Too Little...Too Late
What I am talking about, is this article from the LA Times titled: A Loan That'll Get Ugly Fast. I REALLY suggest you read the whole thing. It is a great article on soooo many levels.
Before we get started, lets take a little test...don't worry, it is only one question!
"Like hundreds of thousands of other homeowners around the state, Hertzberg has a mortgage that lets him choose how much he pays each month."
Question 1. Do you think Hertzberg will chose the little amount, or the big amount to pay each month?? (Take your time...clear your head...take a deep breath...raise your hand if you need another pencil or an eraser. This is a question so tough that it didn't even make the California High School Exit Exam...)
And the answer is........
"Like many of them, he always chooses to pay as little as possible."
DING DING DING....if you said the 'little payment' you won!!
It isn't really any secret that when people are faced with spending a little money or a lot of money for the same 'item', they choose to spend the little amount. The problem is that you get 'behind' on that item if you pay the little amount. I saw an article many months ago in the OC Register that said something like over 70% of the people that were trading in cars in California now days are 'upside down'. That is because people are getting these low payments for 6-8 years on assets that are depreciating faster than they can be paid down.
A similar thing is starting to happen now with real estate, except the difference is that the real estate is not appreciating at a rate to accomodate the 'negative amortization' these borrows are adding to the principal every month.
I have gone over the pitfalls of these loans, how they are sold by brokers so they can make a fat commission at your expense, and what to look out for here.
I suggest you read the entire article...but here is a nice little statistic to think about:
In 2003, only about 8 of every 1,000 people buying a home or refinancing a mortgage in California got a pay option loan, according to San Francisco-based data tracking company First American LoanPerformance.
Last year, 1 in 5 loan applicants got one.
In the first eight months of 2006, even as the real estate market began to weaken amid fears of a downturn, the appeal increased again. Nearly 1 in 3 California loan applicants are now choosing them. The state boasts about 580,000 active pay option mortgages, about half the U.S. total.
Lets pretend this was a 'game' in Vegas and you could place a bet on how you thought things would turn out. Would you bet that most of the 580,000 people with these mortgages are going to be earning the extra money needed to swing the full mortgage when the time comes? Are you willing to bet that appreciation saves them? Or do you think there are a LOT of over extended people out there who are going to be enrolling at FB University in the coming semesters?
Its your money...where would you put it?