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Old 03-19-2007, 06:58 PM
 
Location: Beautiful Lakes & Mountains of East TN
3,454 posts, read 7,398,058 times
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Quote:
Originally Posted by daniellefort View Post
I'm the one who made that quote that we're buying now to move later on. We have been looking at land in East TN since last April and we've already seen the land values go down in the areas we're wanting to buy. Compared to under a 1/2 acre of land in our neighborhood now going for $49,000 to 2 acres in TN for $30,000 to us is a deal. This is the time we can afford to buy and keep our home at the same time. We eventually will move but in the meantime we plan to prepare our land for a home and by doing it over time will be less of a financial burden than doing it all at once. When we do make the move, our home and land will be completely paid for and we'll be able to start building a new home hopefully with little money borrowed.
Well...we also made that quote! We're looking at land and want to get it in hand now because we have the cash available for a down payment, and want to sell this place in NJ in about 5 years and build on our land with (hopefully) the profit we make off this one.

As for OUR 1/2 acre of land in our neighborhood, we paid $215,000! So, when I see 21 acres even if it's mostly mountain land, in Harriman for $35,000 I'm all about it lol.

We're headed down in May to see what's what. My hope is that we'll investigate the living daylights out of the areas we really like, then return to NJ, hear about a great piece of land in the fall when the market is slower and things are more negotiable. Our friend in Crossville will stop by the site to see if it's what we're looking for. If so, we take a weekend trip to see for ourselves and take it from there.

I hope we have the willpower not to jump on the first bargain we see, it's just that we're so anxious to take a step in this direction! To see light at the end of the tunnel...anyone who's lived in NJ feels what I'm saying!
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Old 03-21-2007, 10:32 AM
 
Location: Beautiful East TN!!
7,280 posts, read 21,277,857 times
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Quote:
Originally Posted by Dd714 View Post
Mbmouse, I don't get all your math. Now I am not an expert on no interest loans so some of these are questions.

After 10 years, with the interest only loan, you don't have a $325k house, you have no house at all, your bank owns the house, right? And the savings account would generally be less than the equity you have built up in your house, assuming savings rates at like 2% (national avg) and appreciation rates of 5% (your example).

Now, as your equity grows, under a traditional loan, you would be paying less interest but under the "interest only" loan you would be paying the same interest, your monthly payments may actually be greater (I think, not sure) as you get closer to the loan payoff.

Finally. What happens if you sell before 30 years and the home depreciates? You lose big because potentially you actually OWE money when you sell the house. You can loose big, "bancruptcy"-type big.

Finally, you haven't fully captured the time value of money, or present value vs. future value. After 30 years you have paid $470k for that house that you contracted for $202.5k. But in 30 years $4 will only be worth $2 or less anyways due to normal rates of inflation. A $500k house would more than likely be a bargain, even with home depreciation and a 30 year house. Still, I think the point you are making is you pay less in total for the no interest loan.

The gamble is this, as I understand it - Assuming the home buyer can discipline himself to invest the difference, assuming that his investment rate will be higher than the home appreciation, assuming that something does not happen in his life and he has to sell early and the home depreciates (potentially a life altering error).
Hi Dd,
I see some of your points and do understand why you are getting those figures. You stated a 2% interest gain on savings, that is at your typical bank savings account. I am talking a high yield, liquid account such as ING or Capital One and many others that are now at 5% national average savings. There are many other ways to grow interest on your savings and keeping it liquid, that is why it is also important to have a financial planner if you are considering one of these mortgages. The key to these loans are to FULLY understand them and to utilize them as they are intended. The intention is to pay off your home in 13 1/2 years verses 30 years by gaining interest on your money instead paying the lender off. And if there is some life altering situation that comes your way, to have the liquid assets available to pay off that loan by refinancing into a more fixed loan at a lower loan to value and to have assest available to face that altering situation. That is your gamble, but still you break even and not be in the red because you home is still holding it's market value. The other thing you mentioned is "what if the home depreciates?" That is another key. You do not use these mortgages in a volatile housing market areas. You do you homework, check the history of the housing market in your potential area and you look for potential housing problems. Typically, a house appreciates and not depreciate unless it was over valued to begin with. You also always keep 10% minimum equity in your house as a value buffer so you never get into that situation.

