Mortgage Rate Woes
I saw a story the other night (which you can veiw by goint here and clicking on “Housing Hangover”) about the number of forclosures going up because people with adjustable rate mortgages now can’t pay their mortgages.
Adjustable rate mortgages typically have a lower interest rate than fixed rate mortgages for an introductory period. I emphasize this because after that initial period, which can be one, three, five, seven or 10 years, depending on your mortgage terms, the rate then adjusts every year based on what the current interest rate is.
Many people who bought homes with adjustable rate mortgages in the last few years, when interest rates across the board were low, are now facing that variable rate time (rates on adjustable rate mortgages typically change once a year). According to the story mentioned about, it’s estimated that a quarter of all mortgages will have an adjustment in interest rates in the next two years.
That means people who were barely making their payments before now can’t afford their mortgage payments. When they get behind they can default on their loans and go into foreclosure. Some experts are already seeing the rate of forclosures going up.
A woman profiled in the story is selling her home in Texas because her family couldn’t keep up wth payments after the introductory period. She said her mortgage payment went from $1,709 to $3,000, making their situation go “from bad to worse.”
That’s a telling statement. Things were already bad before the mortgage increase. That’s a pretty good indication that this family bought a house that was more expensive than they should have. They got a bigger loan, and thus a bigger mortgage payment, than they could comfortably afford. They chose an adjustable rate mortgage because it was cheaper at the time, and didn’t really think about the fact that they would have higher costs down the road.
It seems like more banks are willing to give huge loans to people, without much concern for whether the person can actually afford the payments. Of course they care somewhat because they lose money when a loan defaults, but it doesn’t seem like there’s enough credit counseling when it comes to a purchase as huge as a home.
So heed this advice if you’re looking for a home: don’t buy more home than you can afford. Your housing costs should be no more than 30 percent of your income. Consider carefully what an interest rate change would do to your ability to pay if you choose an adjustable rate mortgage, and think about any changes you might be thinking about making in your financial situation before you sign (for example, if one parent wants to stay home when you have kids, can you pay the mortgage on the other person’s salary?).
Review of LendingTree.com
Recently, we found a need to do some work on our house. Our roof had a leak, and the guys we had come take a look at it said they wouldn’t touch it without putting a whole new roof on. That, combined with a desire to lock in a fixed rate on our mortgage and also to do some work on our kitchen led us to start looking around to see what our options for refinancing our mortgage were.
We first contacted QuickenLoans since they had refinanced us once before and we had liked the process – quick and painless. We got a quote from our contact there, for a 15 year fixed rate loan taking out some of the equity from our house to pay for the roof and kitchen work.
Then, we also contacted LendingTree.com, since I had heard their ads on NPR about “when banks compete, you win”. The process of filling out their site was easy enough, but the real process didn’t begin until I got a call from one of their lending specialists.
He explained that basically, the banks that deal with LendingTree have an arrangement that says that if there is a better offer, they have to beat it. So, having an offer in-hand from the Quicken guy was helpful, and in the end we focused our attention on minimizing the closing costs, even if it meant a little bit higher interest rate.
We liked the overall process, it took about 3 1/2 weeks total from start to finish, and the check for our cash-out arrived just the other day. All in all, I’d have to say that LendingTree provided a good service and value, and we now have a solid new mortgage.