"Qualified" for tax deductability.
Huh? A mortgage is just a loan. So why wouldn't any loan (now up to $500,000 max) be qualified as a mortgage? Like...couldn't you just borrow that dough from Rich Uncle Larry?
Well...no. In fact, mortgages carry all kinds of very specific lending language for a variety of reasons, such that in order to receive the mortgage interest credit or tax deduction by dint of paying that mortgage interest, takers of mortgages have to buy them through banks.
So...doesn't this seem like a scam? Like...the government is monopolizing the mortgage industry in forcing you, the home buyer, to essentially buy through them, or at least under their set of rubrics. Well, in fact, it's actually a pretty good idea when you think of all the things that could go wrong, were anyone able to lend anyone money for mortgages.
Those issues revolve around what happens when things go...awry. Like...it's 2009 and nephew Bobby lost his job at the enema clinic. Now he can't make his mortgage payments. And, well, Uncle Larry isn't so rich any more. He wants those payments. Needs them. So now Uncle Larry has to kick Bobby and his wife and their little enemates out of the home, with a sheriff dragging the bags and tubing behind them.
Painful social situation. Bad headlnes. Nobody wants this. So in forcing mortgages to be run through banks, there is a third neutral party doing the kicking-out if need be, and there is a higher level of scrutiny in granting mortgages in the first place. That is, banks can just say no to granting a mortgage in the first place. Supposing the buyer doesn't qualify because they dont have enough money down, or don't earn enough, or have bad credit or whatever...if the bank just says no, then the family doesn't upgrade homes...or they just keep living in the apartment or tool shed they've been living in. No sheriff involved, no tears. Well, some tears.
Related or Semi-related Video
Finance: What is Adjustable-Rate Mortgag...17 Views
Finance allah shmoop What is adjustable rate mortgage or arm
Well here's an arm and here's a leg and that's
What Renting the money to buy a home costs you
Yeah Okay Eight r m stands for adjustable rate mortgage
The rate well that's The interest cost of the money
or the cost of renting that money to buy the
home Well the rate isn't it fixed in this case
like five point seven percent for thirty years Where you
know in advance that your monthly payments going to be
nine hundred forty three bucks a month or whatever it
is that would be a fixed mortgage a fixed number
You can count on it for all three hundred sixty
payments And then the house is all yours So that's
fixed then what's adjustable like yes the interest rate changes
But how does it change Well in a standard arm
there is some global standard on which the rates are
often price like lie bore the london interbank borrowing offering
rate It's one of the key things that price is
the cost of renting money all around the world with
the actual rate of libel or is generally reserved for
banks like super cheap cost of renting money to banks
who are very likely to pay back the money with
no hassle that rate is more or less what banks
pay for running the money along with blue chip customers
in real life The banks then mark up a premium
on top of the rate that they're paying to rent
the money to themselves And then they resell or re
rent that money teo their prized customers So the pricing
of bank my views in renting money to joe six
pack could be something like lie boer plus three percent
or three hundred basis points So if libel or is
it didn't say two and a half percent today the
adjustable rate might be five and a half percent and
all that's great honor given alone It might mean that
for a while you're paying seven hundred twelve dollars a
month for your house payment wonderfully cheap and in fact
banks market these low rates initially to help people be
able to afford tto by that new home and live
of the dream You know the american dream usually with
an arm there's a teaser rate that starts really low
Like at live or live or plus ten basis points
or something like ridiculously cheap for six months or a
year something like that Then it has an incremental set
of step ups in interest costs and venit adjust with
the markets usually upward maybe upward by a lot Remember
there's a reason it's called a teaser rate but then
if we get inflation or a you know just bank
nervousness for there are weird effects from brexit or the
volume of transactions going through london or something weird happens
Well then the liquidity drops and interest rates rise So
now lie board goes up and up and up to
four and a half percent and wealth contractually in your
mortgage paperwork you have to pay live or plus three
hundred basis points no matter what So now that's seven
and a half percent interest on the dough you borrowed
and well we're that toe happen It's likely that your
monthly payment has skyrocketed from seven hundred twelve dollars a
month is something more like twelve hundred dollars a month
or more Can you handle that big of a payment
Well have you done a fixed rate loan at nine
Hundred forty three dollars a month Well you'd still be
paying on that number but you rolled the dice with
an arm and now you owe big bills There go
that arm and a leg thing we warned you about 00:03:26.033 --> [endTime] eh
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