As for the question of who owns your house you or the bank, that does not matter what type of mortgage you have, whether it be a 30 fixed for 10% of the value of the home or a Interest only loan for 90% value of the home or even if you have 100% of the value mortgaged. YOU own the house and the bank who holds that mortgage note has a lien against the property in case you default on the loan. This gives them the right to take the property in lue of payment. So technically, yes you own a property worth 325k, the bank still holds a note and lien against the property for only the balance of the original note, even if you never paid any principal to that loan. That is the gamble both sides of the transaction take in any type of secured loan. Example: If you default on your loan in the last years of your mortgage, say you owe 10K more of your loan to the bank. The loan defaults, the bank exercises their right (happily) to foreclose on your home, they sell it for the 325k (value at the time of foreclosure) and make over 300k profit. You...have to walk away with nothing but now bad credit. That was the terms of the mortgage.....any mortgage. If you have 90% of your home mortgaged and things go bad do you think that the bank will work with you on payments or foreclose? I am not saying do this, it is more of just a realistic, big business foot note to all this.
All in all, it really doesn't have to do with typical math, but how money really works, yes those two things are VERY different. It is leveraging someone else's money to grow your assets. That is how the wealthy become even wealthier. That goes for many financial transactions, not just mortgages, this is just a mortgage example.
One other thing not taken into consideration is federal taxes. You can deduct ALL of the interest you pay to a bank for your mortgage but zero of the principal, so depending on what tax bracket you are in and other tax situations, you can have the potential to recover 100% of the interest you paid in a year back to re invest that into savings as well.
All in all, you are correct, these interest only loans can be confusing and a bit tricky, that is why it is SO important to fully understand them. Again, I am just hitting a few key points. If you do understand them and utilize them properly, they can be very beneficial to ones portfolio/net worth growth.
I hope that answered your questions a bit clearer and explained it all a bit more?
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Old 03-21-2007, 11:02 AM
 
2,106 posts, read 5,778,817 times
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After 10 years, with the interest only loan, you don't have a $325k house, you have no house at all, your bank owns the house, right? And the savings account would generally be less than the equity you have built up in your house...

I hate to be nasty here, but bottom line, if the only option that you have in front of you is an IO, ARM, or combination of the two in order to "buy" a house, then you probably shouldn't be buying in the first place. These loans had only one purpose, which was to shoehorn the most people- often times people with bad credit and poor finances into homes they had no business buying and couldn't afford. These loans have been around for decades, but only recently became more widely available in the last few years,or precisely when the latest housing bubble reared it's head. In some placed like California and New York, over 60% of all households used these to get into a home. You are also right to assume that they function more or less on speculative assumptions in market performance. Being the fact that even in TN the market is at its peak and the indication for risk is that much greater.

Wonder why the stock market has been twitching uncomfortably? Wonder why the housing market is in the news daily? Wonder why affordability is at an all-time low? Wonder why there are suddenly thousands of people pouring into the Southeast? Because we've been riding a tidal wave of easy credit for years now and eventually that bill will come due. It is knocking on the door right this minute.

In fact, as mentioned before, there are motions in congress to further regulate and perhaps even prohibit the use of these types of exotic loans. This would probably be the best thing for the national economy in the long term. But for the short term, I would not recommend anyone using these unless you either have an enormous amount of savings as a windfall or are simple viewing your home as a stock and not as a place to live- in other words- an investor.

