OmegaMom

Jack and Diane bought an acre of land and a house in Alaska in 1987.  They paid about $67,000.  Time went on, their kids grew up, the US went into a housing tizzy, and Jack and Diane looked at their house and realized they could now refinance and get at the equity…maybe fix things up, pay off some debt, buy a nice plasma TV, send the kids to college.

So in 2005 they refinanced using Lending Vine.  They paid off the first mortgage and had money to spend–they had borrowed $135,000, a fairly conservative amount, merely twice what they had bought for, and probably quite a bit less than what their house was worth (on paper) at the time.

Home values were skyrocketing.  People were getting 20% equity increase per year.  All was good.

They got themselves an interest-only adjustable rate mortgage.  Maybe they really looked at the details and decided that the way the housing market was, it was a sure thing that they could sell the house for way more than the mortgage or refinance for way more than the current mortgage when things got problematic.  Maybe they didn’t see the small print until they were signing, and figured it was going to be okay.

They fixed up the house.  They did some other things.

The interest rate on their mortgage changed in 2006 and their payments went up.  The interest rates went up again in 2007, and were probably going to go up again in 2008.

They sat down early in 2007 and looked at the bottom line.

The bottom line was that their mortgage, which was for $135,000 in 2005, was now for $145,000. 

Houses which were selling like hotcakes only a year ago were now sitting stagnant on the market.  Newly built homes in fancy subdivisions were sitting empty, and developers were slashing prices to reduce inventory.

Jack wanted to leave Alaska; he was tired of the winters and wanted to move to the Southwest.  And, no doubt, the increasing mortgage and the increasing mortgage payments weren’t helping.

So Jack and Diane decided to move.  After talking to some friends in the real estate business, and looking at the way the housing market was framing up to be for the year, they sadly decided to put their house of 20 years for sale for less than the going rate, and much less than it could have sold for two years ago.

Go while the going is good, eh?  Pay off that scary mortgage with the numbers increasing every time you turn around…

Names have been changed, some details are made up (such as motivation and when the interest rates went up–but the document indicated that the interest rate could go up the month after the mortgage was signed).  The IO/ARM and the increase in the mortgage balance are not made up–we saw them in the closing documents.

Folks, don’t do it.  Just Do.  Not.  Do.  It.  Jack and Diane lost $10,000, and they were some of the lucky ones–they didn’t lose their house, they ended up with some equity after all, they got out in time.  The Feds are busy changing their tune every week, it seems; first the housing downturn was no big deal, then it was going to be over with in a few months, one week it’s not going to impact the economy, the next week it’s going to cause a recession…

There are states where 60% of the mortgages written up in the last two years are zero-down IO/ARMs.  There are states where the foreclosure rate is doubling.  It’s a scary scenario. 

Our house in Small Mountain University Town has lost 24% of its value in the past year and a half, according to Zillow, and SMUT is an area where housing is still going fairly strongly.  What if we had refinanced then for what our house was (supposedly) valued at?

Things to think about.