Adjustable Rate Mortgages

[Brad Johnson]

As pointed out though, too many people take these in order to get into a home they can't afford.

Ditto times eleventy gazillion.  Buyers tend to look at an ARM as an excuse to buy too much how rather than what it is, a tool that is advantageous in certain limited situations.

I've seen too many, and I mean waaaayyyyy too many, people get more house than their finances would allow simply because "that's how much we qualified for".  It's a piss-poor excuse for bad personal financial management decisions.

People want to blame the mortgagors, or at least the mortgage product, for their real estate woes.  I say hogwash.  In the end it boils down to a simple question of "is this financial obligation within my financial ability to easily and properly service?".  The unfortunate truth is that a lot of people think that qualifying for a given mortgage amount automatically makes it financially okay for them.  They want as much house as they can qualify for, not as much house as they can realistically afford.  I saw it happen on a daily basis.

Brad

[Fitz]

When I bought the house in VA, we were well under half what we could have qualified for.

I specifically budgeted our house on "if I lost my job and had to work at walmart/best buy/ a moving company/ etc, would we be ok?

[roo_ster]

When I bought the house in VA, we were well under half what we could have qualified for.

I specifically budgeted our house on "if I lost my job and had to work at walmart/best buy/ a moving company/ etc, would we be ok?

This.  About 60pct of what i qualified on my income alone.  If i get hit by a truck my wife can up her hours and pay the bills.

[cassandra and sara's daddy]

another here  we bought at 55% of what we qualified for.  and barely survived tough times. 

[cordex]

This.  About 60pct of what i qualified on my income alone.  If i get hit by a truck my wife can up her hours and pay the bills.

If I get hit by a truck my wife can pay off the house and - if she invests wisely - never work a day in her life.

[Balog]

If you want to argue real estate market financials with Dame History, be my guest.  I don't think you'll sway her much.  Take the market over any 30 yr period in history, even the Great Depression, and the trend is always up.

You're trying to base an overall decision on the exception rather than the norm.  That's like basing your retirement on winning the lottery. Is it possible? Yes. Is it probable? No.

Brad

If you look at the historical data of my life, house fires never happen. Basing my decision on whether or not to own smoke detectors and fire extinguishers on that "historical" "data" is probably still not a good idea.

[Brad Johnson]

If you look at the historical data of my life, house fires never happen. Basing my decision on whether or not to own smoke detectors and fire extinguishers on that "historical" "data" is probably still not a good idea.

Irrelevant to the topic of discussion. Invalid comparison.

Brad

[Northwoods]

I'm just curious why, at a time when mortgage rates have almost never (if not actually never) been lower at all, never mind meaningfully lower why anyone would want an ARM.    Rates are all but guaranteed to only go up whether we're talking 3, 5, or 7 years from now.

[Brad Johnson]

I'm just curious why, at a time when mortgage rates have almost never (if not actually never) been lower at all, never mind meaningfully lower why anyone would want an ARM.    Rates are all but guaranteed to only go up whether we're talking 3, 5, or 7 years from now.

Immediate gratification.  People have now-itis. They're so fixated on payment they will actively disregard the larger picture.

Brad

[zahc]

I'm just curious why, at a time when mortgage rates have almost never (if not actually never) been lower at all, never mind meaningfully lower why anyone would want an ARM.    Rates are all but guaranteed to only go up whether we're talking 3, 5, or 7 years from now.

This point is not lost on me; however, the low rates make ARM rates lower at the same time. Mortgage brokers are aware of interest rates as well.

Yes, I qualify for a fixed-rate 15-year at 3.875. However, my 5-1 ARM rate is 2.875! Compared to a fixed-rate mortgage, after the the first 5 years, that's about $40,000 more equity I will have in my house, AND a lower monthly payment the whole time (and the budget headroom that implies). If I would pay extra each month to bring my effective payment equal to what it would be with a 3.875 fixed-rate mortgage, then I will be socking even more equity on top the 40k. The rate, after the first 5 years, is capped both in annual % increase and absolute maximum increase. Even if I make the minimum payments and rates go through the roof the instant I sign, I would only be moderately worse off than I would with fixed. If I pay extra (even just enough extra to equal the payment amount of a fixed) or I move early, I come out ahead. It seems like a reasonable gamble, unless there is something I'm missing.

Aside from the ARM issue...


I'm a single-income household. I'm looking at a total payment (principle+interest+taxes+insurance) of about 32% of my take-home, after-uncle-sam pay. Does this sound excessive? 

[Brad Johnson]

A capped ARM is a darn sight better than an open-ender.

Brad