I'll stop my ranting now, but I've lived in CA for years now and I see exactly what trouble these loans have caused.
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Old 03-21-2007, 11:41 AM
 
Location: Beautiful East TN!!
7,280 posts, read 21,277,857 times
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I TOTALLY agree with you that these loans should NEVER be used to qualify to buy a home. If you can't qualify for a 30 year fixed, you should not buy. However, if you do qualify for that 30 year fixed you should be able to have other more beneficial options open to you if you use them properly and so choose to do so.
I don't think it is fair to blame a product or option as for the downfall of an economic market though.
It is kind of like saying the price of clothing has gone up because Whirlpool advertised a better washer to make clothes last longer but you didn't follow the directions and your clothes were ruined. Or you bought your Whirlpolly washer off the back of a truck and believed the seller who said that it was the same if not better than the other guys. So now that lots of people have done the same and are in the same boat as you, everyone is out trying to sell the washer for a profit and buy their replacement clothes from a different store hoping for quality again and complaining that the cost of clothing has gone up (supply and demand). Yet blaming the manufacture of the washer for not writing the directions better and demanding the government step in and regulate.
......Ok, maybe that was a bad analogy, but you get my point hahahahaha.
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Old 03-21-2007, 12:13 PM
 
2,106 posts, read 5,778,817 times
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I don't think it is fair to blame a product or option as for the downfall of an economic market though.

I totally agree. I'm not necessarily blaming the product itself. But I do think Real Estate was touted as an investment for way too long. In essence, all real estate provided for those exiting the tech boom was something that was seemingly safe and not tied to market fundamentals. Trust me. I live in the heart of Silicone Valley and I saw for myself firsthand the tech boom and it's subsequent implosion. The comparisons between the housing bubble and the tech boom are uncanny. In my opinion, the housing boom was simply an extension of the tech boom where outright speculation fueled prices versus real market value. Just like the tech boom, some people made out like bandits, selling many houses and pocketing a handsome profit. Many others will lose their homes plus some.

I don't think that it helped the public perception that virtually every other radio, tv, and network show was focussed on real estate. I know that out there all we got were Donald Trump Expos, commercials regarding making millions flipping houses- and even TV shows named precisely that- "Flip this house!" and other silly business. I can even recall a TV infomercial featuring midgets. Yes, midgets to expound upon the miraculous stories of happy-dappy people who worked as secretaries, carpet salesmen, and school teachers who made money simply buying and selling homes. In other words, this really got out of hand.

While I don't feel exactly sorry for people who bought in over their heads, I can also understand how people could get easily persuaded into buying while all this laced kool aid was being served all over the place.You cannot blame the product, but at the same time, I think many people take what they see at face value. An industry that screams that "It is always a great time to buy!" doesn't help either. I also think an element of fear was being introduced by the media and industry, especially in my area: "If you don't buy now... you'll be priced out FOREVER!" Of course statements like these seldom count on the fact that eventually, all markets correct towards a level that is supported by real incomes. But people bought into it anyway. These exotic loans just made it that much easier for the show to go on for a few extra years.

Why am I so bitter about this? Because even though I realize that we are now on a downward spiral towards lowering prices, who knows how long it will take before that occurs? In many areas, especially in CA, a lot of damage was done to the economy in the form of unaffordable housing that is so far out of reach for most everyone- even those making upper incomes- that it could take YEARS to correct. I'm not sure if I am willing to wait that long, and frankly, many my age feel the same way. The fact that there are still people here desperate to buy at any price with whatever crazy financial scenario they feel they have to endure is really frustrating. Then to come here and see that now there are people in my own former home state considering such options is troubling because the last thing a developing state like TN needs is a real estate based economy with a foundation of debt.

The way I feel about it is that the sooner we rid the system of these loans, the sooner true market value and economic balance will be returned.
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Old 03-21-2007, 12:48 PM
 
