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Home | Finance | Financial Planning On the short run, the loans can seem appealing. People who would not otherwise qualify for a mortgage can get one with far less than 20% down. In fact, many are fully-funded (using two loans: one for the main mortgage and a second one for the down payment). The problem with a 100% funded loan is simple. Long ago, lenders decided that to show credit-worthiness and perhaps even financial discipline, borrowers should have saved at least 20% of what their new home will cost. If the borrowers in good faith ante up 1/5th, they’re unlikely to bolt. Hence, a lender is pretty safe loaning them the remaining 80%. As soon as a lender says, “Here, let us buy you a house; all you have to do is sign here,” people without financial discipline or a saving habit can buy a house. Not saying that they are all lower echelon or riff-raff, but the odds are some of them will be higher-risk than those who have saved an adequate down payment. To lure even more customers into the market, interest rates may also have to be low—as low as 1% in some cases. Nothing down and 1% a year, divided by 12, would make monthly interest on a $100,000 home less than $100 a month! And if the loan is interest-only, anyone who can afford to go out to eat once a week can afford to buy a house. Seemingly. That is, until the adjustable rate adjusts. In a typical 3/1 ARM, the interest rate remains constant for three years. In the fourth year, it adjusts to a percentage above LIBOR or the treasury index or some such. Some loans will increase by 5%. That could be several times what the borrower was already paying, even if it remains interest only. A 5/1 ARM is similar, except the stable interest rate remains for five years. It could be higher to start with, because of enduring longer. So you see that the least-advantaged people are the ones likely to get into a 3/1 ARM, possibly interest only, possibly 100% financed. What will they do when their monthly payment doubles? Since the average American is only three house payments away from bankruptcy, many will lose their homes. It will be a feeding frenzy for foreclosure sharks. Are ARMs all bad? No. If you know your financial situation will dramatically improve within three years, or you know you’ll be able to refinance at a rate you can afford, or you know you’ll be moving and selling the house anyway, this could be a very attractive approach. Unfortunately, many people guess their future when getting in over their heads financially. Article Source: http://www.articlewheel.com
Lin Ennis is the author of Let Your Mortgage Make You Rich! a do-it-yourself guide to paying off your home early, in some cases without making extra payments.
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