Introducing...The 40 Year Loan Plan
When the offers for 40 year mortgages appear, the top cannot be far off. This happened in Japan (they even went for 100 year mortgages at the peak of their real estate blowoff) and is happening here now. I won't bore you with my usual verbage, since opinions are not worth the paper on which they are printed. So here are the facts:
1) The ad says that a "$1 million loan will cost $2,529 per month, based upon a 1% start rate, with APR of6.133%. The actual rate is the 12 month average of the MTA which is currently about 3.5% plus a margin of 2.6% (current fully indexed rate would be 6.1%)." A fully amortized loan with a 40 year term would cost $5,500 per month. A fully amortized 30 year loan would cost $6,000 per month.
2) "This loan is a monthly adjustable rate with annual fixed payments for at least 3 years if only the minimum payment is made." (MONTHLY adjustable rate!) Negative amortization is what this loan should be called, although nowhere in the fine print is this stated. Note that the fixed payments are annual fixed payments.
3) "Payments recast at 110% of the loan amount to become a fully amortized payment." Another clever way of stating that this loan in negatively amortized. After three years, you will owe 10% more than when you started. So the monthly payment at that time will be not $5,500 as stated above, but actually $6,050 per month.
4) "Minimum payments are set to increase by 0.075 per year. For example, a payment of $1,000 the first year will increase to $1,075 the next year and then $1,155.63 the next year and so on." Actually, this will only apply for the first three years, because once the negative amortization limit (110% of original loan value in this case) is reached, the minimum payment will adjust to the fully amortized rate for the original term of the loan, in this case, more than $6,000 per month! This assumes that interest rates don't change over the next three years. If interest rates go up, this minimum payment could be even higher. The caps do not apply to this recasting. They will apply afterward, but not for this one-time occurrence of recasting.
So anyone who buys a $1 million house with no down payment and makes the minimum monthly payment for the first three years will see their monthly payment more than double from $2,529 to over $6,000 per month assuming interest rates are unchanged and it will adjust MONTHLY thereafter. Let's assume that the buyer actually has the wherewithal to pay $2,529 a month (a questionable assumption since so many people these days rely upon the so-called "service industries" for their paycheck and it seems unlikely that their income will remain the same if their clients must pony up an additional $3,500 a month to make their mortgage payment. They may not be able to sell as many lattes, perms, personal training sessions, massages, spa treatments or even mortgage refinancings.) How much house would $2,529 per month actually buy? About $442,000 worth. So here is my prediction: All of these $1 million homes in California will be selling for $442,000 before this cycle is over. (Sorry, but I couldn't resist throwing my shot in at the end!)
1) The ad says that a "$1 million loan will cost $2,529 per month, based upon a 1% start rate, with APR of6.133%. The actual rate is the 12 month average of the MTA which is currently about 3.5% plus a margin of 2.6% (current fully indexed rate would be 6.1%)." A fully amortized loan with a 40 year term would cost $5,500 per month. A fully amortized 30 year loan would cost $6,000 per month.
2) "This loan is a monthly adjustable rate with annual fixed payments for at least 3 years if only the minimum payment is made." (MONTHLY adjustable rate!) Negative amortization is what this loan should be called, although nowhere in the fine print is this stated. Note that the fixed payments are annual fixed payments.
3) "Payments recast at 110% of the loan amount to become a fully amortized payment." Another clever way of stating that this loan in negatively amortized. After three years, you will owe 10% more than when you started. So the monthly payment at that time will be not $5,500 as stated above, but actually $6,050 per month.
4) "Minimum payments are set to increase by 0.075 per year. For example, a payment of $1,000 the first year will increase to $1,075 the next year and then $1,155.63 the next year and so on." Actually, this will only apply for the first three years, because once the negative amortization limit (110% of original loan value in this case) is reached, the minimum payment will adjust to the fully amortized rate for the original term of the loan, in this case, more than $6,000 per month! This assumes that interest rates don't change over the next three years. If interest rates go up, this minimum payment could be even higher. The caps do not apply to this recasting. They will apply afterward, but not for this one-time occurrence of recasting.
So anyone who buys a $1 million house with no down payment and makes the minimum monthly payment for the first three years will see their monthly payment more than double from $2,529 to over $6,000 per month assuming interest rates are unchanged and it will adjust MONTHLY thereafter. Let's assume that the buyer actually has the wherewithal to pay $2,529 a month (a questionable assumption since so many people these days rely upon the so-called "service industries" for their paycheck and it seems unlikely that their income will remain the same if their clients must pony up an additional $3,500 a month to make their mortgage payment. They may not be able to sell as many lattes, perms, personal training sessions, massages, spa treatments or even mortgage refinancings.) How much house would $2,529 per month actually buy? About $442,000 worth. So here is my prediction: All of these $1 million homes in California will be selling for $442,000 before this cycle is over. (Sorry, but I couldn't resist throwing my shot in at the end!)
posted by Matt Butler at 3:02 PM
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