Location: Beautiful East TN!!
7,280 posts, read 21,277,857 times
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I see your point and understand where you are coming from. Those midgets by the way are brothers that have made millions in real estate and have been around with their infomercials for over 20 years!
I too hope TN and many others states look to CA, FL, and the other few states that are dealing with this housing bubble issue and will learn what not to do. However they will not infringe on the "free enterprise" either. So I don't know how much they can do to prevent it. This is why national lenders are re evaluating there lending guidelines will help it not happen elsewhere. But those who don't understand the whole market will see it as a "downfall" because less people are qualified to buy homes and sellers get nervous and drop the price of their home which effects the value of the same type home in the area. This is a snowball effect and the wrong reason gets blamed again in the media.
If it makes you feel better, TN does have different banking laws than CA and Fl and are a bit more regulated as far as predatory lending practices and such so hopefully that will help avoid people here being told they can afford a house when they can't. The big thing about CA I never could understand is that you can use borrowed money for a down payment to get a lower rate. OK, I can understand a 1st and a 2nd to avoid paying MI, but all in one transaction from the same lender so everything is on the up and up. But to be able to borrow 20% down payment from one bank, then 80% from a different one and still be offered rates for an 80% LTV,(which are always lower than a higher LTV transaction) yea, recipe for foreclosure there for sure! TN banking laws do not allow for that. The other thing is that Loan Officers here are limited to way less than what can be charged for fees on a transaction in CA. As well as title agents, appraisers and anyone else that charges a fee in connection with the mortgage That too will hopefully deter a lot of misrepresented loans. Also, appraisers have stricter regulations when it comes to valuing a home here in TN verses one in CA. That is one place homes get miss valued and is causing a big stir in the National Markets. Homes that had a 300k mortgage lien put against them should really have been valued at 150k. That causes big problems! That is one of the biggest reasons why these sub prime companies are folding. The homeowner defaulted on the mortgage (any type), and now the lender under cuts the appraised value to where it should be because of the new regulations being placed on appraisers nation wide, there is no equity to refinance with. The lending company has no choice but to foreclose and now no way to re coup the loss because they can't sell a 150k house for 300k!. Some people are calling this "home values deteriorating", no it is correcting the errors of bad appraisers and lenders that allowed it.
I don't see that happening here in TN, so that too is good news for us here.
I will say again as I have before, TN (at least here in East) have seen steady 5%-7% equity growth per year and this has been the same growth rate for about the past 20 years, we have not seen any value spikes or a fast changing market. I for one, hope it stays that way.
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Old 03-21-2007, 03:00 PM
 
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If you don't understand CA realty, then don't worry. I've been here for years and am still scratching my head. The basic home buying venture here these days are as follows: 1: secure multiple loans from more than one source. 2: Take out an IO or ARM. The IO is usually set for x number of yeras, 2-10 years, but usually less than 5. The ONLY way this can work is if the value of the property goes up enough to refinance, then reapply the loan. So yes- you read that right- many californians do not even begin to pay on their principals until they've been living in the residence for 5 years, and only then if they manage to gain equity. The average home here hovers around 600k, or around a $3,600 a month mortgage payment minus taxes, HOA fees, and anything else. So as anyone can see, there are really very few people who can actually afford a home here. People get desperate when they have no real options. That's why I feel at least in CA, many lending companies took advantage of a somewhat desperate situtation.

I seriously doubt anything near this bad will happen in TN which seems to have barely been scathed by the bubble with the extreme exception of some very particular areas, like parts of East Nashville and Brentwood, and maybe even parts of Memphis.
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Old 03-21-2007, 05:17 PM
 
Location: Steilacoom, WA by way of East Tennessee
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MBmouse,

With the implosion of the subprime and now alt A, lenders and the ceasing of many of the 100% loans and stated income loans this will seriously reduce the number of buyers and affect property values, even in steady rise places like TN.

Monday march 12th was a big day for ceasing of loan products, I'm caught up in this mess, as my primary residence was to have alreay closed but the buyer is on their 3rd loan program and the broker finally just sent the loan package directly to an investor for funding. I hope it closes, and soon!

Here's the situation, subprime buyers are out of luck to a large degree, 100% LTV buyers are out or soon to be, many investors are pulling back smelling blood in the water, foreclosures and deliquent loans are on the rise nationally TN is now in the top 10 with a 7.3% deliquency rate.

This housing bubble was a liquidity bubble, and silverbox was correct on it's source, the emergency 1% fed rate after the stock market/tech bubble.

Nationally, the liquidity in housing is starting to dry up and when you have more supply and less demand the prices will (and are) falling. I think most posters on this thread are in agreement. Where there is a difference is that some say since TN has not run up much, it won't fall much. I have to disagree for two reasons.

1. Liquidity has helped and will hurt the TN market just like every other market, this is a National bubble, first one in a long time.

