Mish,
loans are not all that complicated but easily misunderstood. Start with this:
countrywide.com
The best way to compare apples to apples is to stick with, first of all, the 30 yr fixed rate conforming loan, which is a full doc loan, MI required for less than 20% equity and for loan amounts below $359,000.
Let us use $300k loan amount as an example.
At 5.25%, the monthly payment is $1,657.
At 6.25%, the monthly payment is $1,847.
Obviously, that is a $190 difference. What that also means is the borrowers' income (using a 33% ratio) need to go up 11.5% from $4971 to $5542 a month to qualify for the same loan.
I opine this has the largest core impact to real estate nationwide.
As we know, obscene markets such as Southern Cal have already relied upon all kinds of non conforming financing to fuel the bubble. Now those options are of diminished value since they have been overused and their original benefits exhausted.
There are two components of financing that I believe are generally misunderstood.
The first is this fabulous "monthly savings" when refinancing. The more accurate way of putting it should be: Monthly savings but don't forget you are re-amortizing over a longer period.
countrywide.com
While the "monthly savings" figure is true, no where would that tell you that the number of payments is now going to be increased.
The second is the impact of the ARMs adjustment vs reset. An adjustment is usually limited based on the original rate plus some maximum amount the loan may adjust up or down from. A reset is when the original terms are basically over and a totally new rate will start.
ARMs have been around for a long time but they were usually the 30yrs ARMs with adjustments but no reset. The popular ARMs today are all the 1yr, 3yr or 5 yr ARMs with a reset at the end of the original fixed period. I believe this reset is something that may not only result in a huge payment shock but also is something that had not been stressed tested in previous markets, it did not exist in previous down cycles.
Can we afford to allow the real estate bubble to burst? |
