« I’m Back (Sorta) | Main | 1-800-Contacts Doesn’t Like Mailing Out Rebate Checks »
Maybe People Should Listen to Their Gut
By JLP | August 16, 2007
This is from one of the cover stories in today’s Wall Street Journal:
Nearly two years ago, Mario and Leticia Montes found a home they loved, a gray stucco bungalow with a hot tub in the backyard in a middle-class neighborhood of Orange County.
The price was a major stretch at $567,000. But the couple, who had sold a home a few years earlier to move to a better area, was tired of renting. Mr. and Mrs. Montes convened a meeting with their two teenage daughters around the kitchen table to hash out the implications. “We agreed we wanted to be homeowners again,” says Mr. Montes, “even if it meant the end of vacations and not eating out as often.”
With a December “reset” on their loan looming, however, the refinancing option now looks impossible. A friend who works as a loan officer called with some bad news this week: Similar homes in their area have been selling for $535,000 to $565,000 recently. That means the Monteses’ loan balance may exceed the value of their home.
The Monteses are caught in a trap — one that hundreds of thousands of people could face as the housing market totters and the easy credit of recent years dries up. They in effect bet that the boom in housing prices would continue. It was more important to hop onto the escalator than to wait until they could afford to make the leap according to traditional measures.
Later in the article a few pieces of important information are revealed:
1. The husband and wife together make $90,000 per year.
2. They had spotty credit and therefore had to settle for a 2/28 subprime loan, which is a loan with a low payment in the first two years followed by 28 years of hell.
3. They currently pay $38,400 on their mortgage loans. That number will balloon to $50,000 per year once their mortgage resets in December.
4. They weren’t aware that there was a $12,000 prepayment penalty if they refinanced their loan in the first 3 years.
5. Their broker assured them that they would be able to refinance when the mortgage reset.
I hate to say it but unless this couple can afford their new monthly payment, they are screwed. They have no equity so refinancing is totally out of the question.
The really sad part is that they shouldn’t have bought this house in the first place. I can’t imagine anyone thinking they could afford a house payment that sucked up over 40% of their income. The article did mention that Mr. Montes was feeling edgy about being able to afford the higher costs once the loan reset.
Maybe he should have listened to his gut.
Topics: Housing Market, Mortgages |