Comments on: Mortgage Rates Briefly Explained http://www.moneyunder30.com/mortgage-rates-briefly-explained Simple, Honest Financial Advice Thu, 09 Feb 2012 22:53:06 +0000 hourly 1 http://wordpress.org/?v=3.2.1 By: T http://www.moneyunder30.com/mortgage-rates-briefly-explained/comment-page-1#comment-1907 T Sun, 21 Dec 2008 14:29:22 +0000 http://www.moneyunder30.com/?p=958#comment-1907 In an ARM, the "low introductory mortgage rate" isn't always "followed by a much higher rate". In general, the more extreme situations people ended up in trouble with were eg versions of ARMs where people also paid only interest for a number of years. But, there are also relatively conservative ARM loans where not only are there no strange gimicks to make the rate artificially low, but where there are limits on how quickly the rate can increase at the other end - so that in the worst case scenario your rate incrementally resets towards the standard current rate - and at any point, of course, you can refinance. As long as you're not buying too much house, it can be a perfectly reasonable way to set up a mortgage, depending on your situation. For example, I bought a condo my second year in an 8 year graduate program, when I knew I was almost for sure planning to move back near family at the end of the program. It was 2004, when rates were VERY low, and buying a 7-year ARM let me get an even lower rate (4.15%) for 7 years, instead of more like 4.85% for a 30 year. Given that there was a more than 90% chance I was going to sell in 7 years, there was no sense paying $80/month for 7 years just to lock in the option of a lower interest rate on someplace I was pretty sure I'd sell! Now, if I wanted to, I could of course refinance and lock in eg a 5% rate for a 15 or 30 year fixed rate (both of which I could handle with my current income), but given that my plans to return near family haven't changed (parents get older, and it's hard to deal with health problems from afar...), even now it doesn't make sense to spend extra money per month to lock in a rate on a place I plan to sell in 2 years. Just to defend a reasonable plan in case anyone's been considering it but is being made anxious by all the negative hype surrounding the poor ways ARMs have been used! In an ARM, the “low introductory mortgage rate” isn’t always “followed by a much higher rate”. In general, the more extreme situations people ended up in trouble with were eg versions of ARMs where people also paid only interest for a number of years. But, there are also relatively conservative ARM loans where not only are there no strange gimicks to make the rate artificially low, but where there are limits on how quickly the rate can increase at the other end – so that in the worst case scenario your rate incrementally resets towards the standard current rate – and at any point, of course, you can refinance. As long as you’re not buying too much house, it can be a perfectly reasonable way to set up a mortgage, depending on your situation.

For example, I bought a condo my second year in an 8 year graduate program, when I knew I was almost for sure planning to move back near family at the end of the program. It was 2004, when rates were VERY low, and buying a 7-year ARM let me get an even lower rate (4.15%) for 7 years, instead of more like 4.85% for a 30 year. Given that there was a more than 90% chance I was going to sell in 7 years, there was no sense paying $80/month for 7 years just to lock in the option of a lower interest rate on someplace I was pretty sure I’d sell! Now, if I wanted to, I could of course refinance and lock in eg a 5% rate for a 15 or 30 year fixed rate (both of which I could handle with my current income), but given that my plans to return near family haven’t changed (parents get older, and it’s hard to deal with health problems from afar…), even now it doesn’t make sense to spend extra money per month to lock in a rate on a place I plan to sell in 2 years.

Just to defend a reasonable plan in case anyone’s been considering it but is being made anxious by all the negative hype surrounding the poor ways ARMs have been used!

]]> By: the weakonomist http://www.moneyunder30.com/mortgage-rates-briefly-explained/comment-page-1#comment-1908 the weakonomist Tue, 16 Dec 2008 13:48:31 +0000 http://www.moneyunder30.com/?p=958#comment-1908 Paying down the rate with points also gives the selling broker/bank more up-front income. When the loan is sold off, the bought down rate doesn't represent that actual risk of the homeowner defaulting. I find buying down with points to be cheap and deceptive. I guess you could call me a financial fundamentalist. I don't think there should be any fees except to a realtor. The bank should go back to making money on the spread. The fees are a way to pay the mortgage guy up front, that sure worked well for the industry. Paying down the rate with points also gives the selling broker/bank more up-front income. When the loan is sold off, the bought down rate doesn’t represent that actual risk of the homeowner defaulting. I find buying down with points to be cheap and deceptive.

I guess you could call me a financial fundamentalist. I don’t think there should be any fees except to a realtor. The bank should go back to making money on the spread. The fees are a way to pay the mortgage guy up front, that sure worked well for the industry.

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