Jul. 11, 2005 - Playing with Mortgage Fire

I started to notice a change in the ads for mortgages back in March and April.  Long-term interest rates were rising rapidly and so the mortgage pitch was for adjustable rate mortgages (ARMs) and "interest-only" mortgages.

Then a funny thing happened.

By the end of May, long-term interest rates had inexplicably fallen to their lowest levels in the last 15 months.  Suddenly the mortgage ads changed to extoll the virtues of locking in these great long-term rates with 15- and 30-year fixed rate mortgages.

The mortgage industry today is a vast marketing machine that churns out products to meet ever-changing market conditions and consumer tastes.  If you haven't been paying attention over the last 10 years, there has been a radical transformation in home financing.  Every conceivable type of mortgage is now available to meet any situation or need.

• Good credit, bad credit, no credit.
• Fixed rate, adjustable rate, flexible payments.
• 1, 3, 5, 7, 10, 15, 20, 25, 30, 40 year adjustable or fixed rate terms.
• Flexible payments, teaser introductory rates, interest-only payments.

They've got it all.  But what does this mean to the average consumer?  Trouble if you're not careful.

Each of these new mortgage products can be a useful tool for the right family in the right situation.  But a poor choice of loans can spell disaster.

For example, the Mortgage Bankers Association recently issued a warning that many of these new "nontraditional" mortgage products (especially ARMs and interest-only loans) could lead to high foreclosure and delinquency rates in the future.

Why?

Instead of using these mortgage tools intelligently (right family, right situation), people use the increased flexibility and lower payments to live beyond their means and buy "more house" to keep up socially or to fulfill their dreams.

Big mistake as the family in my Lender's Slave post found out.  They're not alone.  Many others have felt the pinch of ill-advised mortgage choices.

Of course the mortgage companies are only too happy to accomodate the demand.  Just remember that when you hear all those commercials for exotic financing options.  The mortgage industry will pitch to you whatever will help them close more loans, whether it makes sense for you or not.  After the closing, the burden is all on your shoulders.

Generally speaking, you will be much further ahead in the long run by sticking with a house that you can afford and by financing it conservatively.  If you find yourself gravitating toward risky mortgage products just to afford the payment, then you are going too far.

Not everyone who plays with fire gets burned, but it's not worth the risk when you're playing with mortgage fire.  The consequences are too steep.  Just ask Lender's Slave.

Jul. 11, 2005 - Mortgages