Housing market & crazy financing: Chicken or Egg?

[widebody911]

Is the wild housing market a result of the creative financing available, or is the creative financing a response to the crazy prices?

Now available: 50-year adjustable mortgages
http://money.cnn.com/2006/05/10/news/economy/economy_mortgage/index.htm

[RANDY P]

the crazy prices - and as noted the 50 actually yields a lot more interest for the lender, it's an alternative to I/O loans -Typcial loan lasts less than 10 years, usually about 7 - on a 50 year note the lender makes a bit more. It's also the only way left these days that a borrower can have less than a 50% Debt to Income given the current housing prices in most parts of the country.

Remember this - as long as banks are lending against housing you will ALWAYS pay at least going 30 year rates on that money. The only way to alleviate that debt is to PAY THE FULL PAYMENT.

There is no creative financing that will overcome that simple fact. If the going rate is 6.5% you will always have to pay your payment plus that interest if your goal is to pay the property down. A magic "low payment" means you will not pay down the principal, period.

Once again, there is no magic bullet. Your home mortgage, with your rate will require a minimum payment to pay down. 10 year or 50 year term, this is true.

This is where the American consumer is getting hosed. They aren't aware that a lot of these programs offered today don't allow for a full paydown of principal lke what they're used to. They think it's like buying a car where they walk on to the lot and the dealer magically makes their car payment lower if you ask for it. - And all that's really happening is the term being altered and rate altered to get there

[RANDY P]

Also, you have a choice. If you feel guilty about going 50 years, qualify under a 50 but make 30 year payments.

Problem solved.

[Porsche-O-Phile]

Until the bank slaps you with a penalty for overpayment. They want the interest; they could care two *****s about whether or not you want to own the property free and clear faster. They have no interest in helping you - only helping themselves (through making you pay as much in interest as possible).

[Porsche-O-Phile]

Back on-topic, I think that the extended-payment type options are simply a response to higher (over-inflated) prices and an attempt to keep people buying even though they can't afford it under "conventional" terms.

Until wage increases keep pace with housing prices, this is going to be what you get. Housing costs as a percentage of disposable income has skyrocketed. It used to be if you were paying 33% of your gross in housing, that was a lot. Now I know people first-hand that are leveraging over 2/3 of their income (gross COMBINED income!) just to afford a mediocre home. They fear it's either do that or be priced out of the ownership market forever. I told 'em they were nuts, but thus far all they've done is throw the appreciation values in my face and laugh.

I do think the day of reckoning is coming though.

[Hugh R]

I know people doing 40 year loans with interest only for the first ten. I make a good living and I can't afford to buy my own house. Not even close. At least not on a 30 year fixed. I went from a 30 to a 20 about 5 years ago and between mortgage, college tuition for my daughter, taxes, insurance, utilites, FOOD, there's nothing left at the end of the month.

Back to the question... yes, these "creative" financing schemes I believe are allowing the market clearing prices of houses in some markets to stay high. 20 or 30 years ago, you couldn't get 40 or 50 year loans. The buyers focus now is not so much on price, but qualifying and the monthly payment. Not when they'll pay off the note.

[RANDY P]

Originally posted by Porsche-O-Phile
Until the bank slaps you with a penalty for overpayment. They want the interest; they could care two *****s about whether or not you want to own the property free and clear faster. They have no interest in helping you - only helping themselves (through making you pay as much in interest as possible).

Believe me, to trigger a Pre Payment Penalty (AKA PPP) you have to pay down the principal a total of 20% within a 12 month period.

So, if you owe $400K on the home, on top of the interest payments you would have to pay down the principal a total of $80K within 12 months - about $7800 / mo ON TOP of the actual interest generated.

The better loans do not have any sort of PPP so you can pay off as soon as you wish..

it's not as easy as it sounds....

[BlueSkyJaunte]

This all smells like "buying on margin" that led to the crash in the 20's.

[legion]

I purposefully made sure the bank I got a loan with had no pre-payment penalty. After I get enough equity (and I overpay every month), and interest rates are as low as when I got my loan, I'll refinance with my credit union (I used a federal first-time buyer program, which my CU wouldn't touch).

I'm on a 30 year. I'm paying down principal like mad to get rid of PMI ASAP.

[BlueSkyJaunte]

PMI?

[widebody911]

Originally posted by BlueSkyJaunte
PMI?

Pound Me In the a$$ - an 'insurance' surcharge if you don't meet a certain loan-to-value metric.

[legion]

Personal Mortgage Insurance. It's a policy the banks takes out to protect itself from me defaulting on a loan because I didn't put down at least 10%. I pay the premiums every month.

I fell for the "might get priced out of the market" hype three years ago when I bought the house. I put 0 down, but at least I got a normal 30-year fixed mortgage.

