Was Anyone Else As Stupid As Us (and probably 1/2 of my neighbors)

[SomewhereNotAtWDW]

Saw the thread about Expensive Financial Mistakes and wanted to post about my own (but not under my personal account, for semi-obvious reasons).

We decided to purchase our new home in the summer of 2022 after we sold our house in 2020 and tried to "wait out" the madness for over a year. We bought new construction in a wonderful development and are actually happy with our house. Here's the problem, though...

I've basically had to admit to ourselves that we probably bought at the top of the market, and even worse, our builder talked us into a 5-Year ARM, so we would have affordable payments. When our 5 years are up at 4.25% (in 2027), this loan will adjust to 8%, based on today's rates, which we actually can't afford. We could afford up to about 6% before we would be unable to afford the payments, based on my calculations. That also assumes that nothing (like our insurance) goes way up.

Ironically, one of my close neighbors, who is actually a CPA , brought up to me that she bought her house on a temporary buydown from the builder. Her mortgage is temporary at a 3% rate, which will step up to 4%, 5%, and then 6% fixed rate after 3 years. She told me she had been confidently told that rates would come down before the 3 years were up, and she could refinance.

This conversation brought up a string of conversations at a recent pool party when I realized that more than a handful of my neighbors are in the exact same boat. Some of them took out 3-Year Loans that will Adjust. Some took the buydown with the intention of refinancing, and some are just planning to sell their house before the 3 or 5 years are up. Apparently, a lot of us took the special financing deal from our builder, not realizing how most of us are screwed if ideal scenarios do not work out.

I am now thinking to myself, with a lot of confidence, that impending doom is upon me. I also personally believe that the housing boom is mostly over. And lastly, I cannot get over the fact that so many people (including me) could have been so foolish in our decision-making. It doesn't seem like any of us thought too far ahead into the future.

So... that's me. I am in a brand new subdivision of almost 130 homes, and I am seriously convinced we will eventually lose most of our down payment now. Definitely an example of a financial mistake.

The real question is, though - how many more people like me and our neighborhood are out there? Are there hundreds or thousands of us? Tens of thousands? I wonder now.

 

[nono]

I'm guessing you are younger than me. When my older sister bought her first house, the mortgage rate was around 13.5%. Yep. Fixed rate. A lot of adults have never seen anything more than 4-ish percent until the last couple years. Don't beat yourself up because you haven't seen it all yet. There's also a chance that things will moderate by 2027. If fixed rates drop to a rate you could handle, I'd have all my paperwork ready to pounce on a refi. I'd also be looking to change jobs in a tight market because you may be able to secure a nice jump in base pay.

I can't answer your question as to how many, but just wanted to say hang in there, and think about what you can do in the next four years to make your position stronger. Don't waste any brain power on saying "Why did we all do this?" You have to play in the market you were in. It's not a mistake, it's that you just realized you need some next steps planned, as you look at the market ahead.

 

[HawaiianFish]

That is really unfortunate. This decision was not stupid, just poorly timed, you risked it (unintentionally on a sales person’s advice who was not unbiased) and the rates climbed more than most people expected. The issue now is that it sounds like everyone else in your neighborhood did as well. The rates more than likely will not go down that much in the next couple of years, the market is just happy at them not continuing to go up. So do you want to be selling when everyone else might be as well? Fortis fortuna adiuvat! (Fortune favors the bold), prepare to sell if/when the timing in your local market is right, do not be the frog in the pot in 2027!

 

[MimitoAlex]

My DD and Son in Law were thinking about finally buying, last year. Which here is Florida is crazy town the prices are really something. Sticker shock the kind that stops your heart.
The builder started that in house financing with them, to which DH said wait a minute, and started doing the math over the long haul. Which DH is a numbers guy, he sat down with my DD and showed her, where it could go, and what could happen, and he was on point. Thankfully they decided to wait and rent for at least another couple of years, save more and wait it out.

We have friends that got in a bidding war, with the house they wanted, well they got it and paid way to much and within the next year most likely they are going to have to sell it, because the mortgage is going to balloon at the end of next year and they can't afford it. On top of they both decide to work from home, and in the last 2 years they went from being employee's with really great benefits, now they are both contractors for the companies they work for, with no benefits, things like health care, vacation and sick time, 401K or any retirement options. While they are making more money, the cost of all of those benefits out weighs what they are bring in. That's all on them now. They are in a real financial mess. They just were turned down to refinance. I feel so bad for them, this was suppose to be their retirement home.