2. As the feeder markets for TN erode (FL, MA, NC, etc) TN prices will soften as the demand softens. I just got back from W. NC and homes that were for sale in Nov 06 are still for sale and prices have definitely fallen. The Asheville market while not a direct feeder market for E. TN is definitely a supplier of "value" buyers who have been priced out of the more affluent NC market into to less affluent market of E. TN. And if Asheville is softening, so will E. TN.

I'm a bit of a Macro economic thinker, if prices are falling in an era of low interest rates and low unemployment, they will really start falling later this year as the economy goes into a housing led recession. Even Greenspan thinks that is likely, of course he's the same one who gave us the liquidity for this current housing bubble.

For what it's worth, if you are within 12 - 24 months of selling and moving to TN, sell your home, rent and let prices drop over the next 12 - 24 months and come in with your cash from your previous sale and buy then. Save the difference from your current mortgage and your new lower rental amount, put the cash in a CD and earn 5% while property values drop 10%.

The above is just my opinion and since no one knows the future for sure, do what you think is best and good luck with your choice.

MB and Silverbox, great interaction, good discussion, I'm including a couple of cool housing and mortgage related websites that are interesting reading.

Tony in WA

www.ml-implode.com

www.itulip.com

Moderator cut: no blog links alowed
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Old 03-22-2007, 07:59 AM
 
Location: Beautiful East TN!!
7,280 posts, read 21,277,857 times
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Hi Tony, was wondering how your sale went. Sorry to hear it is becoming so stressful. The Sub-Prime issues started the last few days of Feb and I believe have yet to come to a head. Luckily we don't do to many of those.
Conforming market is basically unchanged.
I see your thought process on home prices, but honestly, living here and seeing it day to day in what I do, I honestly do not believe we here in TN will see prices dropping. Personally, I wish they would but don't see it happening. I guess we will have to wait and see.
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Old 03-22-2007, 09:36 AM
 
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Well Tony,
I think you're right in that none of us really knows the end story of the market. The homes in my area (ca) haven't gone up on the market yet. At the present time, there isn't that large of a supply. But come Spring and Summer, I expect there to be even more than last year. If that be the case, then that will probably be the last nail in the coffin. If not, then it's time to start considering other options.

As far as where this liquidity bubble came from, I sometimes hypothesize that in actuality, this all came about in the late 90's once the Fed realized that there was an enormous Baby Boomer population set to retire of which most didn't have enough in savings to do so. In my opinion, the 1% interest suddenly gave many retirees a very good reason to sell their homes and buy something smaller. In essence, transfer the debt from one age group to a younger one. In many ways, I think it worked. The problem was that the rates were kept too low for too long which encouraged over speculation and over investment.

As far as how TN will fare, There are many scenarios I can see happening. First of all, I think TN's housing prices are still split into very distinct levels. There are still plenty of very low priced properties out there, some being way below the national average and within easy reach of all class levels. I can see certain segments suffering while others still manage to do ok. I think the upper end market, as in those 400k former crack houses in Nashville will fall dramatically. Anything highly speculative will fall pretty fast. Certain metros will and have already begun to decrease dramatically. Memphis in particular, with close to 19,000 foreclosures which likely caused TN to become so high on the foreclosure rate nationally. At the same time, as long as there are very reasonable prices on homes, the lower to median end will probably do ok, but not stellar. As Tony pointed out, TN gets a lot of feeder state action. Many people in states like Ohio, Florida, PA, and so on MUST sell their home first before they can move. The entire Northeast is doing very poorly in terms of existing home sales, so I would expect less people from these areas to come in. North Carolina, as Tony pointed out has an enormous amount of supply, especially in areas like Raleigh-Durahm, Asheville, and Wilmington. NC is supposedly the "Hot" state that many Californians are moving to. If they aren't performing well, then TN will not be able to attain anything over what NC has since they are both similar in price, location, economy, and growth.

My final guessis that TN will probably fare better than a good bit of the country. CA, NY, MA, WA, NV, AZ, FL, and the rest of the Northeast-rust belt states will do badly for who knows- the next 4-5 years while the Southeast will probably see either a slight decline or a very slow, undramatic appreciation, much as it has seen for decades.
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