[BlueSkyJaunte]

Ouch. OK, that wasn't an concern for me because we put down 20%...but then we don't live in Kalifornia. Just a suburb of it, apparently, bacause I sure couldn't afford 20% on my house now, 7 years later!

[bigrubberjeep]

Originally posted by legion
I purposefully made sure the bank I got a loan with had no pre-payment penalty. After I get enough equity (and I overpay every month), and interest rates are as low as when I got my loan, I'll refinance with my credit union (I used a federal first-time buyer program, which my CU wouldn't touch).

I'm on a 30 year. I'm paying down principal like mad to get rid of PMI ASAP.

Uh...how much is your PMI?

They didn't offer you a lower rate on a loan that had PPI?

[legion]

Originally posted by bigrubberjeep
Uh...how much is your PMI?

They didn't offer you a lower rate on a loan that had PPI?

$65 / month.

Banks around here don't do the exotic financing. If I understand what you mean correctly, PPI is a second line of credit for 20% of the balance of the loan so it's 80% mortgage/ 20% line of credit thus getting me out of PMI. I think it would have been more expensive in my case...

[bigrubberjeep]

Originally posted by legion
$65 / month.

Banks around here don't do the exotic financing. If I understand what you mean correctly, PPI is a second line of credit for 20% of the balance of the loan so it's 80% mortgage/ 20% line of credit thus getting me out of PMI. I think it would have been more expensive in my case...

Not really what I ment but I get the picture of your situation. So are you saying you got "a" 100% loan with only $65 in PMI per month?

[RANDY P]

The reason the 80/20 is so popular VS PMI is that dollar for dollar, the payments are identical with 1 loan with add on PMI vs. 2 loans with a higher rate 2nd.

PMI isn't tax deductible so the 80/20 wins. PMI on 100% financing is ugly, so is the rate. Conforming (Conforming = best rate 30/fixed everyone wants) doesn't do 100% 1 loan, in fact it's maximum of 90%, so on top of that the rate is ugly.

100% one loan products do exist without PMI, but the payment after it's all factored is close to an 80/20, qualification is harder, so in the end it's basically all the same.

PMI is only useful if you intend on paying down the home loan (like if you're waiting to sell another property and you want to close). Then, by all means I advocate PMI.

rjp

[legion]

Originally posted by bigrubberjeep
Not really what I ment but I get the picture of your situation. So are you saying you got "a" 100% loan with only $65 in PMI per month?

There was also a first-time buyer program in there, that gave me the appearance of a 5% down payment.

Also, houses are cheap here compared to most of the rest of the country.

[turbo6bar]

Earlier today, I met with a realtor who told me about a contract she just received.

Here are the details:
List price of home: $129,900 (yeah, this is east bumble*****, USA. Houses are cheap.)
Buyer's agent offered a contract for
$149,900
Out of the $149k, the seller is paying $15k for the buyer's 10% down payment. There are non-profit associations that take the $15k and gift it back to the buyer. Seller is also paying ~3% closing costs.

The buyer is basically getting into the house for zip-zilch-nada. The buyer has no money in the deal, so there is less incentive to maintain, improve, and build equity.

Insane in da membrane is all I gotta say.

[RANDY P]

Originally posted by turbo6bar
Earlier today, I met with a realtor who told me about a contract she just received.

Here are the details:
List price of home: $129,900 (yeah, this is east bumble*****, USA. Houses are cheap.)
Buyer's agent offered a contract for
$149,900
Out of the $149k, the seller is paying $15k for the buyer's 10% down payment. There are non-profit associations that take the $15k and gift it back to the buyer. Seller is also paying ~3% closing costs.

The buyer is basically getting into the house for zip-zilch-nada. The buyer has no money in the deal, so there is less incentive to maintain, improve, and build equity.

Insane in da membrane is all I gotta say.

BZZZZZZZZZZT!

Wrong answer. What they are doing is a "gift equity" situation. Only works between immediate family. They have to prove that they are immediate family involved. And, if you do that they will insist to see all parties credit reports to make sure it's not a distressed sale (Mom is in foreclosure and son is gonna bail her out)- they will simply not approve that

Lender will not allow the seller in any way, shape or form to pay the downpayment so there is a downpayment and therefore a lower Loan To Value.

Did the realtor cook this up? Dumba$$. This will never, ever ever work. The proper way is to set it up as an 87% 1st / 13% 2nd and tell the bank that the Seller is "carrying back"$ 20K and have the bank qualify it on that.

This method requires a bit of trust - what will happen is that escrow will draw it up as a note (for the $20K) between the Buyer and Seller -

The day after closing, the Seller marches back into escrow and declares that the $20K note is forgiven and no repayment is due.

Instant equity.

I'll take my $5k fee now please....

rjp