User Comments

1. 

   6/24/08

   MadameX

   Just one of many "creative" mortgage options that sprung up in the 90s and have contributed overwhelmingly to the tidal wave of mortgage foreclosures over the past few years (and those yet to come). Fortunately, a lot of the "exotic" mortgage companies founded on ideas like this have gone out of business over the past couple of years.

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2. 

   6/24/08

   PetLvr

   Don't forget that the longer the mortgage term, the rate of interest is usually higher.
   
   I think most of the mortgage foreclosures too, are due to the high rate of market values and flipping. A lot of people would rather walk away from the mortgage than find out that if they sold their house, there is a shortfall and they have to cover the loss. So, they stop paying and want to get sued and go bankrupt and have their mortgage foreclose.
   
   If I was smarter in my youth - this is what I probably would do in this situation.
   
   1) Firstly - if I can afford $1,200 per month mortgage payments, over and above the operations of a household (taxes, heat, electricity, maintenance, etc) .. then I would use that as my upper limit for the payment and see what GROSS loan could be in a 15 year term. At 6%, it would be roughly speaking ... about $142,500 mortgage.
   
   2) Downsize into a smaller house that can be financed $142,500 instead of $200,000 .. The reality is - that as we get older, we always end up downsizing (until the coffin comes) and if you start out with a bigger house in the beginning - you just collect more stuff to fill it.
   
   3) Now, take that $142,500 loan and amortize that over 30 years - the monthly payments would only be about $850 per month.
   
   4) Take the difference $1,200 less $850 = $350 per month and dump it every month into some balanced mutual funds for the next 30 years (in addition to your regular contributions, or annual bonus contributions).
   
   I can guarantee that at the end of the 30 years - you will be on your way to a good retirement and still have a reasonably priced house - fully paid - to be able to live for the rest of your life - or, sell and use the cash to enjoy your early retirement before you are unable to enjoy your senior years due to health, etc.
   
   OF course, this is just a hypothetical 'i.m.h.o.'. I'm not a financial advisor = and, poor.

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3. 

   6/24/08

   Theresa111

   I have been thinking that building an Ark might not be a bad idea after all.

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4. 

   6/24/08

   gerryPlanetEarth

   I think a fixed rate of 6 % will probably be a good rate for the future...
   
   A 40 year fixed rate mortgage at todays rate is a good investment...
   
   A 40 year floating rate mortgage with restrictive pay off penalties/clauses could be a recipe for disaster...

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   1. 

      6/24/08

      MadameX

      A good investment? On a $200,000 loan, you'd save less than $99/month and pay for an additional ten years as compared to a traditional 30-year mortgage? You'd save $36,000 during the first thirty years of the loan (accruing equity much more slowly, of course) and then pay out an additional $132,000 during the last ten years, for a net loss of $94,000 (not even taking into account the greater risk in the early years when virtually no equity accrued)
   2. 

      6/24/08

      PetLvr

      if you invest that $99 difference each month in a mutual fund over the term .. it would cover the entire downfall if it made 3.15% average per year and if you look back at most mutual funds - what do they do? Double every 10 years?
      
      It's definitely not a black and white topic. Black and grey perhaps If you spend the extra $99 on groceries, beer, or lotteries .. its a no-brainer.
   3. 

      6/24/08

      PetLvr

      And, don't forget the deductibility of the interest or portion of it (if self employed in Canada) and just deductibility of it in USA as well and other countries.
   4. 

      6/24/08

      MadameX

      Agreed, PetLvr, but you and I both know that these loans aren't being marketed to those who know how to do what you've just described and have adequate cushion to do it--they're being promoted hard to people who think the $99/month will make a difference in their ability to pay.
   5. 

      6/25/08

      gerryPlanetEarth

      @MadameX...
      
      No one can predict the future but you may have noticed lately the price of gasoline and food suddenly rising and it would seem logical the cost of borrowing will go up in the next forty years...
      
      A forty year fixed rate mortgage at 6% or less is a steal...
      
      Soon enough we will be hearing the rhetoric "the good old days of single digit borrowing costs" when borrowing costs suddenly rise like oil and rice...
   6. 

      6/25/08

      MadameX

      But since the standard alternative to the 40-year fixed mortgage at 6% would be a 30-year fixed mortgage with very slightly higher payments and 120 few of them, it's tough to see how that's favorable. You seem to think it would be a privilege to pay an extra nearly $100,000 so that you could lay claim to having a single digit mortgage for ten years longer than those poor fools who paid off their houses in thirty years and kept their hundred grand, but that doesn't make a lot of sense to me.
5. 

   6/24/08

   Seabuckthorn

   I completely understand the concept (and I think actually mortgages over 15 or maybe it's 25 years are uncommon or maybe even illegal up here in Canada), but theoretically, if you had a flexible paydown system included, couldn't it be worthwhile, giving you the security of low premiums but with the ability to pay down at the rate of a shorter amortisation if/when circumstances allowed?

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   1. 

      6/24/08

      MadameX

      Perhaps, Seabuckthorn, but in the U.S. such "exotic" and "subprime" mortgage loans often come with heavy pre-payment penalties.