Was Anyone Else As Stupid As Us (and probably 1/2 of my neighbors)

[greeneyedchick]

We knowingly went into an ARM situation back in 2007, but did have a solid plan for getting out of it before the balloon payment. I'm sorry that you are in this tough situation. On the plus side, at least you realize the situation now and not a month or two before your ARM changes. As others have said, try to sell before the rest of your neighbors or re-fi if possible. If by chance you're paying PMI and you think that the value of your home has increased by 20%, see if you can have your home re-appraised and have the PMI removed. That could free up a bit of money. I would also reach out to financial planners who deal with loan consolidation and such. They may know of a mortgage that you could re-fi to to prevent a short sale. Good luck!

 

[Shanna-like-Banana]

A few other things to consider:
Just because your rate has the potential to go up to 8% doesn't automatically mean it will.

Are you in a position, or are you willing to put yourself in a position where you could turn your home into a rental and find more affordable housing for yourself?

I would do everything possible to have my documents and paperwork in a continuous standing order to re-fi the very moment possible. Buyers are caught in two difficult positions right now either higher rates or higher prices. You've experienced some form of both. People who already have homes at higher rates could be in a position to re-fi when the opportunity comes versus people who will be buying when rates go down could be looking at paying higher prices when inventory comes to market.

 

[TwoMisfits]

I'm in my 40's and we purchased our first home in 2014. For my entire adult life, I have never seen rates above maybe 5%, until recently. Call me Naive. I totally feel as though I deserve judgment, but, I will say, I did try to do some research at the time online -- and it seemed like these rates would be more temporary, than what they are saying now.

With that said - this realization a few days ago, has been a good fire under us. Me and DH are now trying to think of ways to increase our income, or... possibly sell the home. We really do not want to sell and want nothing to do with buying another home down the line after this whole experience.

What we need to do is find a way to increase our yearly income by about $25,000 - $30,000 a year. That would allow us to substantially increase our savings (we already have a good emergency fund) and afford these higher payments.


We are also in FL, and that's why I really do not want to sell. Let me just say, trying to buy back in was an absolutely traumatic experience. And I really do not feel like I am exaggerating that.

We watched ourselves go from a windfall of selling our home, to temporarily moving into a rental, and then watching rental prices skyrocket, and home prices climb. Almost all our equity gains were offset by the increase in prices, honestly. Not to mention, just trying to buy a home and constantly getting outbid.

We just wanted to get our family into a house. This part is probably why, I was just desperate honestly to move forward. Doesn't excuse anything, but, I am thinking out loud.

So, you have 4 years to plan...

What I would do is find out if you can live without the extra $25K now. That's an enormous number, and I'm surprised you'd get a $2K+ bump in your mortgage just from an interest reset, but in FL, maybe it's a CA priced house.

So, I'd start pulling the money right from your paycheck into a fund - start at $500 or $1K a month, and keep working up to see what you can save.

If interest rates go down, you'll have a ton of money saved that you won't need for the mortgage reset. That's great. If they don't, you're living within your means and still affording the new mortgage.

You also have 4 years to make life changes, like a new job or a new move or a new roommate, if that savings plan isn't palatable. But it seems those options are a little less desired...

 

[punkin]

We got our rate locked in March of 2022, and didn't close until late June. I was told by their Mortgage Company that this was the best loan possible, in terms of rates. The Loan Officer also told me, I would want to refinance -- which is what I planned to do anyway.

I wonder if they misrepresented something to you and can be sued... they sound so shady.

 

[gottalovepluto]

I'm in my 40's and we purchased our first home in 2014. For my entire adult life, I have never seen rates above maybe 5%, until recently.

