9.07.2011

Mortgage Loans = Mind fuckery

Unless you're Warren Buffet, (In which case, why are you slumming through crappy blogs? And where can we meet for some strings attached sexy time?)

Hey, we've all got goals, some just take different routes to get there.
Sorry, off on a tangent.

Anyway, assuming you're like 99.999% of the population you're not going to be writing one fat check for your home purchase. You're going to be entering into a deal with the devil bank, also known as a mortgage or "dead pledge". Seriously.
Urban Dictionary also defines it as "middle class slavery". Either are accurate enough.

But hey, what is it to be an American without some debt? Pfft! I went to college, how hard can it be to understand a mortgage contract?

Shit.
Like a reasonable person, I started off calling lenders and inquiring into their mortgage programs.
After being inundated with information about rates, APR, ARM vs. Conventional, closing costs, and these insane sounding things called "points", I barely managed to hang up the phone mere seconds before my head exploded. Afterward calming myself within alcohol's warm embrace.




Keeping it classy.
After a brief time out, I called a cab and made my way to a local lenders. Unfortunately it was almost closing time, the realization of which made me a smidge irritable. So I made sure to keep one knowledgeable looking chap around to help me understand the mortgage process, while encouraging him to use very small words and visual aids, as applicable.
Don't judge. He was much more helpful this way.
Despite the crying and attempts at showing me pictures of his children, I actually learned a lot about how mortgages work. Which is reassuring when you're getting ready to make the single largest purchase of your life.

Now granted, there are a million and one different variables when it comes to lending. But since I'm pretty average, Mr. Sweeney just hit the highlights for me.

An average mortgage is made up of four parts. Principal, Interest, Taxes, and Insurance.
Or P.I.T.I for short.

And now I want you to forever think of Mr. T as your mortgage broker.

I piti the fool who gets a 100% financed balloon plan!

Breaking it down: The principal is the amount of money you've borrowed from the bank.
A bank is a business and is going to make money off the sum that you borrowed, so you'll be charged interest. And instead of paying a large lump sum in taxes once or twice a year, (depending on your location), the taxes are rolled into the mortgage payment. And since the bank, owning a large percentage of the property, has a vested interest in it, they want to protect their investment. In which case you've also got insurance lumped in there as well.

Much, much more...


Remember when you were little and there was always that one kid who decided to change the rules of whatever game you were playing right in the middle of it?








I like to think that all those kids grew up and joined the mortgage industry.

There's a lot of lending plans that just ain't happening anymore. You know why. And since they no longer exist, I'm not going to acknowledge them.
According to Mr. Sweeney, this is what we're working with now:

Fixed Rate, Adjustable Rate, and Balloon. There are several variations to each, but I'm trying to keep it simple here, dammit!

A fixed rate mortgage is the safest of the bunch, and the most traditional. Go figure.
Safe like suburbia, behind a white picket fence.
Most people tend to get the 30 year fixed rate plan. (At least initially, but more on that later.)
With a long range plan like this you will be paying the most in interest, but your monthly payments will be lower. Kind of like if you only paid the minimum amount on a credit card bill. You'll also be able to deduct a larger amount of your interest from your taxes.
There are also 20 and 15 year fixed plans. The major difference being that your monthly payments are higher as the number of years drops, but you won't be paying as much in interest.

Adjustable rate mortgages, (or ARMs) were very popular for a while. I like to think of them as that weird hippy family down the street that smells like patchouli.

It's hard to get hired with a name like 'Kansas Moonbeam' on your resume, huh, kid?

ARMs are a riskier venture, and much more confusing. Kind of like taking acid. It may be great with the right precautions and supervision, but God help you if you take a bad trip.

The spiders never stop coming man...
ARMs are most attractive to buyers who anticipate selling their house after a few years. They'll buy into a property at a very low interest rate, and will be locked into said low interest rate for a predetermined number of years, after which the interest rates will adjust depending on the market. There are a stupid lot of variations, but the most common ARM plans are the 5/1 and 3/3. In the 5/1 you're paying low interest for the first five years, after which the interest rate changes annually. In a 3/3 you pay the low rate for the first three years, and afterward your interest rate changes once every three years.
Now there are limits on how high your interest rates can go. They can't just increase forever, but there's still a huge difference between monthly mortgage payments if you've gotten used to paying 3% and now have to pay 4%.
You may have to give up that porn subscription.


Lastly, there are balloon mortgages.
And let me just say that if someone, or you know of someone, who had the hubris to attempt this and then succeeded. Well, damn. Buy them a shot and then ask for help with lotto numbers.

A balloon plan is a huge gamble, and we all know how those turn out...












VS.













It's basically designed to be a short term mortgage for people who plan on "flipping" a house and selling it quickly. The length of the loan is usually around 5-7 years, but the payments are treated as though it's a 30 year loan. So for those first five years you're making very easy, low payments. But here's the catch, and it's a doozy. After those 5-7 years when the time is up, you've got to make good on the remainder of the loan, or that inflated, "balloon" payment at the end, (Ha! I see what they did there!), will make you its bitch.







Hint: The one wearing gloves isn't anyone's bitch.



Whew!

Anyway, seems pretty straight forward so far, eh? Sure.
But then those bastards started getting into annual percentage rates, which is just too much, and I will deal with those mind blowing issues another day.
Until then, I leave you with this...

1 comment:

  1. Basically, loan modification is the only solution that some people have against foreclosure.

    what is a loan modification california

    ReplyDelete