You'd think that with all the subprime mess going on around the country, lenders would be reining in their excesses. But as I found out from a telemarketing phone call the other day, you can still find creative financing offers out there.
I bought a house last year -- yes, congratulate me on my excellent market timing; it's not just with stocks that I'm able to buy at the top -- and have been enjoying the benefits of homeownership since. If you own a house, you know what I'm talking about: fixing leaks, repairing doors that suddenly fall off their hinges, discovering that your basement really does flood when it rains. Fun stuff like that.
My mortgage is a constant reminder to me that this is something I'll be living with for quite awhile. But I don't mind. I still believe that because mortgage money is still some of the cheapest money you can borrow these days, you should get married to your mortgage. Having as large a mortgage as you can afford for as long as you can drag it out can be a smart financial move.
Note that I said to get the largest mortgage you can afford. Getting a jumbo mortgage that you're going to default on or that will send you into bankruptcy is no deal at all, no matter how cheap the rates are.
Playing with telemarketers
So I have a big mortgage for decades to come, and I'm happy about it. Yet when I got a cold call from a mortgage broker the other day wanting to know whether I was interested in refinancing, I figured I'd play along. With lenders like Countrywide Financial
With that in mind, I sparred with my mortgage broker. After all, mortgage applications have supposedly dried up recently, and lenders have allegedly gotten stricter with their standards. I wanted to see whether someone with a fairly good credit rating could get one of these fancy deals that we've been told are so hard to come by these days.
A deal I couldn't refuse?
Well, he had a deal for me. He could get me a 2.5% interest rate for five years with nothing out of pocket other than the appraisal fee for my house. At closing, I could walk away with upwards of $80,000 in my pocket if my house appraised at the estimated value. After five years, the rate would then jump to 7%. But in the meantime, I could reduce my current monthly mortgage payments by nearly half, pay only the interest, and invest the difference. At the end of five years, I could re-fi again, sell the house, or pay the higher rate. If I socked away $1,000 a month for five years, I'd have $60,000 to use as I saw fit, even pay my kid's college tuition. Add in the $80,000 I would get at closing, and I'd have some sweet change clinking in my piggy bank.
As much as I like big mortgages stretched out over many, many years, I'm not really into creative financing tactics. At times they can be useful, but like using margin in an investment account, upping the credit limit on your credit cards, and playing your state's lottery, too much is not a good thing. Getting a gigunda mortgage, tying it to a sub-market interest rate, having it balloon in a few years, and ending up with no equity in a house also seems like too much of a "good thing" to me.
A Foolish lesson learned
We're supposed to learn from market crashes. Following the tech wreck of 2000, we realized (once again) that quality of earnings was paramount, that "story stocks" don't make profits and make even lousier investments, and that focusing on the business was a sound, proven strategy borne out by years of experience from great investors like Graham, Buffett, and Lynch.
Yet as the broker's pitch shows, we're not learning nearly fast enough from the housing crisis. It is still possible to get a risky loan -- risky for the lender and for the borrower -- and one which will ensure that we'll continue to feel the burn.
Our Home Center has more information and tools to help you finance your home Foolishly.