That is simply not accurate so here is a better source going forward for looking at what has happened to interest rates. Link

 

[barkley]

OP, you are apparently not alone. I talked to a family member about this after seeing your story as he is in the market for a house. Apparently other people around him keep sending him articles on how ARMs will help him afford a house and even people at work are telling him to just get an ARM to get the house he wants. Yikes.

i just recently mentioned to dh that i've noticed that within the last few months our snail mail has started to very much resemble what we were receiving back in the few years prior to the housing market crash in '08-mailers on ARM's, home equity loans and timeshares. i have to wonder if some of the newer folks that have bought into our neck of the woods at OBSCENE prices (prices at 700% MORE than it sold for 7 years ago) have done risky ARM's while many an existing homeowner who likely has (at least on paper) significant equity seem to have acquired very noticeable high end 'toys' (rec and sports vehicles, much more elaborate equipment than is truly necessary to maintain our type of acreage) that might have come via equity loans.

i dunno-we moved her in '07 and saw the '08 crash not hit this area as significantly but we still probably witnessed 15% of our small neighborhood impacted by foreclosures and dramatic short sales. i hope we're not heading for another round

 

[Mackenzie Click-Mickelson]

When my older sister bought her first house, the mortgage rate was around 13.5%. Yep. Fixed rate. A lot of adults have never seen anything more than 4-ish percent until the last couple years.

Ah but what were the home pricing in relative to everything else?

A house across the street being built from us is $750K for the price listed. But when our house was built in 2014 we paid almost $400K less than that or you know the price of a house and that included adjustments we paid for to the house.

Way too many people bring up past rates but don't add in the other side of the story which is housing pricing.

 

[tvguy]

I'm very confused why you got an ARM in summer of 2022 when the yield curve was inverted most of the time (making a 30yr fixed cheaper). But in any event...you have until 2027 to figure things out. A lot can change by then. I would consider selling.

Yeah, I'm confused too. I don't follow mortgage rates but my daughter re-financed her home in April 2022 and got a 2.2% 30 year fixed mortgage. Now, her loan is less than a Jumbo Mortgage, but even if OP has a Jumbo Mortgage, that should have been about 2.5% for 30 years then.
4.25% for an ARM is way out of line for the time IMHO.

 

[Mackenzie Click-Mickelson]

Saw the thread about Expensive Financial Mistakes and wanted to post about my own (but not under my personal account, for semi-obvious reasons).

We decided to purchase our new home in the summer of 2022 after we sold our house in 2020 and tried to "wait out" the madness for over a year. We bought new construction in a wonderful development and are actually happy with our house. Here's the problem, though...

I've basically had to admit to ourselves that we probably bought at the top of the market, and even worse, our builder talked us into a 5-Year ARM, so we would have affordable payments. When our 5 years are up at 4.25% (in 2027), this loan will adjust to 8%, based on today's rates, which we actually can't afford. We could afford up to about 6% before we would be unable to afford the payments, based on my calculations. That also assumes that nothing (like our insurance) goes way up.

Ironically, one of my close neighbors, who is actually a CPA , brought up to me that she bought her house on a temporary buydown from the builder. Her mortgage is temporary at a 3% rate, which will step up to 4%, 5%, and then 6% fixed rate after 3 years. She told me she had been confidently told that rates would come down before the 3 years were up, and she could refinance.

This conversation brought up a string of conversations at a recent pool party when I realized that more than a handful of my neighbors are in the exact same boat. Some of them took out 3-Year Loans that will Adjust. Some took the buydown with the intention of refinancing, and some are just planning to sell their house before the 3 or 5 years are up. Apparently, a lot of us took the special financing deal from our builder, not realizing how most of us are screwed if ideal scenarios do not work out.

I am now thinking to myself, with a lot of confidence, that impending doom is upon me. I also personally believe that the housing boom is mostly over. And lastly, I cannot get over the fact that so many people (including me) could have been so foolish in our decision-making. It doesn't seem like any of us thought too far ahead into the future.

So... that's me. I am in a brand new subdivision of almost 130 homes, and I am seriously convinced we will eventually lose most of our down payment now. Definitely an example of a financial mistake.

The real question is, though - how many more people like me and our neighborhood are out there? Are there hundreds or thousands of us? Tens of thousands? I wonder now.

So if this is maybe a case of a builder swindling homebuyers you and other homeowners in the neighborhood may need to seek out legal council. Developers and builders can engaging in bad faith things. And while you could have done things differently it's also sounding like the builder maybe was trying to encourage home buying for their subdivision as a short-term profit.

