Sub-Prime lenders are worse than I thought

[Wiregrass Willie]

I was wondering what all the hoopla is about the sub-prime leanders.

I went to this site:

http://cgi.money.cnn.com/tools/houseafford/houseafford.html

Using the median family income for Americans of $45,000 -- I want to see how much of a house mortgage I can afford.

I want a 30 year loan at 6.15%. I will claim to have no debt.

We are going to expect property taxes of about $1500 and insurance of about $500 a year. We will not pay anything down, just to see how ridicules they get.

Here is what we come out with:

Agressive house value $175,768.85
Loan 175,768.85
monthly payment 1,070.83
Taxes and insur 166.67
total monthly paymnent $1,237.50

With a $45,000 annual family income, I would have to pay Social Security of 7.5%. I would pay at least $2,000 in income taxe.

My $45,000 is now down to $39,625. Divided by 12 = $3302 a month. That means my $1237 house payment is 37% of my take home pay.

Why would anybody in their right mind expect a young person to pay that much ? A new car ... and there goes the house.

No wonder the housing market is bad .... and fixing to get worse.

Anybody who would make such a loan as this should be .... in serious trouble. They are setting the borrowers up for disaster.

I hate to hear it when the next shoe hits the floor.

[Donnachaidh]

1. people are NOT being educated to pay off loans

They are, however, being brainwashed into thinking that re-financing will get them out of financial problems caused by taking on too much in loans in the first place. That's why you get such wretched drek in loan advertising like DiTech's *people are smart* crap.

It's slavery to finance companies. They don't want people to think about becoming debt-free. They want them to sign on for never ending payments.

[matcom]

2. first of all, sub-prime deals with your credit risk

didn't go to the link, is your FICO factored in? if not, what does this have to do with sub-prime? :shrug:

[matcom]

3. 2nd of all, if you truly had no debt at all

and only dumping 37% on the mortgage with the rest of your income disposable, I would think that would be a pretty wise investment

[Donnachaidh]

4. Re-read my post - it's not about the prime

It's about how people are not being educated to finish loans, period. They are being told to re-finance, to be continually in debt.

[matcom]

5. that is oversimplifying don't you think?

once you are in a home, you have leverage (assuming you do it wisely).

interest rates fluctuate. people need to make improvements/repairs/etc...

nothing wrong with refinancing, using the EQUITY to enhance quality of life. hell, MY parents refied their home they bought in '68 for $30k a NUMBER of times before they sold in '98 for $300k.

it gives you leverage. it isn't bad to owe money, it's bad if you don't MANAGE what you owe

on edit: it was the OP who mentioned sub-prime

[fed-up]

6. if they hadn't refied it they would have walked away with ENTIRE $300K (less realtor fees)

refinancing also extends the life of the loan, same with moving every 7 years of so

instead of a mortgage that has a life span of 30 years, people end up paying interest for 40-50 years, a huge chunk of $$$$$$

[matcom]

7. how many people do you know who have NEVER refied?

furthermore, the ugly truth to your 30 year fixed mortgage is that if you put say 5k ONE TIME down on principal, you cut a TON off the life of the loan.

find an online amortization table and plunk down a one time major contribution to your mortgage. watch what the loan does then.

it ain't rocket science folks and refinancing can have benefits as well as paying it off completely. the OP blamed the 'sub-prime' "market" on a mortgage payment that frankly, would be a good investment (especially in THIS buyers market) IF the 'facts' of the situation are indeed accurate.

[tammywammy]

8. And, people also refinance

without taking equity out, and rolling it all back in, to get a lower interest rate (or like my mom, go from a 30 year conventional to a 15).

[matcom]

9. bingo

all kinds of reasons.

I remember when we rented YEARS ago. I turned to Mrs Matcom and said, "We have NO financial leverage in this world right now. We need to get into a home and THEN we will have options."

oh how right I was

[tammywammy]

10. That's part of the reason I just bought a house

My mortgage is for $59,000, 7% interest, and I put zero down. With taxes and insurance in escrow, I'm paying $702/month.

I only made $25K last year. But I have zero credit card debt. My only debt is my car payment of $328/month. Yeah, I don't have cable or internet at home, but it's worth it to own a house. :)

edited to add: and my credit score isn't subprime either.

[SoCalDem]

11. AND you get to write off all that yummy interest every year

In the early years of a loan (think young folks)you are paying MOSTLY interest, so if you have 8K of interest, and pay $1200 a month ($14,400 for a year), and your interest is $8k, divide the balance by 12 and your monthly "rent" works out to $533.33 a month...not bad for a house that can be sold after a few years, and MAY make you some extra money..

Many of the sub-primers are basically just renting a nice house they could not afford to rent otherwise, and they have a 30yr "flexible lease"..

They gamble that their salaries will keep up with the costs, but few have put much down, so all they end up "losing" when they fail is their confidence and their credit rating (which may already be in the shitter for other debts.).

The sub-prime lenders are the ones really taking it in the shorts, when all their "clients" start to go belly up, and they end up with a ton of un-sellable houses on their hands..

[fed-up]

12. sorry left out part about refi is okay if not pulling out equity unless there is an emergency nt

[matcom]

13. refi can be ok if you ARE pulling out equity

that is my point. :eyes:

[tammywammy]

14. Especially if it's for home improvements

That increase the overall value of your home.

[edhopper]

15. don't listen to this BS

matcon sounds like a Real Estate Agent or Morgage Broker.

[matcom]

16. care to elaborate?

you sound like a WONDERFUL financial planner. GREAT ADVICE pal. :eyes:

for the record, I DID work for a mortgage company although I was their IT support and am since removed from them AND the industry.

is your mom's basement a BETTER financial strategy than MY own home?

i'm really interested.

[edhopper]

17. Yes,

My financial planning is horrid. I should have done what all those people did in the last 4 years and bought a home with a ARM during the biggest housing bubble in US history, because RE never goes down. Then with each 10% to 20% increase in the value of my house, I should have refied to take out equity for SUVs and cruises, for my "lifestyle". Since RE never goes down, if I got into trouble I could sell my home into the market that would never crash.
Sure you should spend almost 40% of your income on a home. I mean, people never have a stretch of financial trouble where they have less income. And since RE never goes down you can always take out more equity, or sell. Gosh I hope all those people that now have a house that is worth LESS than they paid for it will always listen to such sound advice like yours.
I am so stupid for renting at 1/3 the cost of a mortgage on the same home. Cause you know, I ain't got no equity.

[matcom]

18. bought our home 10 years ago for $134k

worth between $350k and $375k today. we owe $120k after refinancing twice.

i'll ask you for financial advice when we are ready to sell in another 10 years. you'll be a great resource.

thanks for making my point.

[edhopper]

19. My point was about

people buying now or during the bubble of the last 4 years. Why don't you take a MEW for all that equity you built up like you advise, and come back in a year and tell us what your house is worth.