| | FIRST IN A SERIES OF WHAT WOULD GARY DO IN THE COMING FINANCIAL CRISIS
I'm going to direct this post to a VERY important topic to those of you in the U.S. who hold mortgages. Please take a moment and locate your loan statement and follow along with me. If you are like so many people, you have a "Payment Option ARM" which was hugely popular about 3 years ago and is extremely dangerous if you don't know what it means.
In a payment option ARM, you have a choice of how much you would like to pay each month. It's kind of like the credit card statement that says, "here is the minimum balance due" and maybe the credit card wants $125 on a $10,000 balance and your first thought is, "whew!" I only owe $125. Well the truth is - when you pay the minimum balance on your credit card, the interest gets added to what you owe, and your debt keeps increasing. This logic created the payment option ARM, and honestly - I think it is highly misleading:
Here is the trap. You only see the "minimum payment" and you go ok - who wants to pay 32% more for the interest-only payment, or 50% more for the regular amortized payment? (Regular amortized monthly payments would pay off your loan in 30 years if you had a 30 year mortgage... under interest only at the end of 30 years you would still owe the original balance!)
The danger here is that if you pay the minimum payment - just like on your credit card bill - you keep adding to the balance that you owe. The MAJOR DANGER IS if your balance goes 15% above your original amount borrowed - THE BANK WILL REQUIRE THAT YOU PAY OPTION 3 FOR THE REST OF YOUR LOAN. That is mandatory 50% more than your original "minimum" payment.
The scary thing that is getting the U.S. into all of this mess is that mortgage lenders QUALIFIED you based on if you could make the MINIMUM monthly payments - that was all that was required for you to be approved for the loan. So two things happened - the bank lent money to you but you really weren't able to make good on the loan with your current income, but you were probably told that your house was going to go up so much in three years that you could refinance, take cash out, and by the way - you better get this house now before the price goes up even more.
IF YOU DO NOT pay heed to the warning in your mortgage that your loan balance cannot exceed a certain percentage of the original loan before they make you pay regular amortization, YOU CAN BE SCREWED in so many ways:
 First of all, you probably can't make the payments at the new level. Second of all - and this is the worst - you won't be able to refinance in a down market, because the bank will not allow you to borrow more than your house is worth. And for most homeowners these days, because $2,000 billion dollars was cashed out of home equity loans to pay for kitchen remodels, pay down credit cards or buy that SUV with the spinning wheels - their equity is probably less than the loans.
So here's the scenario - you don't know that you can't exceed the loan balance forever, and all of a sudden you get a letter from your bank that your payment has now gone up a minimum of 50%. You can't afford it, so you decide that you have to sell the house, but you owe the bank more than you can get for the house. Now you are stuck, because if you sell the house for cheaper than the loan - you have to write the bank a check to cover the difference.
Selling the house is not a reality because foreclosures are hitting the market in historic numbers, and all of these houses in your neighborhood have to be liquidated at huge losses. Putting your home in that market is unrealistic. What should you do - walk away from the loan? Let it foreclose?
NO BECAUSE IF YOU DO IT WILL BE A MISTAKE THAT WILL BE WITH YOU FOR THE REST OF YOUR LIFE.
I'll tell you why later. I welcome your comments. |
| | Posted 9/20/2007 12:56 AM - 3667 Views - 42 eProps - 54 comments
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