Chief
08-21-2007, 11:02 AM
http://www.washingtonpost.com/wp-dyn/content/article/2007/08/18/AR2007081800089.html?referrer=digg
They Bought the House They Wanted, and Now Everything's Changed
By Michael S. Rosenwald
Washington Post Staff Writer
Sunday, August 19, 2007; Page F01
Two years ago, my wife and I sat at a long conference table in a mortgage-title office in Bethesda. Sitting next to us: our real estate agent, who drew up our bid on a townhouse in Germantown two days after showing it to us. We didn't get an inspection, and I don't recall going back for a second look. We had to act fast or someone else would get it.
Our bid won the house -- our very own first home -- and now we had to close the deal. The owners sat across the table. They seemed more nervous than we did, perhaps fearing we would have second thoughts -- about our risky interest-only mortgage, about seeing them walk away with a $120,000 profit, about buying a house just as "bubble" was entering the regional lexicon.
They signed. We signed. Price tag: $459,275.
And then, as the saying sort of goes, the stuff hit the fan. The sizzling home market almost immediately began to cool off, which my wife and I sort of ignored. Interest rates started to creep up, and we sort of blew that off, too. We have time. This too shall pass. No worries. Life is good! We bought a flat-panel television, took a nice vacation, bought a dog, hired him a daily dog-walker, and then we got pregnant. We have time. This too shall pass.
But now, with our baby due in six weeks, the stock market has taken a serious drive south, with the Standard & Poor's 500-stock index dropping 6.9 percent since its high on July 19 after problems emerged for subprime lenders, who gave loans to people with spotty credit at the height of the frothy housing market. The contagion from the busted subprime sector has hit credit markets hard, and now Brian Williams and Charlie Gibson and Katie Couric are talking every night on the national news about how hard it will be to get credit, perhaps leading to more problems in the housing market.
I walked in the door one night last week, and Brian Williams was talking to my wife. I heard the word "subprime" from the TV. She looked at me and said, "Should we be worried?" I said, "We have plenty of time." But the truth is, I am getting nervous. And a few days later, when I told my wife I was indeed worried and writing about it for this newspaper, she said, "You're going to give me a panic attack." She paused and then added, "Did we really mess up?"
My wife, who is a physician, asked a question that thousands of other people in the region must be asking now, too. In 2005, the year we bought our house, nearly 40 percent of the mortgages in the District were interest-only, according to LoanPerformance, well above the national average of 27 percent. Interest-only loans typically mean that buyers lock into a low interest rate -- about 5.125 in our case -- for the first three or five years, without paying principal, before the loan balloons into a 30-year, fixed-rate mortgage tied to current interest rate indexes.
Our loan is tied to the one-year London interbank offered rate, or Libor. On June 1, 2010, our interest rate will be whatever Libor is, plus 2.25 percentage points. Our total interest rate could jump as high as 10.125 percent, according to our mortgage papers, which would be rather unpleasant. If our loan ballooned now, as many others have, our interest rate would be 7.48 percent.
But that wasn't really on our minds two years ago. For us, and I suppose others who signed such deals, the lower payments afforded by an interest-only loan helped us buy a house in an expensive county -- Montgomery -- where we wanted to live and eventually send our children to school. Our payments were significantly lower than what they would have been with a 30-year fixed-rate mortgage, meaning we could buy a nicer, larger home. Also, with the real estate market then booming, we planned to sell the house within five years anyway -- for a big profit, just like the previous owners got from us -- so why pay principal on what was essentially a starter home?
**SCHNIPP**
Worth a read to see how some people have rationalized their way into financial disaster...
Stout Hearts...
They Bought the House They Wanted, and Now Everything's Changed
By Michael S. Rosenwald
Washington Post Staff Writer
Sunday, August 19, 2007; Page F01
Two years ago, my wife and I sat at a long conference table in a mortgage-title office in Bethesda. Sitting next to us: our real estate agent, who drew up our bid on a townhouse in Germantown two days after showing it to us. We didn't get an inspection, and I don't recall going back for a second look. We had to act fast or someone else would get it.
Our bid won the house -- our very own first home -- and now we had to close the deal. The owners sat across the table. They seemed more nervous than we did, perhaps fearing we would have second thoughts -- about our risky interest-only mortgage, about seeing them walk away with a $120,000 profit, about buying a house just as "bubble" was entering the regional lexicon.
They signed. We signed. Price tag: $459,275.
And then, as the saying sort of goes, the stuff hit the fan. The sizzling home market almost immediately began to cool off, which my wife and I sort of ignored. Interest rates started to creep up, and we sort of blew that off, too. We have time. This too shall pass. No worries. Life is good! We bought a flat-panel television, took a nice vacation, bought a dog, hired him a daily dog-walker, and then we got pregnant. We have time. This too shall pass.
But now, with our baby due in six weeks, the stock market has taken a serious drive south, with the Standard & Poor's 500-stock index dropping 6.9 percent since its high on July 19 after problems emerged for subprime lenders, who gave loans to people with spotty credit at the height of the frothy housing market. The contagion from the busted subprime sector has hit credit markets hard, and now Brian Williams and Charlie Gibson and Katie Couric are talking every night on the national news about how hard it will be to get credit, perhaps leading to more problems in the housing market.
I walked in the door one night last week, and Brian Williams was talking to my wife. I heard the word "subprime" from the TV. She looked at me and said, "Should we be worried?" I said, "We have plenty of time." But the truth is, I am getting nervous. And a few days later, when I told my wife I was indeed worried and writing about it for this newspaper, she said, "You're going to give me a panic attack." She paused and then added, "Did we really mess up?"
My wife, who is a physician, asked a question that thousands of other people in the region must be asking now, too. In 2005, the year we bought our house, nearly 40 percent of the mortgages in the District were interest-only, according to LoanPerformance, well above the national average of 27 percent. Interest-only loans typically mean that buyers lock into a low interest rate -- about 5.125 in our case -- for the first three or five years, without paying principal, before the loan balloons into a 30-year, fixed-rate mortgage tied to current interest rate indexes.
Our loan is tied to the one-year London interbank offered rate, or Libor. On June 1, 2010, our interest rate will be whatever Libor is, plus 2.25 percentage points. Our total interest rate could jump as high as 10.125 percent, according to our mortgage papers, which would be rather unpleasant. If our loan ballooned now, as many others have, our interest rate would be 7.48 percent.
But that wasn't really on our minds two years ago. For us, and I suppose others who signed such deals, the lower payments afforded by an interest-only loan helped us buy a house in an expensive county -- Montgomery -- where we wanted to live and eventually send our children to school. Our payments were significantly lower than what they would have been with a 30-year fixed-rate mortgage, meaning we could buy a nicer, larger home. Also, with the real estate market then booming, we planned to sell the house within five years anyway -- for a big profit, just like the previous owners got from us -- so why pay principal on what was essentially a starter home?
**SCHNIPP**
Worth a read to see how some people have rationalized their way into financial disaster...
Stout Hearts...