Be Careful What You Wish For

The old adage goes: Be careful what you wish for, you may get it! This has some relevance to the housing market today and I’ll share my concern with you. I’ve been in the mortgage business for over twenty-five years and I have never seen money as easy to get as it is today.

“What’s wrong with that?” you ask, “That ought to be good for everyone.” Yes and no. Certainly three years of low interest rates has fueled a vibrant housing market and has allowed a couple million wanna-bes to become homeowners. I believe that increase in buyers also slightly warped the supply-demand equation and may have been at least partially responsible for the record housing price increases in the last few years.

The latest gimmick is the re-packaging of old negative-amortization loan that was the mainstay for the S&L’s for the past the thirty-years. It’s now called the Option Loan, meaning you have the option of making several different payments. The other “Loan du Jour” is the interest only loan. Both types have obligatory payments that are much less than the traditional 30-year amortized loan.

Obviously with a lower payment, more people will qualify for a given loan. Combine that with looser underwriting standards and you can see why there are so many new buyers around. You can also see why there has been such a low housing inventory in most local markets as that horde of buyers have quickly snatched up new listings.

So what’s wrong with this picture? I am concerned with a few things. First, greedy agents and loan officers eager for another commission can use the availability of easy money to put buyers into homes that they really have no business buying. Just because you CAN doesn’t mean you SHOULD! We’re now seeing some of these people who got what they wished for trying to find a way to extricate themselves from homes they should not have bought. Luckily, values have gone up so they won’t get hurt.

Second, the reason these loans have a low payment is because no contributions are being made toward the principal balance. With the “Option Loan” the mortgage balance will actually increase during the first few years. And ultimately the payment will increase significantly. The agents tell them not to worry, that values are going to go up and that they can always refinance again, but this may not be the case.

Millions of homeowners simply do not understand the terms of their loan. Like so many Americans, they are debt-junkies fixated on low payments. They don’t give any consideration to where they will be five or ten years later. Some of them come to my office and are surprised to find out that they owe more than when they bought their home. They have less equity than they thought they had and in those cases where they were selling that home to buy another, they have less of a down payment.

Now, it wasn’t like they couldn’t have found out. They got a payment coupon every month that showed how their payment was being applied and what the principal balance was. They just got into the bad habit of making the minimum payment. It’s like a shell game where lenders get you to focus on something other than the proper issue, which in my humble opinion, is building equity and eventually paying off your loan.

We all know that the stupidest credit card policy is to make the minimum payment every month. That policy keeps you in hock for the longest period of time and results in them collecting the most interest from you. Yet here we have the mortgage industry creating giant credit cards and encouraging people to make only the minimum payment. It’s wrong.

People just aren’t saving money today. The savings rate is currently less than one percent of income! At least paying down the mortgage and building equity is one way of saving. And now with these loans people are being encouraged not even to do that. Not good!

If you have such a mortgage now, it’s time to find an expert to assist you in evaluating your situation. Establish reasonable long-term goals and make sure you are managing your mortgage so as to meet those goals. If you know someone who is wishing to buy a home because they can get a low payment, get them to consider the larger picture before they commit themselves.

Be careful out there!

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