We built when our neighbor was in the very very beginning stages, about 2 years before the pandemic. We negotiated for several things, like we made them include our lot, as well triple the amount of the package for upgrades, because they were offering more in another development that they were trying to close out, which we had been looking at a home in that neighborhood. Plus we had a few hiccups on things during building, so I asked for monetary compensation, in writing. Which if you get anything like that make sure to keep it, and for goodness sake at closing make sure that everything that you are owed gets taken off. It took us 6 hours to close because they were trying to pull a bunch of stuff. The lady was like, I can't believe you are actually looking at the numbers, us stopping and looking at the numbers saved us quite a bit of money and lowered our payment by over 100 dollars a month. Which really doesn't seem like a huge amount but over time its really alot of money.

So sorry this happened to you. If you can maybe a money manger could help you out, and come up with some type of plan.

 

[gottalovepluto]

Holy heck you win. An ARM you won’t be able to afford if the Fed doesn’t drop rates during/trying to come out of the worst inflation in decades. I disagree with others because yep, that was stupid. And neighbors in the same boat? Oof. We all fall into the trap at one point or another of seeing only what we want to see.

I’m sorry you’re in deep now. Hope you enjoy your next few years and/or find success in moving to a lesser place with a FRM. And please, do not put any money into that house that you do not need to since you suspect you are at high risk of selling at a loss/losing it.

 

[barkley]

i'm so sorry.

if it's any consolation-no, you and your neighbors are not the only folks to get into this type of situation. back in the early 2000's the neighborhood in california we lived in started exploding in price-homes people bought (new construction) in 2000 were worth double by 2003 and it was a crazy seller's market. SO MANY people were selling and moving to lower cost areas, and with many of our new neighbors we couldn't figure out (after meeting them/learning what they did for a living) HOW they could afford the mortgage payments. when we sold in 2006 for over triple what we paid in 1999 we learned from our realtor how they were doing it-the same kind of mortgages (although through banks) you are speaking of-adjustable rates they were sold on with assurances 'rates will decrease'/'your income will increase'...rates did not, incomes did not and people rushed to sell-driving prices down. the seller's market crashed there earlier than 'the big short' housing crash-the home we sold went into repo for our buyers as well as the next.

So do you want to be selling when everyone else might be as well? Fortis fortuna adiuvat! (Fortune favors the bold), prepare to sell if/when the timing in your local market is right, do not be the frog in the pot in 2027!

this is excellent advice. research what if any penalties your loan has for prepayment and consider selling during what might be a 'cooling' market in your area-yes, you may take a financial hit now but it could be considerably less now vs. a couple of years down the line.

 

[TheSouthernBelle]

I have no idea how many folks this may have happened to but you may want to look at selling before all your neighbors do. If you have a handful of homes on the market in the same neighborhood, it will be much harder to sell with the competition. No idea where you live but there's still a really low inventory of homes where I live in the Carolinas so prices are still high. You may have some prepayment penalties but it might be less than the other option of losing a home to foreclosure which will have its own set of issues.

If you can't sell, then your only other options are to talk to the bank and at some point refi out of the ARM and deal with the closing costs, etc or earn more money to make your home more affordable.

I'm not sure if you had a broker or not, as many folks don't realize you can have one that represents you on a new home build, but no reputable agent should have let them happen. But, unfortunately, you can't dwell on what's happened, just gotta move forward and fix the situation. The worst part of being in a financial conundrum is not having plan, maybe once you discuss and come up with some options, that will help you guys feel better. Everyone makes mistakes, the most important thing is that you learn from it and move on. Good luck!

 

[DLgal]

Oh boy, that's a doozy.

People hear only what they want to hear when it comes to buying a house, but you have to remember that everyone involved in the transaction is just trying to get paid. They are looking out for #1. They don't care what happens to you down the line.

Buying a house with payments at the top of what you can afford is never a good move. Costs for everything go up (taxes, insurance, maintenance and repairs, etc). Buying with an ARM is basically gambling.

Sell that house now. Get out before you find yourself in a situation where you have to foreclose on it and ruin your credit. Long term, expect mortgage rates to settle somewhere between 5-6%. If that's the top of what you can afford, that's too high. You won't have wiggle room for anything else going up.

 

[CAPSLOCK]

Isn't there a cap on the amount that your fixed rate loan would increase each year?

So do you want to be selling when everyone else might be as well? Fortis fortuna adiuvat! (Fortune favors the bold), prepare to sell if/when the timing in your local market is right, do not be the frog in the pot in 2027!

I agree with this also.


I bought this year, right as the rates dropped then started to go up. Unfortunately, it wasn't a done deal when the rates were at their lowest, so I didn't lock in the rate. I never figured they'd keep raising so consistently week after week... so, I held out too long. 3 or 4 weeks later, I locked in at 6.25% (after buying points). I probably spent more to do that than I would have to lock in at 6% or lower 2-3 weeks prior. Thankfully, I did the fixed rate because of the potential for the ARM to go above my means. Still an expensive life lesson.

