The risk of course is choosing a form of financing with inherent uncertainties and putting your long term financial situation at risk. One of the most popular mortgage products available today are variable (floating) rate mortgages. The mortgage rate varies with the current Treasury rate until it is locked in at a set amount above the future treasury rate three to five years after the date of origination. Many mortgage customers are fond of this type of funding because it allows them to enjoy a very low rate for the next three or five years. Unfortunately, the risk involved with this type of loan is huge, and can have substantial impact on the customers ability to pay.
Given that rates are at a forty year low, it is very probable that interest rates will climb substantially within the next three years. Although most of these variable rate mortgages have interest rate caps where the lock in rate will not exceed twelve percent, the impact of a rate increase during a lock-in period can be substantial. To provide an example, suppose you have a $200,000 variable rate mortgage with a 5.5% interest rate. When you first originate the loan, your monthly payment will be $1,135. If interest rates increase to 12% by the time of your lock in period, your payments will increase to $2055 per month; where they will remain for the life of the mortgage. For many home owners this type of increase will quickly lead to default, eviction, and bankruptcy.
Keep in mind that mortgage lenders are sales people, and mortgage brokers are essentially selling you a product. They make money when they sell you a mortgage. With the current emphasis on low finance rates, they are inundated with business, and are more focused with getting the loan closed than with evaluating your future ability to pay. As sales people, they have been given a number of products to sell, and because of the current frenzy, have been given substantial leeway from the banks. Therefore, they can forgo many of the risk analyses that were necessary during leaner banking times and sell whatever mortgage product is available.
Given that rates are at a forty year low, it is very probable that interest rates will climb substantially within the next three years. Although most of these variable rate mortgages have interest rate caps where the lock in rate will not exceed twelve percent, the impact of a rate increase during a lock-in period can be substantial. To provide an example, suppose you have a $200,000 variable rate mortgage with a 5.5% interest rate. When you first originate the loan, your monthly payment will be $1,135. If interest rates increase to 12% by the time of your lock in period, your payments will increase to $2055 per month; where they will remain for the life of the mortgage. For many home owners this type of increase will quickly lead to default, eviction, and bankruptcy.
Keep in mind that mortgage lenders are sales people, and mortgage brokers are essentially selling you a product. They make money when they sell you a mortgage. With the current emphasis on low finance rates, they are inundated with business, and are more focused with getting the loan closed than with evaluating your future ability to pay. As sales people, they have been given a number of products to sell, and because of the current frenzy, have been given substantial leeway from the banks. Therefore, they can forgo many of the risk analyses that were necessary during leaner banking times and sell whatever mortgage product is available.
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