Thanks to reader Dukes for pointing me toward this story. When CNN wanted a typical story about a young couple getting in over their heads with ARMs and HELOCs, where did they turn? Seattle, of course.
Shortly after they were married, Aaron and Lacey Blank, now 25 and 27, wanted just what you’d expect: to buy their first home and start a family.
But like many young couples, the Blanks had trouble scraping together a down payment for a house in pricey Seattle.
By the time they found their three-bedroom, newly built home 40 minutes from downtown last year, they had set aside just $16,000. "We weren’t planning to buy a place so soon, but we fell in love with the home and the area," says Lacey, a family therapist.
Though Lacey and Aaron, who works in public relations, earn a combined income approaching six figures, their $90,000 in student loans made it hard for them to qualify for a fixed-rate loan.
Their solution amounted to a financial high-wire act.
The Blanks took out a $271,000 interest-only hybrid ARM with a rate of 6.4 percent and monthly payment of $1,440 for five years. To cover the rest, they used a $51,000 variable-rate home-equity line of credit.
"I want to build some equity, but we haven’t really been making much headway," says Aaron. The rate on their HELOC has already hit 10.6 percent, or another $115 a month. The $1,900 Aaron and Lacey spend on their home loans every month is still manageable, but with their first child due any day, they are understandably nervous.
In theory, the Blanks could see their mortgage rate jump as high as 11.4 percent in 2009. Add in principal payments and a 14 percent rate on their HELOC, and their worst-case scenario is a monthly nut of $3,445.
The solution: Refi with a fixed-rate loan; pay down the HELOC
So let me see if I’ve got this scheme straight.
- Step 1: Buy a house you can’t afford—use suicidal financing if necessary.
- Step 2: Ride the market up until your house has appreciated 25% for no good reason.
- Step 3: Refinance your suicidal 100% loans into a new 80% traditional loan.
- Step 4: Keep riding the gravy train of equity up and up, forever!
- Step 5: Profit!
It’s a flawless, can’t lose plan! Every one of you should go out and buy a house right away so you too can take advantage of this amazing opportunity.
(Cybele Weisser, CNN Money, 05.17.2006)