Adjustable rate mortgages stink

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Homeownership “The Great American Dream” is by far the most influential financial goal. People are more motivated to purchase a home than they are to save for emergencies, retirement, college and other financial goals. Perhaps it’s because houses are tangible. You can touch, see and feel a home. Furthermore, shelter is a necessity. We all need a place to live. Make no mistake about it—homeownership is a wonderful thing. I encourage all to become homeowners. I believe that you should get your financial house in order first, then seek homeownership. I agree with comedian George Carlin who said, “The reason they call it the American Dream is because you have to be asleep to believe it.”

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I’m highly critical of various financial products that are being sold. So much so, that my business advisor asked me “Would you rather be right or rich?” You see, it would be more profitable for me to simply shut my mouth, follow industry norm and sell you a bill of goods under the guise of “affordable housing,” “low monthly payments” and “flexible payment options.” Here’s why: Until you create a platform with a large, responsive audience like Suze Orman, Dave Ramsey, Jim Cramer and Robert Kiyosaki—you don’t make large sums of money giving sound, unbiased practical financial advice. You make large sums of money selling financial products. I make ten times more selling mortgage products than I do selling sound unbiased financial plans. It takes far more time to prepare a comprehensive financial plan than it does to structure a mortgage loan. Naturally, I would prefer the bigger check with the least amount of work. However, I refuse to place someone in a bad product even if it hit me in the pocket.

With interest rates rising, millions of American who opt for adjustable rate mortgages and variations of adjustable rate mortgages are experiencing what we mortgage insiders refer to as “payment shock”. The monthly payments on these mortgages are increasing by $100, $200 and in some cases as high as $600 per month wreaking havoc on the family’s budget.

What follows is the inevitable—a rise in mortgage payment defaults and/or foreclosures. Major media outlets are sharing stories of those who are victims of the negative consequences of adjustable rate mortgages. In an effort to help victims avoid the worst, major media outlets are seeking advice from financial experts asking, “what should these people do?” Here’s my advice. It boils down to two options—refinance into an affordable fixed rate mortgage where the monthly payments does not exceed 35 percent of your take home pay or sell the property and move into a more affordable housing situation. Here’s some better advice. I quote Benjamin Franklin—the guy on the $100 bill, “an ounce of prevention is worth a pound of cure.” In other words, NEVER under any circumstances take out an adjustable rate mortgage. My reason is very simple—your income does not rise every month or every six months. So why would you subject your largest expense, the roof that shelters you and your family to potential payment increases?

People are lured into adjustable rate mortgages because the initial interest rate on an adjustable rate mortgage is lower than the interest rate on a fixed rate mortgage.

This allows the homeowners to get a larger home with a more manageable monthly payment.

Whenever, your primary concern is total monthly payment as opposed to total cost and potential risk, you’re experiencing what Benjamin Franklin calls “penny wise and dollar foolish.”

With a fixed rate mortgage, your interest rate, principal and interest payments never change. You know exactly what your payments are going to be throughout the life of your loan. With an adjustable rate mortgage, the rate and the payments changes periodically, be it every month, every six-months or every year. The payments on an adjustable rate mortgage moves in tandem with a market index rate. In most cases, your interest rate can rise as high as 6-percent higher than the initial interest rate on an adjustable rate mortgage doubling or even tripling your monthly payments.

Adjustable rate mortgages were not created as a benefit to the consumer. Adjustable rate mortgages came into existence during the early 1980’s as a way to combat inflation. During the late 1970’s inflation hit the double-digit mark increasing the interest rate on short-term savings vehicles such as passbook savings and certificate of deposits. Savings and Loan companies were paying out 8 to 14 – percent interest on deposits while making 5 to 8 percent on long term mortgages that were locked in for 20 or more years.

This literally crippled the industry.

In today’s economy, the only thing that’s rising at a pace faster than the cost of goods, services, education, health care, cars, and housing is the consumers’ appetite to have it all. Our appetite to have it all also rises at a pace faster than our income.

The only way for consumers to satisfy their appetite is to finance everything with as low a monthly payment as possible. Seven-year car loans are now the norm. Adjustable rate mortgages and variation such as interest only mortgages, payment option mortgages (all stink) are the most commonly sold mortgage products helping consumers get big houses, big debt, big risk, big interest expenses and low monthly payments.

(Mortgage and Money Coach Damon Carr is the owner of ACE Financial. Sign up for Damon’s FREE online e-newsletter at http://www.allcreditexperts.com. Damon can be reached at 412-856-1183.)

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