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From: dberg@noscvax.UUCP (David I. Berg)
Newsgroups: net.invest
Subject: Re: mortgages
Message-ID: <856@noscvax.UUCP>
Date: Mon, 1-Apr-85 17:08:48 EST
Article-I.D.: noscvax.856
Posted: Mon Apr  1 17:08:48 1985
Date-Received: Wed, 3-Apr-85 01:42:16 EST
References: <1659SGL@PSUVM>
Organization: Naval Ocean Systems Center, San Diego
Lines: 39

Fixed Rate Mortgages are pobably better during times of low interest
rates, particularly if it appears on the horizon that rates are going 
to increase.  Conversely, Variable Rate Mortgages are better in times
of high interest rates, especially if they are too high to sustain the
real estate economy, like they were in the early 80s.  (Variable Interest
Rate Mortgages usually have a ceiling above which the rate cannot go).

Sometimes, you can get a builder to "buy down" the interest rate at the
bank by adding to your cost of the property.  (For example, with only
hypothetical numbers, a builder selling a $100,000 house at 15%, might
"buy down" the interest rate to 12% by paying the bank the difference 
up front (say $10,000) and adding that amount to the purchase price).  The 
monthly cost to you is minimal when amortized over 30 years.  The risk to you 
is that if you sell before the house has appreciated the amount of the added 
cost, you may have to take a loss.  This is in no way as risky as a
Graduated Equity Mortgage, though.

Graduated Equity Mortgages may be attractive to a buyer in your shoes, but
they can be painfully dangerous.  You actually start out paying some
fraction of the total interest due each month, and no principal.  The balance 
of that interest is then added to the principal.  (This is called "negative
amortization").  As your payments go up, the amount of excess interest added 
to the principal decreases, until you reach the point of equilibrium where 
your monthly payment equals the monthly interest amount.  This usually takes 
about five years.  By now, your principal has increased, perhaps at a rate 
greater than your property has appreciated.  If you have to sell, or if you 
are forced to refinance (as some GEM mortgages are set up), you may owe the 
bank a tidy sum just to clear the loan.  BUYER BEWARE!
-- 

David I. Berg (dberg)
ARINC Research Corporation
San Diego, CA

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