Major Mortgage Mistakes
Just
as there is no neighborhood that is right for everyone and no single
home that is perfect for every buyer, there is no one mortgage that
will be the best for each and every home buyer. Each buyer's situation
will be unique, and thus their home loan
needs will
vary. This does not mean that the mortgage selection process is an easy one. There are a number of situations where mistakes and
errors can, and often do, occur. Mistakes made in the mortgage
process can cause everything from minor annoyances up to, and
including, financial disaster, so the potential for these mistakes
should be taken very seriously.
To avoid mortgage mistakes, the very first thing that any home buyer
must do is to clearly establish the attitude that they, and only
they, will be responsible for the payment of the mortgage. Not the
lender, not the Real Estate Agent, not friends or relatives. Therefore,
any and all decisions should be first and foremost personal ones, and
secondly, rooted in common sense.
Are many home buyers currently making major mortgage mistakes? We think
the evidence is fairly clear, that many are, in fact, making mistakes
as evidenced by the fact that last year saw the highest level of home
foreclosures in history. Higher than in much deeper and longer
recessions, higher than in periods of much higher unemployment. We see
this as absolute proof that many home buyers are making big errors as
they examine and choose mortgages.
MISTAKE #1: Choosing the Wrong Mortgage
It is easy to make an error here, if only because there is such a vast
selection of mortgage plans from which to choose. Common sense
should prevail here. For example, choosing a 30-year mortgage when you
plan to retire and move in 10 years. Securing a fixed-rate mortgage
with high closing costs when you are going to be transferred in 2 1/2
years is another example. Another mistake that is potentially a budget-busting
one is selecting an adjustable-rate loan, especially in this
historically low interest rate environment, when you don't expect your
income to take a large jump in the near future. The biggest "wrong mortgage" of all -- getting a large mortgage when you know that 1
of the 2 incomes needed to support it will be going away in the future.
The key to selecting the right mortgage is to find the loan that fits
your personal budget and situation, rather than trying to have your budget and situation conform to the
mortgage. The road to financial ruin is littered with examples of
buyers who did not do the research necessary to ensure that they
selected a mortgage that was a good fit. Take your time, analyze your
situation, get several opinions and use your common sense.
MISTAKE # 2: Letting Qualifying Ratios Get Out of Hand
"The old rules don't apply anymore." We've heard these words so often
that it is about to make us crazy. We heard them during the stock
market run-up of the 1990s, when stock prices had no connection with
reality. We heard the words in 1999 and 2000, when businesses that had
no reason for existing drew accolades and admiration from the business
press and the American public. Strange
that it now looks as though the old rules, like proper valuation and smart business plans, DO apply.
Now we are hearing the same kind of nonsense when people speak about
mortgage qualifying. "Oh, that's the way they USED to do it, but things
are a lot different now. Mortgage lenders are much more flexible on how
much you can afford."
True. But there are many home buyers in very serious financial trouble
now, so who was right? For years, you qualified for a mortgage based on
some fairly well established ratios. Your total mortgage payment
(including principal, interest,taxes and all insurances) should not
total more than around 28% of your monthly gross income. Your total
debt load, including the mortgage payment,as well as all other debts
(car loans, personal loans, credit card payments and any other loans)
should be no more than 36% of your total monthly gross income.
Many mortgage lenders have thrown those old ratios out the window,
approving household debt ratios in excess of 50% of income. Let's be
clear here: If over 50% of your income is going to debt service you
will be forced to either live a very shallow life with little or no
funds for saving, investment or enjoyment, or, worse, are headed for a
financial disaster.
MISTAKE #3: Not Enough Down payment
Want to really compound mistakes 1 and 2? Get the wrong mortgage (#1),
have too heavy a debt load (#2) AND put little or nothing down. Not too
long ago, a 20% down payment was fairly normal when purchasing a home.
In the last decade the average down payment fell to 10% and recently,
to even less. This has been a boon for home buyers, especially those
purchasing their first home, but these lower (and, at times,
nonexistent) down payments carry with them some real potential
downfalls.
As long as real estate values continue to appreciate at the supercharged levels
that have in the last couple of years, and NOBODY thinks they
will, there should be no problem for those buyers who have little or no
down payment should they want or need to sell. Should housing values
stagnate, or worse, go down, these buyers will not be able to
sell their homes without paying for commissions, selling expenses and
the like out of their own pocket. These expenses can total upwards of
$ 10,000 on a $ 120,000 home. Still owe around $ 150,000? Those
expenses will need to come out of your pocket.
How do you avoid these potential costly and/or disastrous mistakes? By
preparing yourself as best you can for the mortgage lending process.
1) Carefully research the types of mortgages available in your area.
2) Spend the time necessary to take a clear look at your income, budget and future plans.
3) Tailor your mortgage decision to these factors, rather than just
accepting a loan that the lender offers, even if it may not suit your
situation.
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