There was a builder in my metro that actively built on land prone to ground layer issues, basically the homes are sinking. They did not disclose this to the homeowners and legal action was taken against them.

Put this down as Mistake #2. When we first visited the Sales Office, we were asked if we had a Realtor. When we said No, we were told we would get a better deal if we were unrepresented. So... we did just that. You are probably correct, we would have been better of.

I'm going to guess it's because they didn't want to split the commission.

In my state legally if you have a buyer's agent you have to disclose this but the buyer's agent and the real estate company split the commissions. So what I'm thinking is yes they lied to you OR engaged in shady stuff as a backdoor dealings to discourage you from having someone there to look over things.

FWIW our buyer's agent wasn't really involved in the mortgage proceedings, he was there to walk through the house with us over time, was there at signing of the contracts with the builder but the builder wasn't involved with our mortgage other than a pre-approval letter if you had one they requested to see it.

In our case our buyer's agent was well known by the real estate company the developer had representing our neighborhood

 

[tvguy]

I am in my mid 40’s, bought my house in 2004, there were most definitely interest rates above 5% in your adult life. My fixed rate interest rate back then was 6%. My credit was good. The only way I could have gotten a lower rate was an ARM, but I did not want that risk.

Yeah, we JUMPED to buy our house in 1983 when mortgage rates FELL from 16% to 12.25% 30 year fixed. Refinanced in 1987 to 9% 30 years fixed. Refinanced again in 1991 to 6.25% 15 year fixed. We continued to make the same payment with the refinances as with the original mortgage with the extra money going to principal. Because of that our house was paid off 17 years after we bought it. That was 5 years before our oldest hit college, and so for 5 years that house payment money went into the college fund.

 

[amylevan]

You do have 4 years. So now that you’ve imagined worst case scenario, make a plan to deal with it. You stated that you think you can afford a 6% mortgage, so I would start by putting the difference between your current mortgage payment and that 6% mortgage into a savings account monthly. If your mortgage only resets to 6%, you’re already used to paying 6% and you have a little pile of money to use as needed.

If it resets higher than 6, you can supplement the amount you’re already used to paying with money from your account. The good news about high rates is that savings accounts are also making money now too, so you should have a few years of supplemental money to hopefully wait out a refinance.

 

[Lumpy1106]

TO OP, sorry for the expensive lesson, but the one rule DW and I have always followed is we only have a fixed rate home mortgage. If you can't afford it then it is time to wait it out and save until you can. The scenario you describe is called "getting upside down" in your mortgage and it happens in cycles. We bought our first house in '96 just as the interest rates went up and a bunch of people defaulted on their mortgages - the price of house went down so we jumped on it - with a fixed rate mortgage. You CAN refinance if you can afford your fixed-rate mortgage and the interest rate goes down, you CANNOT refinance if your variable rate mortgage rate goes up and you can't afford it.

 

[SomewhereNotAtWDW]

Yeah, I'm confused too. I don't follow mortgage rates but my daughter re-financed her home in April 2022 and got a 2.2% 30 year fixed mortgage. Now, her loan is less than a Jumbo Mortgage, but even if OP has a Jumbo Mortgage, that should have been about 2.5% for 30 years then.
4.25% for an ARM is way out of line for the time IMHO.

Your daughter must have had a better source because we did call around. I remember calling three banks, and rates were all over the place from 5.5 to 6 precent. We thought the lower rate from the builder's company sounded great, and we would get something more conventional when these high rates went away. I didn't anticipate they would be sticking around.

 

[SomewhereNotAtWDW]

That is simply not accurate so here is a better source going forward for looking at what has happened to interest rates.

It appears you are correct. Honestly, I just haven't been paying attention until maybe 2011 or so.

When we first tried to buy a house (in 2008) we got approved with a 5 percent rate. However, my mother-in-law insisted we step back and wait. So we waited until 2013 for the market to fully correct. With that said, I hated renting so much for all those years.

 

[SomewhereNotAtWDW]

So, you have 4 years to plan...

What I would do is find out if you can live without the extra $25K now.

