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Help Me Understand

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Rowan
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Help Me Understand

Post by Rowan » Mon December 15th, 2008, 10:25 pm

Okay this is about the only place I feel safe asking this question; anywhere else would make me feel stupid for not knowing.

I do not own a home, so I don't understand the inner workings of mortgages. Can someone please read this short story and explain to me how a mortgage is doubled? I mean I thought it could only happen through the actions of the home owner - i.e. that they refinance the home to get money that is needed - yet it sounds like this mortgage doubling is something of a surprise. At least that's the impression I get.


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diamondlil
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Post by diamondlil » Mon December 15th, 2008, 10:35 pm

I don't know what the mortgage situation is like in the US, but here one of the factors could be interest rates. I bought my house 3 years ago, and my payments went up by more than $300 a month (about 25%) since that time. They are finally going down again now.
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michellemoran
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Post by michellemoran » Mon December 15th, 2008, 10:42 pm

It's the interest rate. If it isn't locked in, it could double.
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Post by Ash » Mon December 15th, 2008, 11:56 pm

When my husband was still in school, we bought a house with an ARM: adjustable rate mortgage. At that time the interest rate was very low - I think 5%. We knew that in 2 years time it would start to go up, but assumed that David would start working by then. Luckily for us, he did, so when the rates did go up, we were ok, but we quickly looked at refinancing to get a fixed loan. We knew just what we were getting into; which makes me wonder about these folks that are in trouble with these now. Did the leander just not tell them the rate was going to go up? Or did the buyers not listen, or not 'get it'?

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MLE (Emily Cotton)
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Post by MLE (Emily Cotton) » Tue December 16th, 2008, 12:48 am

Rowan, I think your confusion is between the MORTGAGE doubling (it didn't) and the mortgage PAYMENT doubling, which happens often in the case of adjustable interest loans. That is because in the first few years of a mortgage, 90% of the payment goes to interest, as opposed to paying down the loan (principal). An increase in the interest rate can change the monthly payment significantly during the first ten years of a thirty-year mortgage.

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Post by Volgadon » Tue December 16th, 2008, 1:08 am

[quote=""Ash""]When my husband was still in school, we bought a house with an ARM: adjustable rate mortgage. At that time the interest rate was very low - I think 5%. We knew that in 2 years time it would start to go up, but assumed that David would start working by then. Luckily for us, he did, so when the rates did go up, we were ok, but we quickly looked at refinancing to get a fixed loan. We knew just what we were getting into; which makes me wonder about these folks that are in trouble with these now. Did the leander just not tell them the rate was going to go up? Or did the buyers not listen, or not 'get it'?[/quote]

There is probably so much going on with young couples that not everything registers.

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Rowan
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Post by Rowan » Tue December 16th, 2008, 2:08 pm

Thanks guys. It just seems to me like pretty much all of the families who have ever appeared on that program have wound up in worse shape than before. In this case, though, it sounds like things were going to go south no matter what with the way those rates fluctuate.

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Telynor
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Post by Telynor » Thu December 18th, 2008, 5:54 am

ARM mortgages are IMHO, a very dangerous thing to do these days. Fifteen years ago, they made sense, as the economy was strong, there wasn't a lot of debt crushing the overall market, and you still had to have some sort of down payment. Sadly, economics is something that really isn't taught in schools, and the folks who have gotten burned on this latest cycle are the long term losers in this one.

A basic rule of thumb on figuring out if you can even think about affording a home is this one -- I used it when I was a homeowner, and later, added some properties to my portfolio:

(base gross pay for one year) x 2, then multiply that by 10 -- that's about how much home you can afford at the very very most. If you're paranoid like me, use what you take home after taxes and medical insurance. Then, take that final figure, and use 5% of that -- that's about how much you want to have for your down payment.

What this does -- it tells the lender that you are serious about staying in that home, and that you have a sizeable investment in the property. The less debt burden that you have going into a home is good too -- once you really start looking at just how much interest you're paying on credit cards, it starts to eat away at your sense of security.

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princess garnet
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Post by princess garnet » Thu December 18th, 2008, 5:51 pm

Anyone else get CNBC? Suze Orman has her own show 9 pm and midnight (Eastern time) on Saturdays.

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