Recently, there has been a lot of talk about "high risk loans" and a growing interest in governmental controls of such loans. High risk loans are loans where the borrower puts little or no money out of pocket when purchasing a home. This could easily be you or me controlling our cash flow at a time that makes sense.
Often I have counseled buyers to keep their equity money from a previous sale, in their pocket (read, bank account) instead of reducing the loan amount. This makes sense when the cost of consumer debt is greater than the cost of a home loan. The reasoning behind this is: IF you need to fund an needed expense, does it make more sense to put that expense on your credit card at, lets say 9.9% interest, or borrow that against your home at the prevailing rate when you purchased it, again lets say 5.5% (over 30 years.) In this example, if you borrowed $30,000 on your credit card, you would be making a minimum of $300/mo. payment for approximately 15 years, if you added that to your mortgage payment your payment would be less than $175/mo. keeping your equity money liquid and available to you at a moments notice.
The problem with high risk loans is that most are written at adjustable interest rates with an artificially low "teaser" or entry rate. This can be a formula for disaster if the borrower is not prepared for a major change in payment. If, this is a BIG if, you have done as I suggested above, you will have money in the bank drawing interest that can be used to help with your new monthly payment. If you take the route that too many people take and spend that banked money, lightning is about to strike.
So, the question is: Should the government step in and control "high risk" loans?
The answer may not be a straight yes or no. This type of loan is a "TOOL" to use to achieve an end. Like any other tool, the user needs to be educated on the proper use of the tools they choose to use. Will a screwdriver work as a hammer? Of course it will, for a while, then it won't even work as a screwdriver. Loans of this nature should be used as a means to an end, not as the end all solution.
What do you think? Give us your opinion.
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