Conventional Wisdom does not result in conventional mortgages
by John Agno
Published on this site: July 26th, 2005 - See
more articles from this month
Conventional wisdom is to buy a house because over time inflation
will make this a wise decision. That hedge on inflation has
worked well in the past. With mortgage rates at near historic
lows (and will only go up in the future), why aren't home
buyers locking in their interest rates with conventional mortgages?
Most people believe they will sell their home after five
to seven years and are looking for the lowest monthly payment
plan over this period. That is why, nationally, interest-only
and adjustable products made up 63% of mortgages written in
the second half of 2004, according to the Mortgage Bankers
Association.
Interest-only loans (where you don't pay anything against
the loan principal for 2-10 years), nationally, are running
at 23% through May 2005. But today's low interest-only payments
for those who stay in their house long enough can face a jump
of $500 to $1,000 or more in monthly payments.
Here is how it works, compared to a conventional mortgage,
fora loan of $400,000 on a five-year adjustable, interest-only
loan at an average rate of 5.46% with a current monthly payment
of $1,820. After five years with the interest rate staying
the same, the monthly payment rises to $2,425 or $2,945 if
the interest rate rises to 7.46%. Whereas, locking in the
5.84% interest rate in a 30-year conventional mortgage, the
monthly payment stays the same at $2,357 and after five years
the loan principal would be reduced $28,526.
Riskier Loans + Higher Appraisals + Looser Standards
With some banks and mortgage lenders becoming increasingly
aggressive in their practices, can the bubble bursting be
near? Discouraging hyper-aggressive lenders from extending
mortgages to high-risk borrowers is having limited success.
For the economy, a slowdown in home demand and prices could
reduce consumer spending. In the last three years , from 2002
to 2004, homeowners who refinanced their mortgages took out
$400 billion in extra cash which was pumped back into the
economy. That source is going to dry up.
For more on the real estate bubble, go to:
http://home.att.net/~coachthee/whats_new/index.html
John G. Agno, certified executive & business coach
Signature, Inc., PO Box 2086, Ann Arbor, MI 48106 Telephone:
734.426.2000 (US Eastern Time Zone)
Email: mailto:[email protected]
The most critical knowledge is self-knowledge.
http://www.MentoringandCoaching.com
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