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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, to some
degree, unique, and thus their mortgage needs
will vary. This does not mean, though, that
the mortgage selection process is an easy one.
There are a number of situations where
mistakes and errors can--and frequently
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, though, 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 (potentially a budget-busting
one) would be to select 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
future. Or, perhaps, 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--or worse,
hoping--to have your budget and situation
magically 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 homebuyers 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.
Want the financial aspect of your home owning
experience to be as stress-free as possible?
Do your best to adhere to the 28% and 36%
ratios.
MISTAKE #3:
Not Enough Downpayment
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 appreciate at
the supercharged levels that have in the last
couple of years (and virtually NO one 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, though, 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 $150,000 home for
example. Still owe around $150,000? That
$10,000 in expenses will need to come out of
your pocket.
Summing Up
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.
The
purpose of this newsletter is to stimulate
thought for my clients and those professionals
with whom I network. If you are a real
estate, estate planning, taxation, financial
planning or insurance professional receiving
this newsletter, please call my office and
introduce yourself to me. I'm always
seeking to grow my referral network, and to
expose more service professionals to my client
base. I specialize in helping those
individuals looking to buy, sell or refinance
real property in the Pacific Northwest Area.
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