us a HELOC. They based all the HELOC documentation on our no-doc refinancing, they said that there would be no closing costs, and they even sent the notary out to our house to sign the papers.

The notary said that she'd been practically living out of her car for the last three months as she went from one HELOC signing to the next. The woman was on track to rack up 36,000 annual miles on a 30x40 island. She'd notarized more HELOCs than the local NFCU office had processed mortgages.

 

[UncleHoney]

Two years ago while I was taking care of my mother's estate, my younger sister indicated she wanted to buy mom's house. I knew at the time she and my BIL didn't have the best credit in the world and were always a day late and more than a dollar short when it came to paying bills. I asked if she knew what she was getting into at the time, "Sure, no problem was always the answer"

After a few months it was obvious she was in a pinch trying to come up with the $60 need to buy the house even with $150K ownership as her part of the estate. Knowing how they managed their money was enough for me to stay away from any creative deals she came up with. Like, just sign the deed over to her and then she could get a mortgage and pay the estate back to the estate could loan her the money for a few weeks till she got a mortgage.

I got a good laugh out of the attempts but she kept at it till the lawyer doing the estate told her any loan would have to be secured with a promissory note and it would have to be approved by the probate judge. She cooled her heals after that and finally found a mortgage company that loaned her the money. In August 2004 she got the house and a $63K ARM at 6.25%. Nothing like a good credit rating for good rates.

The first week in September 2004 she sold her other house and netted $37k after expenses. Not bad for only owning it 3 years. Now the plot thickens.

At the end of September 2004 she refinanced her new house and grabbed the full value of $210K with a 6.75% ARM.

It gets even better. In May 2005 she refinanced again and grabbed another $10K for a total of $220 at a rate I can't find. Then in June 2005 she grabbed a HELOC for another $20K.

The big thing that has me wondering is "Where did all the money go?" : I know they had about $30k in car loans and I think they were in big trouble with Uncle Sam for some back taxes. Funny how the self employed can get by for a while without paying taxes.

It didn't take long to figure out why she wanted the house, it was ONE BIG CASH COW.

Where the money went is anyones guess, but it doesn't look like there will be ER for my sister (54) and my BIL (60). Just keep working kids, only 342 more payments and it's all yours.

Ron

 

[macdaddy]

We took out a 100k HELOC in 2002 to put a down payment on another house. The rate was real low. The rate started to creep up as the Fed raised rates and went almost to 8%. Some time back we balance transfered the 100k onto a 12-month 0% CC which now saves 8k in interest costs per year. If we can balance transfer for another year I think it's a no-brainer, otherwise the cash is in the bank to pay it off. Some tax deductions were lost with the elimination of the HELOC, maybe 1k worth. Ron - that is a sad story, I know people in the same boat, it's even sadder when they are good (unselfish) people who use the money to pay for things like health care (boob jobs not included) or college for their kids.

 

[justin]

http://www.msnbc.msn.com/id/14251743/

Looks like Newsweek got the scoop on ARMs causing problems this week. Is it really "news" though?

 

[brewer12345]

http://www.msnbc.msn.com/id/14251743/

Looks like Newsweek got the scoop on ARMs causing problems this week.  Is it really "news" though?   

Awww, they even put a soldier on the page. Cry me a freakin' river. You did a highly levered real estate purchase with an adjustable rate loan that you didn't make sure you could afford the risk on.

 

[justin]

Awww, they even put a soldier on the page. Cry me a freakin' river. You did a highly levered real estate purchase with an adjustable rate loan that you didn't make sure you could afford the risk on.

Seems like every case of "ARMs destroying a life" is really a case of "failure to analyze risk". Probably not a lot of spreadsheeting going on.

 

[brewer12345]

Seems like every case of "ARMs destroying a life" is really a case of "failure to analyze risk".  Probably not a lot of spreadsheeting going on.   

Nope.

Actually, I have compassion for the large numbers of people who will lose their homes in the next few years. Its sad when a family is forced out in a foreclosure. While some of the blame lays with the borrowers, some of it also lays with our society, specifically for increasing income inequality and a failure to educate our people in even basic financial skills.

 

[justin]

Actually, I have compassion for the large numbers of people who will lose their homes in the next few years. Its sad when a family is forced out in a foreclosure. While some of the blame lays with the borrowers, some of it also lays with our society, specifically for increasing income inequality and a failure to educate our people in even basic financial skills.

I place the blame primarily on the individuals and greed in general, however it seems to be a case of "not knowing enough to know that you don't know". Not understanding that ARMs means the monthly payment can change drastically, but not knowing enough to ask. Same with car buying - buying the payment instead of the purchase price.

It would suck (understatement of the week!) to be kicked out of your house and have it foreclosed on.

 

[Andre1969]

I actually feel kinda bad for the soldier and his family. While they went out on a limb and bought more house than they could afford, it doesn't look like they went hog-wild and bought a McMansion or anything. House looks fairly modest actually, and that GM truck in the driveway is a 1987 at the newest. Now who knows, maybe they're hiding a BMW and a Navigator in the garage? 8)

I don't know where these people get the notion that the value of their home could only go up in the 5 years they planned on being there! Heck, I sold my condo in November 2004 (a few months after they bought their house), and I wanted to get out as quickly as possible because prices had ALREADY risen so much, and I knew they couldn't continue!

Still, they over-extended even to get this fairly modest home, so maybe they should have just stayed put where they were for awhile longer, and tried to save up more of a down payment.

 

[Marshac]

I place the blame primarily on the individuals and greed in general

I agree with the 'greed' part, and also with brewer. A friend of mine just bought a condo earlier this year, and is now having trouble making his monthly ends meet. Sounds sad, but until this point he had never lived away from home, never rented, never paid any utility bills, etc. I tried to convince him to rent for a little while, just so he could experience how much everything cost, and to get a better grip on what living on your own is like. Nope. Wouldn't even hear of it. Wouldn't want to 'throw his money away', and buying a home (condo) is an awesome investment. right? So instead of renting some 2br 1.5ba place for $900/mo or less, he buys a 1br 1.5ba condo for about $210k. Oh yeah, his contract job is up this month.

So what we have here are three things- Lack of planning (can I afford this?), Lack of real-world experience (HOW much does nat. gas heat cost in Jan), and greed (the 'investment' part). Will he pull it off? If he finds a job, i'm sure he will. It's just a tough transition going from $2k/mo in discretionary income to almost nothing.