Humans are hopeful animals, I think we're wired to look at the positive side and downplay the worst case. Sometimes that bites you in the bum and all you can do is make the most of a sucky situation.

 

[stranger706]

Sorry about your situation.

We did something similar before the 08 recession. Young, first mortgage, didn’t know any better. Had to short sell after a few years, took a bath in $80k+. Couldn’t buy for 4 years after. Learned our lesson.

Look into doing a short sale. Get the pain over with, and start on the path to recovery.

 

[punkin]

I'm very confused why you got an ARM in summer of 2022 when the yield curve was inverted most of the time (making a 30yr fixed cheaper). But in any event...you have until 2027 to figure things out. A lot can change by then. I would consider selling.

 

[SomewhereNotAtWDW]

I'm guessing you are younger than me. When my older sister bought her first house, the mortgage rate was around 13.5%. Yep. Fixed rate. A lot of adults have never seen anything more than 4-ish percent until the last couple years. Don't beat yourself up because you haven't seen it all yet. There's also a chance that things will moderate by 2027. If fixed rates drop to a rate you could handle, I'd have all my paperwork ready to pounce on a refi. I'd also be looking to change jobs in a tight market because you may be able to secure a nice jump in base pay.

It's not a mistake, it's that you just realized you need some next steps planned, as you look at the market ahead.

I'm in my 40's and we purchased our first home in 2014. For my entire adult life, I have never seen rates above maybe 5%, until recently. Call me Naive. I totally feel as though I deserve judgment, but, I will say, I did try to do some research at the time online -- and it seemed like these rates would be more temporary, than what they are saying now.

With that said - this realization a few days ago, has been a good fire under us. Me and DH are now trying to think of ways to increase our income, or... possibly sell the home. We really do not want to sell and want nothing to do with buying another home down the line after this whole experience.

What we need to do is find a way to increase our yearly income by about $25,000 - $30,000 a year. That would allow us to substantially increase our savings (we already have a good emergency fund) and afford these higher payments.

My DD and Son in Law were thinking about finally buying, last year. Which here is Florida is crazy town the prices are really something. Sticker shock the kind that stops your heart.
The builder started that in house financing with them, to which DH said wait a minute, and started doing the math over the long haul. Which DH is a numbers guy, he sat down with my DD and showed her, where it could go, and what could happen, and he was on point. Thankfully they decided to wait and rent for at least another couple of years, save more and wait it out.

We are also in FL, and that's why I really do not want to sell. Let me just say, trying to buy back in was an absolutely traumatic experience. And I really do not feel like I am exaggerating that.

We watched ourselves go from a windfall of selling our home, to temporarily moving into a rental, and then watching rental prices skyrocket, and home prices climb. Almost all our equity gains were offset by the increase in prices, honestly. Not to mention, just trying to buy a home and constantly getting outbid.

We just wanted to get our family into a house. This part is probably why, I was just desperate honestly to move forward. Doesn't excuse anything, but, I am thinking out loud.

 

[SomewhereNotAtWDW]

Isn't there a cap on the amount that your fixed rate loan would increase each year?

I bought this year, right as the rates dropped then started to go up. Unfortunately, it wasn't a done deal when the rates were at their lowest, so I didn't lock in the rate. I never figured they'd keep raising so consistently week after week... so, I held out too long. 3 or 4 weeks later, I locked in at 6.25% (after buying points). I probably spent more to do that than I would have to lock in at 6% or lower 2-3 weeks prior. Thankfully, I did the fixed rate because of the potential for the ARM to go above my means. Still an expensive life lesson.

There is, but it's 5% on each adjustment. I've already spent hours on the phone with our Mortgage Company who provided me with a comprehensive understanding of how the loan works. Right now, our Index (the thing our rate is based on) is about 5.02%, and our Margin is 3%, then rounded to the next eighth of a percent.

So, if our Loan reset today, our new rate would be 8.125, which is a significant jump from 4.75. It's almost double what we are paying now.


The only lucky thing is we were able to get our rate locked in at the time of signing our contract. Plus the Builder brought our rate down to 4.25%, which is much better than we could have done anywhere else.

 

[SomewhereNotAtWDW]

I'm very confused why you got an ARM in summer of 2022 when the yield curve was inverted most of the time (making a 30yr fixed cheaper). But in any event...you have until 2027 to figure things out. A lot can change by then. I would consider selling.

We got our rate locked in March of 2022, and didn't close until late June. I was told by their Mortgage Company that this was the best loan possible, in terms of rates. The Loan Officer also told me, I would want to refinance -- which is what I planned to do anyway.

