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Mortgage ARM Twisting
How to Buy a Home.
A couple of years ago my daughter decided she wanted to buy a new home. She and her husband and two children were living in home that she and her husband had purchased a few year before. It was too small, in need of some expensive repairs, and in a deteriorating neighborhood. She had an opportunity to purchase a nice home in a good neighborhood for a fair price from her husbands"s aunt.
Problem #1 - All she could get from her old house was enought to pay off the mortage with almost nothing left.
Problem #2 - The house was twice as expensive as the one she was selling . She could not afford the payments on a 30 year mortgage. She could handle it in a couple of years once they had paid off the truck but the deal was now or never
Problem #3 - She was a little short on money for the closing cost . But that's what Daddy is for.
How to do it.
Finding a Solution.
My daughter is a very resourceful young lady. She went to an espensive college when she couldn't afford it. She worked two summer jobs to buy a car when she couldn't afford it. She and her husband bought their first house when they couldn't afford it. Like her Mother, she finds a way to accomplish what she sets out to do. She would find a way.
Solution #1 She got the offer up enough to clear up a minor credit problem and cover her closing cost. After the closing she had three day to move.
Solution #2 She and her husband talked his aunt into renting the house to them until they could solve the mortgage problem. She found what looked like a solution. She was offered an affordable mortage called an ARM. The interest was 7% but only 4% would have to be payed for up to five years. Nothing would have to be paid on the principal for 5 years. That made her payment about the same as the old house. The extra 3% would be added to the principal and be covered in the refinance. The truck would be paid for by then and they could afford a higher house payment.
Solution #3 Solution #2 created a problem. Daddy( I ) did not like the deal. Adding 3% to the principal every year would make the mortgage greater than the value of the house. They would never be able to refinance unless the value of the house went up. The Mortgage Broker assured her it would be no problem. Home values had been going up steadly and the higher value would cover the larger mortgage. They could end up with bad credit, no home, and five wasted years. There had to be a better way.
Get the Money
A Profitable Solution
The solution was - she is also her mother's daughter - and her mother has good credit. We arranged a 15 year 80/20 regular mortgage. I covered all the closing cost and her mother is covering what they could not pay until the truck was paid for. The outcome means my grandchildren have a home without having to fear a foreclosure sign. It means we also saved and made a tidy sum. While researching the mortgage I learned that a lot of this crap was being used to finance home purchases. I learned that home construction was slowing in key markets inspite of rising prices. I learned that stock prices in big Home Builder companies were falling even though the Stock Indexes were still rising. I was reminded of the Technology boom of the late 1990's and their fall ahead of the market. I talked my wife into switching her 401K into the cash fund and we waited. But that's another story.