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From: ark@alice.UUCP (Andrew Koenig)
Newsgroups: net.invest
Subject: Re: mortgages
Message-ID: <3512@alice.UUCP>
Date: Sun, 31-Mar-85 11:46:58 EST
Article-I.D.: alice.3512
Posted: Sun Mar 31 11:46:58 1985
Date-Received: Mon, 1-Apr-85 04:12:58 EST
References: <1659SGL@PSUVM>
Organization: Bell Labs, Murray Hill
Lines: 38

> The disadvantages associated with the Variable Interest Mortgage make me
> wonder what the advantages are?  I can't imagine paying a possible 19%
> interest a few years down the road!  That's what seems attractive about
> the Graduated Equity Mortagage.  The fact that the interest rate remains
> constant while the payments increase 7% per year makes the GEM seem ideal
> to me even though a $500 house payment grows to around $1200 by the 15th
> year.  Can't you *ALWAYS* refinance your home if things don't progress as
> rapidly as expected?  Why are some realtors dead set against this mortgage?
> Is it simply because they have no experience with it or is there something
> that I've overlooked?

The advantage of a variable rate mortgage is that the rate is usually
several percent lower than any fixed rate mortgage available at the
same time.  It is also now possible to get variable rate mortgages
with a ceiling on the rate -- typically about 15%.  Such a mortgage
will be a better deal than a fixed rate mortgage unless the prevailing
interest rate goes up and stays there for a long time.

You pay your money and you take your choice.

Attractive as it may look, there is only one advantage to a GEM:
it permits you to pay less than the interest you owe for a few
years, at a time when you might like to have the additional
money for other things.

Because the initial payments are artificially small, the total
amount of money you owe the bank actually increases for a few
years, and then starts to decrease.  Thus, if real estate prices
stay constant and you have to sell, you might find yourself
having to pay the bank extra to clear the mortgage!

Except for this "feature," a GEM has nothing to offer, because
you can always set up an equivalent payment schedule for yourself
on a conventional mortgage.  I believe that all mortgages must
now allow any part to be repaid early at any time without penalty,
so you should consider the published payment schedule as a
lower bound, and realize that you can pay it back faster
(and pay less interest as a result) whenever you like.