8 April 2005
Now he tells me:
[P]eople are using ARMs to buy houses they can't otherwise afford. That's a bad idea in the first place, since any increase in rates means that the home you can barely afford becomes the home you can't afford. As a general rule, I think people in our society are far too heavily leveraged for their own good. People don't understand the simple fact that you cannot live in an instant gratification lifestyle forever. You shouldn't be living one paycheck away from poverty. You shouldn't be buying a home that you can't hope to afford, and if you are looking at homes out of your price range, you should shop for cheaper home prices, not game the interest rate market and increase your leverage with an ARM.
Actually, I'm almost two and a quarter paychecks away from poverty.
Seriously, I never gave any thought to an adjustable-rate mortgage when I was house-shopping; I figured that if the standard rates, as advertised, were near "historic lows," then there's only one place an adjustable rate can go, and that's up. Better to bite the bullet now and lock in something that will stay locked.
And so I did. By standards I consider reasonable, my home was actually just slightly out of my price range (though the bank was willing to finance almost 20 percent more), but I figured that inside of two years I'd have my car paid off and I'd have a little breathing room, and in the meantime I'd have something I actually wanted, as distinguished from something I could tolerate.
I still think I'm far too leveraged for my own good, but then I have this love-hate relationship with debt.
Posted at 6:28 AM to Almost Yogurt
I agree wholeheartedly about ARMs. That and the "balloon payment" model both strike me as ideas that only serve the lender in servicing (as the word is used by livestock breeders) the borrower.
My lender told me he only used them with people who could not qualify for a fixed rate.
My Brother had one because he bought something way out of his price range. Luckily for him he got to lock in a nice low rate which was comparable to his ARM as otherwise he would have been forced to sell :(
Sometimes it's a matter of what the economy's doing.
The original mortage on our first home was an ARM, at the then-favorable rate of 13.5% (This was 1980, when fixed rates were running at 17%).
When the first three years expired, the rate dropped to 9% or so.
We've had a lot of fun with mortgage rates in the intervening 25 years or so, but never went back to an ARM after that first time. Then again, mortgage rates have not yet returned to those stratospheric levels.
I work on mortgage documents day in and day out. It's interesting to see all the different kinds that fly across my desk. I get the feeling that some people really have no idea how bad a deal they are getting.
Balloon loans are also good for people who are only intending to own the land for a short period of time. Typically buyers who want to buy the house, fix it up, and sell it.
But for any other purpose it's a really, really bad idea.
Recently, I've met two people who complained about how stretched they were, but when you look at their habits, you sense a disconnect.
One was complaining that she didn't have any money at the same time she's planning to go on a seven-day river trip overseas this summer.
The other woman was complaining about gas climbing to $2.20 a gallon. The day before, she took her kids to the bus stop a block away from her house and because it was about 40 degrees, left the engine running. She also smokes a pack of cigarettes a day.
So when people complain about how expensive things are these days, I take it with a huge shaker of salt.
Indeed. I've been pleading poverty for quite some time now. Will it stop me from my annual seventeen-day (more or less) road trip? Not even. It will be a little more problematic I had to shell out $956 this spring for the winter's physical-therapy sessions but only a little.
Thanks for the link...
One of my commenters on the post pointed out that he had flipped a couple of ARMs over the past few years and has now locked in a fixed while rates are still low. One of the above comments points out that when rates are high (early 80's) and you predict they're going down, an ARM is great. I'm sure both parties understood they were playing with fire, but had made a rational decision that the risk was worth the reward.
One of the things I left out of my original post was that the post wasn't really intended for people who are capable of managing their money and making those arguments. Too many people are looking at ARM's or interest-only with the idea that they're going to buy a home they otherwise wouldn't qualify for. They don't even understand they're playing with fire, and then they want someone to bail them out of that mess when they get burned.
The same would seem to apply on a smaller scale with automobiles: they promote the monthly payment ahead of everything else, and leave you to decipher the fine print on your own.