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Re- Re- Refinancing Home Loans to Keep Payments The Same July 24, 2006

I think I’m partially crazy for taking on a 30% debt-to-income ratio by buying a home in New York City. But if you read the NY Times article yesterday about people refinancing their mortgages before their adjustable-rate mortgages reset just to to keep their payments the same, I think it’s time to say that a lot of people are just delaying their debt drowning.

Millions of Americans have turned to adjustable-rate mortgages to afford a home as prices soared. But when you don’t plan for the ARM interest rates reset when interest is rising, it’s time to start living below your means. The artificially low teaser rates are attractive when you think you might not stay in your home for more than 5 years, but you never know what your financial circumstances or housing market will be like when your interest rate resets. People who are refinancing and re- refinancing are just building up their mortgage with closing costs and delaying a possible financial meltdown. We all would like to assume that we’ll be making more money in a few years or that we can build up enough of an emergency fund, but anyone who doesn’t have a trust fund can loose their income. I try to make myself useful at work, but we all know that employment is an at-will term, which means the company can fire me or I can quit at anytime. Even if you have your own company, business can slow down. I know I’m not indispensible, so I’m trying to build up my cushion. Don’t you get nervous when you read articles like this one and the person they interview says:

Still, borrowers like Mr. Perry say the loans make sense because in a few years they plan to move to another home, earn more or refinance again, often using the same assumptions they made when they took out their earlier loans.
…“I am not going to be here for 30 years. Why is it important to have a fixed mortgage?”

If home prices keep rising, maybe this won’t matter in 5 years, but what are the chances they keep going up like they have been in the past 5 years? (Looks like there’s about 50% of all loans in major California cities in 2006 are negative amortization mortgages. What will happen in 2010? Scary thought. Check it out in the article).

Source:
Re-Refinancing, and Putting Off Mortgage Pain, NY Times
Published: July 23, 2006

Comments»

1. Miguel - July 24, 2006

I read that article yesterday. Scary stuff. I admit to having a 7-year ARM that will adjust in a 4 years. But, I’m more prepared than most. If rates are crazy but the time it starsts adjusting in 2010, then I will have put enough away to be able to substantially pay-down the mortgage to a point where the payments would remain level. In the meantime, I have been enjoying some extremely low rates, which certainly helps save money.

The danger is highlighted by the NYT article, which suggests that many people are just treating their homes like big fat piggy banks, as a replacement for saving. I like to think most people are not that dumb, and that the media is overblowing all this and looking under rocks for mentally challenged people.

But, I do worry, that maybe they are onto something. Maybe there really are lots of people doing nothing but carrying debt forward instead of ever thinking about paying it off.

2. Kyle - July 26, 2006

Miguel,
Smart. As long as you have enough to put away when interest rates rise, you’re golden. If you move before the 7 years is up, it doesn’t really matter. As for people using their homes as ATM machines, I really hope they’re doing some smart financial planning!