California Adjustable Rate Mortgage. Has the Love Affair Ended? if Not, it Certainly Should
California mortgage consumers absolutely love adjustable rates mortgages like the pick a payment and option ARMs. Maybe it was not so much love but some sort of cult like following. You had to get one or you were a loser.
But now these folks are realizing they may have been a loser for getting one. I have talked to so many people from California over the past 3 years. These people had good jobs, made good money, and all told me the same story.
They got caught up in the home buying craze just like everyone else across the country. The difference was in California, adjustable rate mortgages were just about the only loan you used. Strangely, it was not just the loan officer pushing an ARM, it was their peers.
They not only told these people who were their co-workers, friends, and family to buy a house or refinance with one of these pick a payment or option ARMs, they told them to buy a second home using one. And then the kicker, they could state their income to buy a much bigger house than they could afford. If you are investing, then you might as well invest big right?
They would not leave them alone about it either. If these people went out and found someone like myself to explain the dangers of these loans, their peers would ridicule them back at home or the office.
Why would these so-called helpful peers be so over zealous about this mortgage? My theory is Californians got a taste of something with the tech bubble. Even though most lost everything, they had it for a while even if it was only on paper. They needed something else to get that back and they looked to the real estate market and these adjustable rate mortgages to get it. It is like peer pressure. If you are doing something bad you want to take others with you.
These folks were told by the loan officer, their co-workers, and friends and family that the market would always go up and they would not have to worry about the payments. Just make the minimum payments every month and sell to take your profit when the time is right.
If you do not know by now, the minimum payment on those loans does not even cover your interest. Your loan balance grows every month. So, the balance is growing and the market is declining and they are struggling to make even the minimum payments because they used income they didn’t have. So, this isn’t shaping up any better for them than the tech bubble.
A California adjustable rate mortgage was also used by quite a few drug dealers. Yes, drug dealers. These guys would pick upscale neighborhoods all over California and use a pick a payment or option ARM to buy a house. The minimum payment was less than rent and they didn’t have to worry about the landlord showing up unannounced.
Once they got into the property, they completely gutted it and the whole thing was used to grow marijuana. It seemed perfect with massive square feet and every inch growing pot. It was in such a nice neighborhood that no one would suspect anything.
But eventually many of these drug houses were raided and shut down. And left were condemned houses and mortgages in foreclosure. These loans were just too easy to get. Even a drug dealer could get one! It had to end.
Right now the COFI is going up and that means so is your interest rate. Also, these loans are set to recast in five years. The bulk of the California adjustable rate mortgages were originated in August 2005. In August 2010, your payment will go way up. But that may not be the only thing to worry about. What will the housing market in California be doing by then?
Good Luck!
Originally published here.
Rob K. Blake, author of the BUILD System, Adjustable Mortgage Rates created a mortgage calculator called “No Cost” Mortgage Software- Save $-No Refinance! Click link for more California adjustable rate mortgage