Quote:
Originally Posted by Chuck Norris
Simply put, we are at historical lows for interest rates. It is likely to stick around with us for a while but the only likely direction for interest rates to move is up. If you're on the limit at 2.5%, what happens when the interest rates go up to 5%?
If someone is on the edge at 2.5% and purchased a $500,000 home, their mortgage (assuming the statistically incorrect assumption it is a 20% down payment) is $400,000. A monthly payment of $1577 on a 30 year term.
In a few years, it would not be unrealistic to consider rates to be at 5% which means this mortgage would now be $2134 or an extra $560 a month.
Some of you might say that $2134 is still easy to pay off, but for someone that was on the limit at $1577, $2134 is not possible. Sooner or later, no matter how much money you make or have, you will reach a limit.
|
Chuck gives great advice, I hope more young people listen rather than foolishly buy houses they can afford now, and cannot afford in 5 years...
Actually correct that, I hope a bunch of idiots do buy houses they cannot afford. I'm a renter, I want housing prices to crash and scoop up great deals from idiots having to dump their homes.
The limits Chuck mention are already defined:
35% GDS (gross debt service ratio)
42% TDS (total debt service ratio)
Lets take your example, lets say $1577 represents 35% of the buyer's income. Then $2134 represents 47% of the buyer's income. Guess what happens? Bank denies renewal, buyer forced to sell.
Sound familiar? This is what led to the US sub-prime meltdown. Brokers sold ARM (adjustable rate mortgages) that slowly increased the rate, yet people didn't understand how the rate would increase or expected to beable to refinance for better terms leveraging value built up in their house.
Do I need to review what happened? Hopefully not.