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Monday, July 31, 2006

Interest Rate Change Misconceptions: Cap rates

"The interest rate on their mortgage had risen to 9.5 percent, from 3.5 percent three years ago. They didn’t have the equity or good credit to qualify for refinancing at a lower rate.”
This quote was from Ben's 'the housing bubble' blog this morning and it perfectly illustrates the misconception that I hear all the time: "my interest rate is adjusting soon, but can only go up or down by the 2 % cap." Sort of. Keep reading your promissory note!

The error in understanding is due to focusing on just one cap rate. But there are two. One cap rate is the maximum rate the loan can achieve, the ceiling--usually 5-6% over the start interest rate. The other cape rate centers on how much it can adjust each adjustment period, typically no more than 2% up or down. But here's the kicker: the 2% cap rate is triggered ONLY AFTER the 1st adjustment period. Thus, your interest rate can skyrocket at the first adjustment all the way to the maximum full interest rate cap (ceiling) on the note.

In the above scenario you can see the borrowers recently hit their 1st adjustment period and were shocked that the rate adjusted up to the full 9.5% ceiling, which was 6% over their initial starting interest rate.

Head up to the attic and find the box where your closing papers are and start reviewing your promissory notes so you can plan accordingly. Loan programs vary and the above scenario may or may not apply to your situation.
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17 comments:

meshugy said...

Sorry...this is OT:

We've seen this before:

Less is more? Not for many new Eastside homes

But for the past few years, developers have been buying properties, knocking down older houses and building towering mansions, with columned balconies, porticoes, dormers and detached garages with additional housing on top.

meshugy said...

Again, it seems that we really are different.

Charlotte and Seattle Top List of U.S. Housing Market Hot Spots

While much of the country is experiencing a balanced housing market between buyer demand and seller supply, a recent HouseHunt national survey has identified a dozen metro area hot spots where most listings are selling in 30 days or less, sellers greatly outnumber buyers, and 46% of sellers are getting 100% or more of their asking prices.

The survey also found that 78% of sellers are still getting multiple offers.
In metro Seattle, Fran Omholt of Coldwell Banker Danforth & Associates in Federal Way reported median home prices of $399,000 and a limited supply of inventory. Greatest activity is coming from move-up buyers. Omholt is the exclusive HouseHunt agent for suburban Renton.

Beverly Burleson of Skyline Properties, exclusive HouseHunt agent for Central Seattle, said many sellers are getting more than 100% of asking prices. Median home price is $428,000, with a limited supply of unsold homes. She described local housing hot spots as Columbia City, Hillman City, Madrona, and Madison Valley.

meshugy said...

sellers greatly outnumber buyers

Looks like they made a little mistake...or maybe they're foreshadowing the impending crash?

Anonymous said...

Meshugy,

You are a hoot! The same article mentions San Diego and southern California as "hot" markets.

Like Meshugy says: "Real estate always goes up and it's always a good time to buy".

LOL!!!

matt said...

Not to fuel Meshugy's OT fire, but this comment from the last post of 'Top Hot Spots'...


1) Charlotte, NC $174,500
2) Seattle, WA $338,600
...
6) Washington, DC $422,500
...
10) Los Angeles/So. California $396,200/712,600


And on the same day you get headlines like this for LA..

"Rough landing explected for [LA] market"

http://www.dailynews.com/business/ci_4112317

and this for D.C.

"Rules for a slowdown"

http://www.usnews.com/usnews/biztech/articles/060730/7reala.overview.htm

...and these are in Meshugy's industry rag 'Top Ten Hot Spots', you have to wonder at what lengths the Realtwhores will go to sell their ARM/io/snake-oil.

Yeehaw! Are we in the top-ten of spiralling apocalyptic housing markets, our are we in top-ten utopia "new plateau" housing market? I'm confused

whatever...

Anonymous said...

Hey Meshugy. How about putting the OT posts in the Open Threads where they belong. You've started to spam practically every post with your OT bullishness.

meshugy said...

Like Meshugy says: "Real estate always goes up and it's always a good time to buy".

Nope...never said that. I would only buy now if you can get something you can afford and keep it for 10 years. the hyper appreciation train is nearing the end of tracks.

I just don't think it will result in a crash...just a return to normal 3-6% appreciation or at worst go flat.

meshugy said...

"Rough landing explected for [LA] market"

If you read the article it says:

selected suburbs in Los Angeles, Orange, San Diego and Riverside counties in Southern California.

