2 ms·

How is it crazy? How else could one reliably afford to buy a house? The main lesson of the 2008 housing crisis, as I saw it, was that adjustable-rate mortgages

How is it crazy? How else could one reliably afford to buy a house? The main lesson of the 2008 housing crisis, as I saw it, was that adjustable-rate mortgages are untenable; I certainly would never sign up for one, because it leaves you too vulnerable.

boulos 3y ago
Most of the world lacks this product. In the UK, for example, I think the most popular product is what we'd call a 2/1 ARM!
- sircastor 3y ago
  Adjustable Rate Mortgages destroyed a lot of people’s wealth in the US back in the housing bubble. I don’t know if the laws are supportive of borrowers in the UK, but in the States ARMs have a bad reputation that they probably won’t shed for 2-3 generations.
- marssaxman 3y ago
  How does this work? Are people just routinely evicted when the rate goes up and they can't afford the payment anymore, or is there some reason this doesn't happen? From my US perspective, I would rather rent forever than risk such a loan, so I suppose there must be something else at play which makes your approach less awful than it would be if we did that here.
  - bombcar 3y ago
    You buy less house and you can get squeezed. It’s closer to renting.
idontpost 3y ago
[dead]
epistasis 3y ago
The existence of this product inflates prices, making it difficult for people to buy except with a 30 year mortgage. The real winners are those who own before the government enforces new price inflation policies on the market. (The only reason we have 30 year fixed mortgages is because of government intervention in the market.)
gizmo686 3y ago
There are two sides to the transaction. The lender is offering a fixed rate loan for 30 years, with no option to call for early repayment. However, the borrower does have the option to repay early at their discretion. In exchange for this massive assymetry, the borrower pays a premium of about 60 basis points over an adjustable rate with 5 year initial rate lock. Broadly speaking, this product makes no sense. If interest rates go up, the value of the loan goes down. If interest rates go down, the value of the loan goes up ... until the borrower unilaterally refinances and pays of the loan at face value. Indeed, no bank actually holds fixed rate loans. Instead they immediately sell it to Fannie May/Freddie Mac, which were created by the government specifically to allow for a product as absurd as the 30 year fixed rate mortgage to exist.
Ekaros 3y ago
Key is not overextending too much. Which I think was one of key issues in that collapse. Also adjustable rates have been amazingly cheap in past and still are not that expensive. Like sub 1% total. And my adjustable rate loan would be 4.425% if it adjusted today.
positr0n 3y ago
It's crazy because it's a government subsidy for mortgages. The bigger the mortgage the bigger the subsidy.

boulos 3y ago

Most of the world lacks this product. In the UK, for example, I think the most popular product is what we'd call a 2/1 ARM!

sircastor 3y ago
Adjustable Rate Mortgages destroyed a lot of people’s wealth in the US back in the housing bubble. I don’t know if the laws are supportive of borrowers in the UK, but in the States ARMs have a bad reputation that they probably won’t shed for 2-3 generations.
marssaxman 3y ago
How does this work? Are people just routinely evicted when the rate goes up and they can't afford the payment anymore, or is there some reason this doesn't happen? From my US perspective, I would rather rent forever than risk such a loan, so I suppose there must be something else at play which makes your approach less awful than it would be if we did that here.
- bombcar 3y ago
  You buy less house and you can get squeezed. It’s closer to renting.

idontpost 3y ago

[dead]

epistasis 3y ago

The existence of this product inflates prices, making it difficult for people to buy except with a 30 year mortgage. The real winners are those who own before the government enforces new price inflation policies on the market. (The only reason we have 30 year fixed mortgages is because of government intervention in the market.)

gizmo686 3y ago

There are two sides to the transaction. The lender is offering a fixed rate loan for 30 years, with no option to call for early repayment. However, the borrower does have the option to repay early at their discretion. In exchange for this massive assymetry, the borrower pays a premium of about 60 basis points over an adjustable rate with 5 year initial rate lock. Broadly speaking, this product makes no sense. If interest rates go up, the value of the loan goes down. If interest rates go down, the value of the loan goes up ... until the borrower unilaterally refinances and pays of the loan at face value. Indeed, no bank actually holds fixed rate loans. Instead they immediately sell it to Fannie May/Freddie Mac, which were created by the government specifically to allow for a product as absurd as the 30 year fixed rate mortgage to exist.

Ekaros 3y ago

Key is not overextending too much. Which I think was one of key issues in that collapse. Also adjustable rates have been amazingly cheap in past and still are not that expensive. Like sub 1% total. And my adjustable rate loan would be 4.425% if it adjusted today.

positr0n 3y ago

It's crazy because it's a government subsidy for mortgages. The bigger the mortgage the bigger the subsidy.