One thing that we may try, is to see if we can cut back our spending somehow by 1/2 of that amount, and take on additional income for the other half. I really like the idea of stashing the money, and having it on hand -- and being financially ready.

If things work better than planned, we might just end up with a huge stash of cash to move over into retirement.

 

[SomewhereNotAtWDW]

i just recently mentioned to dh that i've noticed that within the last few months our snail mail has started to very much resemble what we were receiving back in the few years prior to the housing market crash in '08-mailers on ARM's, home equity loans and timeshares. i have to wonder if some of the newer folks that have bought into our neck of the woods at OBSCENE prices (prices at 700% MORE than it sold for 7 years ago) have done risky ARM's while many an existing homeowner who likely has (at least on paper) significant equity seem to have acquired very noticeable high end 'toys' (rec and sports vehicles, much more elaborate equipment than is truly necessary to maintain our type of acreage) that might have come via equity loans.

That's a thing in itself. I noticed back in 2021 - 2022 went out and purchased RVs and Boats. Many of these high-ticket things were $40k to $70k, I think. I too have wondered how they paid for them.

 

[SomewhereNotAtWDW]

I wonder if they misrepresented something to you and can be sued... they sound so shady.

So if this is maybe a case of a builder swindling homebuyers you and other homeowners in the neighborhood may need to seek out legal council. Developers and builders can engaging in bad faith things. And while you could have done things differently it's also sounding like the builder maybe was trying to encourage home buying for their subdivision as a short-term profit.

There was a builder in my metro that actively built on land prone to ground layer issues, basically the homes are sinking. They did not disclose this to the homeowners and legal action was taken against them.

I'm going to guess it's because they didn't want to split the commission.

In my state legally if you have a buyer's agent you have to disclose this but the buyer's agent and the real estate company split the commissions. So what I'm thinking is yes they lied to you OR engaged in shady stuff as a backdoor dealings to discourage you from having someone there to look over things.

FWIW our buyer's agent wasn't really involved in the mortgage proceedings, he was there to walk through the house with us over time, was there at signing of the contracts with the builder but the builder wasn't involved with our mortgage other than a pre-approval letter if you had one they requested to see it.

In our case our buyer's agent was well known by the real estate company the developer had representing our neighborhood

I honestly have no clue at all, if this was illegal or not. That's something I would have to speak to a lawyer about. What I will say is... someone at the builder had to have known setting up a large percentage of a neighborhood with creative financing was a terrible idea.

 

[gottalovepluto]

Yeah, I'm confused too. I don't follow mortgage rates but my daughter re-financed her home in April 2022 and got a 2.2% 30 year fixed mortgage. Now, her loan is less than a Jumbo Mortgage, but even if OP has a Jumbo Mortgage, that should have been about 2.5% for 30 years then.
4.25% for an ARM is way out of line for the time IMHO.

As you can see in the FRED link I posted above the average 30 year fixed was 4.7-5.1 in April 2022. I don’t know what your DD’s specific situation was (other business with the bank, buying down the rate, etc) but OP’s experience was pretty normal for the time.

 

[SomewhereNotAtWDW]

A few other things to consider:
Just because your rate has the potential to go up to 8% doesn't automatically mean it will.

Are you in a position, or are you willing to put yourself in a position where you could turn your home into a rental and find more affordable housing for yourself?

I am aware of your first point. If rates were to go down tomorrow, there's a chance our loan wouldn't adjust, or wouldn't go up as much. What I am freaking out about -- is the fact that rates are not shifting. I need them to go down, if I want to refinance.

I am willing to rent out our house and move into a rental. I would just hate to do it honestly. I know how it sounds, but, I am so focused on trying to keep our kids in a nice house with the same school until they graduate. I'd rather try and make sacrifices than move into something else.

 

[disney-inspired]

OP, you are apparently not alone. I talked to a family member about this after seeing your story as he is in the market for a house. Apparently other people around him keep sending him articles on how ARMs will help him afford a house and even people at work are telling him to just get an ARM to get the house he wants. Yikes.

This sounds a lot like a few scenes in the Big Short.