Anonymous said...

My apologies Meshugy. I wonder how I could have confused you with a realtor?

Just a run of the mill, head in the sand type, eh?

matt said...

Orange=Bellevue/Kirkland/Redmond
San Diego=South Snohomish Co.
Riverside=Kent/Renton/Auburn

Yes Meshugy, I'm sure you're relieved to note that there was no mention of any 'Ballard analog' in the LA article... everyone knows Ballard's building the 'great wall' to sheild themselves from equity refugees and BMW speculators anyhow...

plymster said...

Relating to the actual topic of interest rates, a little anecdote:

A friend of mine recently bought a home in Redmond for ~$400K. I asked about her mortgage terms. She and her fiance are pretty bright (so I thought), so said, "You guys got a 30-year fixed mortgage, right?"

"Sure", she replied. A month later, she sees me and tells me that they got a HELOC to pay for the down payment. She was surprised that her payment was going up because she thought her rate was locked in (he-LOCk).

Obviously I was wrong about how bright these two are, but I wonder how many other simps there are out there thinking the same thing when they get locked into these deals. It seems like nobody concerns themselves with actually understanding the terms of the contracts they sign anymore.

matt said...

"Sure", she replied. A month later, she sees me and tells me that they got a HELOC to pay for the down payment.

Good point plymster, when I checked into a few lenders, I could only scrape together about 10% of a down-payment if the seller threw in closing costs, and most of the 'piggy-back' option were tied to the prime rate, with the ARM, etctera. The only part of the fixed was the 30 yr., basically a 30 yr fixed in name only. Most 'piggy-backs' have a shorter term payback peried and are adjustable.

Since most folks (I'm gonna say 90%+ first time buyers in Seattle? just a wild guess) don't have anywhere near 5% of a down, let alone 20% are HE-locked into an ARM loan

Anonymous said...

Hey Meshy,

2 years ago at 6/04, when my boss left Seattle for Southern California, the house he bought there had appreciated about 40% in one year while he just broke even for the house he bought here in 01!!!. At that time, I felt pretty upset because I am a home owner too. Why did it appreciate that much somewhere else and not here? Were we different – meaning the poster boy of the housing froth? Fast forward today, all the front runners of the bubble are running into a break wall – while we’re still slowly catching up and will be in the same situation in no time. Around my area, SE King County, I see that houses are staying for months now, not a few weeks any more like last year, except of low price houses that can still attract the last of the sub-prime buyers who follow the advice of some creative financial brokers: Just buy a house with 0 down and use option ARM to get the lowest possible monthly payment. In a few years, if they are under water, just walk away and leave the lender holding the bag. Other wise, enjoy their sweet equity. It’s a win-win scheme – tail you loose, head I win.

I agree with some bloggers here that you behave like a Flat Earth believer – Have no concept of the big picture or the law of economics (or physics or whatever) – the only things you bring to the table is your some data that can change around quickly as countless anecdotes and stories reported around the country.

Anonymous said...

Tim, anyway to move Meshugy's OT stuff over to an open thread?

Anonymous said...

Mesh,

Do you have any thing to say to comfort the poor doctor in this article?

http://dailynews.att.net/cgi-bin/news?e=pri&dt=060730&cat=frontpage&st=frontpagemcmansions_bubble_060730&src=abc

They didn't believe one of the hottest real estate markets in the country would cool off so quickly.
"I'm completely blown away," he said.
"We're totally surprised," she added. "It's a really beautiful house."
...

sue said...

S Crow-

Thankyou for finally sharing with us your expertise.

It is such a wonderful thing to have somebody with some real knowledge reporting on a bubble blog.

There are plenty of people in Seattle who can talk about the beauty of Mt. Ranier. Let's leave that to the poets among us.

Not many who have knowledge of how these whacky loans work.

And THAT is what we sorely need you for.

It's a service to our under-educated community for navigating these tricky loans that can land some in real hot water.

Thankyou for stepping up to the plate when no one else will.

S-Crow said...

Sue -

Thanks. One of the reasons I appreciate 'The Tim' for inviting me to discuss real estate is that I see a need for unfiltered information and it's fun for me to discuss housing from the perspective of an active participant/invovled in the business every single day. And that is what people WANT. They want information so they can make informed decisions regarding housing. I like to call it understanding the DNA of real estate.

I will address issues and topics that readers requested late last week. Coming soon. Readers can also contact me via Email for any specific questions they may have.