Financial Jungle - » Bye Bye Zero Down and Forty Year Mortgages

I’m glad to see a post, even a guest post, as you seem to have missing in action for the past while.

As for the viewpoints expressed in the post, I would disagree with a couple of things.

First of all, let me ask, if the government has said there will be no more zero down how can any lender come out with a zero down product? I really don’t understand the meaning of the last paragraph.

As for the notion that one has to qualify for a 25 year amortization currently in order to choose a 40 year, let me just say that the simplest way to bypass that is to get a family member as a guarantor/co-signer.

Say you only qualify for a mortgage that would give you a monthly payment (at 25 yrs) of $1,500. But you can’t possibly buy a house in Vancouver for that kind of money, so your folks sign on.

Now you qualify for a house with a $3,000 payment but you can’t afford to pay that (and your folks aren’t really planning on subsidizing you on a monthly basis) so you stretch it out to 40 years and get it down to, say, $2,000 per month.

It may be tight, but you can make the payments. If everything goes well, that’s fine. The real problem is that you are very vulnerable if interest rates rise significantly between now and when you need to renew.

I lived in Calgary in the late 70’s and early 80’s when interest rates skyrocketed. There were stories all the time then of folks just locking up the house and walking away from it and houses cost a lot less then! 18% on $150,000 is $27,000 (or $2,250 per month) in interest. 18% on $600,000 is $108,000! Have you got an extra $9,000 per month sitting around? Didn’t think so.

People with longer than average amortizations could be hit by rising interest rates or rising unemployment and be unable to keep up.

Add zero down into the picture and it becomes very easy to end up upside down on your mortgage and in over your head. You also have less incentive to try to keep the house if you have zero down.

Even worse, if you’ve used a guarantor or co-signer *they* will be on the hook for the money. How will you feel if Mum and Dad lose their fully paid for house as a result?

Reader Comments

Comment Number:: 1
Written by:: Bye Bye Zero Down and Forty Year Mortgages | Financial Solution News
Posted on:: July 10, 2008 at 10:34 am

[…] post by Financial Jungle Guy Related Posts: Consider An Energy Efficient Mortgage For Your Green […]

Comment Number:: 2
Written by:: George of the Financial Jungle
Posted on:: July 10, 2008 at 5:15 pm

Great post but I didn’t know that you were a mortgage broker?! See quotes from your article below…

“In the real world, I’m a mortgage broker.”

“I have clients that finance everything from sea-doos to vacations and literally everything in between.”

Comment Number:: 3
Written by:: Trevor
Posted on:: July 11, 2008 at 8:55 am

Interesting post, however I take exception to the statement that you made…

“The lender pays me by way of a referral fee, so it costs the borrower nothing for my services.”

At a former job, I was a loans officer and had many meetings with Mortgage Brokers who really wanted to refer business to me. However, the fees they charged were anywhere from .75% to 1.25% (at least the ones I talked to) of the PRINCIPLE balance of the mortgage. So on a $200,000 mortgage, the bank pays the broker anywhere from $1,500 to $2,500 in fees. Do you think that the banks just stomach this fee? Not a chance, your interest rate gets increased to cover the fee and so going through a mortgage broker does indeed cost the borrower something, even if they like to pretend otherwise.

Love the blog by the way. And congrats on your new job and all the best.

Comment Number:: 4
Written by:: Shevy
Posted on:: July 12, 2008 at 2:24 am