As usual, the New York Times misses the real point.

There’s no doubt that the Times piece today A Home Loan Trap is well written and skillfully tells woes of people with adjustable mortgages that come with pre-payment penalites — which they all do. But the story fails to engage in some simple math which would lead to the conclusion that even if pre-payment penalties could be waived, a refi to a 30 year fixed would really fix nothing for these folks.

On a no money down $300,000 mortgage with a teaser rate of 3% the payment may have been around $1,400 a month before property taxes and hazard insurance. Woo Hoo! Change that payment to 30 year fixed with principle and interest, before property taxes, and you’re still talking a $2,100 payment (uh oh) which still represents more than 50% of after tax income going for just the mortgage payment once you throw in taxes, insurance, etc for a person with a $60,000 annual income.

In other words $1400/mo was just about right for a $60k income, but it should have been on a $300,000 home purchase with 20% down to get the mortgage to 225,000, or $1500 a month on a 30 year fixecd . It never should have been a little or no money down $300k home purchase with a rate that would reset in 2 years with makes the pre-payment penalty a side show.

No, people aren’t trapped because of pre-payment penalties (and don’t forget those refi costs and mortgage taxes which can add up costing 2% of a new loan) - no, they’re trapped because of too little money down to begin with and the present situation of falling house values. Those are two things legislation can’t cure.

Last 5 posts by Jim Kingsland

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