 

[SomewhereNotAtWDW]

I'm not sure if you had a broker or not, as many folks don't realize you can have one that represents you on a new home build, but no reputable agent should have let them happen. But, unfortunately, you can't dwell on what's happened, just gotta move forward and fix the situation. The worst part of being in a financial conundrum is not having plan, maybe once you discuss and come up with some options, that will help you guys feel better. Everyone makes mistakes, the most important thing is that you learn from it and move on. Good luck!

Put this down as Mistake #2. When we first visited the Sales Office, we were asked if we had a Realtor. When we said No, we were told we would get a better deal if we were unrepresented. So... we did just that. You are probably correct, we would have been better of.

 

[gottalovepluto]

Put this down as Mistake #2. When we first visited the Sales Office, we were asked if we had a Realtor. When we said No, we were told we would get a better deal if we were unrepresented. So... we did just that. You are probably correct, we would have been better of.

OP, you are apparently not alone. I talked to a family member about this after seeing your story as he is in the market for a house. Apparently other people around him keep sending him articles on how ARMs will help him afford a house and even people at work are telling him to just get an ARM to get the house he wants. Yikes.

 

[amylevan]

OP, you are apparently not alone. I talked to a family member about this after seeing your story as he is in the market for a house. Apparently other people around him keep sending him articles on how ARMs will help him afford a house and even people at work are telling him to just get an ARM to get the house he wants. Yikes.

I was just about to ask if people forget 2008…and then I realized that was 15 years ago, so obviously a large number of home buying aged adults were not probably paying any attention in 2008 since they were babies.

And I then wanted to know how 2008 can possibly be 15 years ago?!?!?!

 

[pigletto]

I don’t think you deserve judgement. You’re learning an expensive and very hard lesson and it only hurt you. I’m sorry you’re dealing with this.

I think a sizeable portion of the population of Canada who bought during the height of the market are in the same boat with you.

Our mortgages are either fixed rate or variable rate. Fixed rates are offered for different terms but overwhelmingly people choose the five year fixed for the best rate. So every five years you are renegotiating at a new rate. Variable mortgages adjust with the benchmark interest rate, which has risen steeply.

So to sum that up, people who bought at the top of the market on a variable rate are feeling the pain now, and people who bought at the height of the market on a fixed will feel the pain at renewal in 2024 and 2025. And let’s not forget Canada has the highest household debt rate in the G7. We are slow walking into a an absolute mess.

I couldn’t agree more with those saying to sell now while you can get a competitive offer. It will make a big difference.

 

[Twilghtsprkle]

I'm in my 40's and we purchased our first home in 2014. For my entire adult life, I have never seen rates above maybe 5%, until recently. Call me Naive. I totally feel as though I deserve judgment, but, I will say, I did try to do some research at the time online -- and it seemed like these rates would be more temporary, than what they are saying now.

With that said - this realization a few days ago, has been a good fire under us. Me and DH are now trying to think of ways to increase our income, or... possibly sell the home. We really do not want to sell and want nothing to do with buying another home down the line after this whole experience.

What we need to do is find a way to increase our yearly income by about $25,000 - $30,000 a year. That would allow us to substantially increase our savings (we already have a good emergency fund) and afford these higher payments.

I am in my mid 40’s, bought my house in 2004, there were most definitely interest rates above 5% in your adult life. My fixed rate interest rate back then was 6%. My credit was good. The only way I could have gotten a lower rate was an ARM, but I did not want that risk.

 

[TheSouthernBelle]

Put this down as Mistake #2. When we first visited the Sales Office, we were asked if we had a Realtor. When we said No, we were told we would get a better deal if we were unrepresented. So... we did just that. You are probably correct, we would have been better of.

I definitely feel for you. We bought/built our home back in 2006 and were clueless but thankfully at that time, the only builder special was on upgrades, nothing to do with financing. I don't know what sort of trouble we might be in had they had any deals like that given over the next handful of years with the 08 recession, home values went down considerably and for a time there, our home was worth a lot less than we purchased it for. Had we had to sell, we would have been up the creek.

From reading your response, it does sound like you have a some ideas moving forward but I would count on all the other expenses associated with your home to continue to rise too. I've never lived any where that my home expenses decreased. You said you're in FL so you know your homeowner's insurance is going to keep climbing after every named storm, your taxes will never go down. And not sure but again, FL, almost every neighborhood is an HOA/CDD....if yours is, that will likely increase and never go down. If your neighborhood is fairly new, which it sounds like it is, the builder is likely subsidizing the HOA expenses, so when the builder/developer releases the HOA to the owners, to you and your neighbors, be prepared for that to increase as well. Builders are notorious for padding the HOA when they have a model in a neighborhood so it looks top notch but when they split, the HOA is left short on landscape, pool/clubhouse maintenance, etc. Just things to note, count on some increase every year in these other expenses.