Did you look at the amount of interest you paid to accumulated equity though, setting aside change in home price? While the first (6/7/8) years of a 30 year mortgage is mostly interest and very little principal reduction, I paid 0 principle reduction over that time and something like $190,000 in interest before it was modified. Not all ARMS qualified for HARP or HAMP either - I was only able to modify mine in the very early days of Twitter by tweeting my bank and tugging on some heart strings (and perhaps genitals).
Same rules apply for leases as ARMs: if you are using it to buy/rent/borrow collateral that is more expensive that you would otherwise get, then you’re doing it wrong. There’s a difference between your income supporting the house and not having (or wanting) to put as much money down, and using the instrument to stretch beyond your means. Not saying you or OP did that, but plenty of people did. It used to be that rates were the only thing to watch when considering a conventional/ARM but home values turned out to be the variable in a big way.
Edit: house #1 was an ARM + Balloon. House #2 was a 30 yr fixed. I had both when I moved to CA, and like the old joke about boat owners could not have been happier when I sold both houses and went back to being a “homeless” renter. Now I’m patiently reading Piggington’s Almanac and waiting for the next housing correction…
Funny how a few years changes perspective, I had just started working when financial crisis hit and didn’t feel much effect from it. I do remember it will enough to be keeping a lot of cash on hand due to belief that economic cycles are always cyclical (also inverted yield curve, trade wars etc…)
My wife and I are on ARM #2. ARM #1 was us buying a house we probably couldn’t afford but for the lower interest rate courtesy of the ARM. Worked out, we made a lot of money on the sale and we now are on ARM #2 in a house we can comfortably afford with an APR under 3%. Our assumption being we don’t plan to stay here more than 10 years (it’s a 10/1 ARM). If the economy is good we will move before the rate floats and if economy is bad interest rates should be low enough that with float/refi we still come out ahead after 10 years of an APR .4% lower than it otherwise would have been.
I was about 10 years into my career (started early), had plans to move/work overseas, got “stuck” with a great job in DC and a house I couldn’t sell. I could have done much worse.
No, I bought a lot less house than I could afford, even with the ARM. That’s my style in general.
The HARP did me zero favors, even though it was intended to “rescue” me from my reckless ARM ways. All it did was cost me money upfront and 30-40% more in interest every month (I don’t remember the exact before/after rates) for the “security” of a 30/fixed.
The HARP also reset the repayment period to 30 years, further driving down the amount of each payment that went to principal. I made a bad decision to do the HARP refi.
Once I had 20% equity again I refinanced that 30/fixed back into an ARM, and then ended up really focusing, and got rid of the last 70% of the original loan balance in under two years.
I’m currently in process of refi’ing to a 10/1 arm at 2.625. Saving me $45k+ interest in 10 years. I was in between this and a 15 yr fixed at the same rate. I calculated that if I take the fcf from the lower payment and invest at 8% annual return for 10 years, I’ll have nearly enough to just pay off the entire loan. Granted, I will pay slightly more interest than going to the straight 15 year fixed, but it’s worth the tradeoff to maintain the flexibility of building a six figure brokerage account (in addition to maxing 401ks, ira, has) over next 10 years and then decide what I want to do with it.
Not entirely sure that a blanket statement that ARM’s are a bad idea is good advice.
Geez man. That’s super rough. I’m really fortunate, I graduated college in 2009 right as the recession hit. Bought my house literally at the depth of home values in SE MI. Hilariously in the Zillow home value estimate graph, my sale is at the lowest point it ever was. In 2011 I paid less than half of what it had been refi’d at in 2006, and now it’s worth about 2.5x what I originally paid. Cashed out some equity on an 80 LTV Refi (no PMI) last fall to finally quash the last of my student loans and start a college savings fund for my kids. Sometimes it’s better to be lucky than good…
There was a time in the recent past when ARMs were a fantastic idea because housing always increases in value, never drops. So much so that they led to Neg-Ams (does anyone remember those? When each mortgage payment didn’t cover the whole interest payment so you owed slightly MORE principal each payment but it’s ok because the underlying asset never drops in value right?).
Also hard to believe the Fed Funds rate looked like this over the past 20 years:
We’ve existed in a sort of monetary alternate universe for years now, but eventually rates have to increase just to service the debt, and quantitative easing can’t go on forever.
It sounds like you have a pretty well-thought out plan for yourself with some reasonable assumptions. I don’t know specifically which comment you’re tagging on, but I compared ARMs to leases in that you shouldn’t use either as a way to get into more (house/car) that you would otherwise. I think the shorter term ARMs (e.g. 3/1) carry more … I’ll call it aggravation instead of risk because it’s not just rate adjustment… than a 7/1 or 10/1, even if you don’t plan to be there that long (people make the best assumptions and then their situations change, happens with cars all the time too). I had a good friend who refinanced a 3/1 ARM into the next (and next) during the housing crisis, last try his appraisal fell below his LTV, ended up in foreclosure.
Good for you, and it’s important to recognize when you got lucky or the cards just fell your way. Timing can really be a blessing or a curse.
I know so many people who did all the right things for years, and happened to be ready to retire around 2008 - lost jobs, maybe didn’t lose their houses because they were paid off but they were worth significantly less than a year prior. Bad timing and not enough rainy day planning.
“The S&P 500 Index originally began in 1926 as the “Composite Index” comprised of only 90 stocks. According to historical records, the average annual return since its inception in 1926 through 2018 is approximately 10%. The average annual return since adopting 500 stocks into the index in 1957 through 2018 is roughly 8% (7.96%).”
There is a difference between “on average” and “during a window of time of my choosing”. I debate this all the time with my financial planner. Back to my point about timing.
Totally agree with this. I’m a “proactive” long term investor. I’m constantly moving funds to whatever index is running strongest, then retreating into bonds when there’s any possibility of a market crash.
Hi guys. Longtime lurker here. Mostly keeping up on Cody’s and Trish’s deals of the month. A lot of great information on this thread. And just wondering if you guys can offer any advice. Any advice or criticism is welcome (Don’t worry about hurting my ego!)
Here’s the situation.
I’ve lived in my parents house my whole life and it’s been in the trust’s name since my father’s passing 2012.
I have 2 siblings who want me to buy them out, so 2/3 of the equity $175,000 each.
My wife and I decided to try to do a cash out refi of 80% of LTV so that we can pay their share of equity along with paying off $10,000 debt and $8000 cash. Keep in mind we’d be paying around $1000 a year in property taxes under prop 13 (if we qualify for the full prop 58 exclusion). Which was our deciding factor of whether or not to keep the house.
South Bay Los Angeles
Appraised for $710,000
Refinance of $568,000
Payoff of Existing mortgage $180,000
To siblings $350,000 ($175,000 each)
Here’s what they offered.
5.125% w $12,000 loan costs (1.5 pts) $3,092 a month (Obviously our credit isn’t great)
Thanks for reading
the major issue I read was that the mortgage company does not take weekly or bi-monthly payment. You have to go through some third party, and if for some reason they stop paying and not inform you, it will be an issue
