Thursday, August 16, 2007

Mortgage crisis

Everyday, since I can't remember when, the news about sub prime mortgages fills all the airwaves and print media. Now it is affecting other conventional mortgages. Will it ever end? Probably not soon, we might not have seen the bottom yet. Each day, I read another sob story of another family stretched to the limit. Every one of these stories has a common fault, a lack of financial education, a lack of knowledge of debt and how debt works. It affects every one, even people who don't own a house and have no mortgage. Years ago, a friend told me her daughter and son in law were going to buy a house. Here am I, being the dolt that I am, asking her how much down payment they are coming up with. She, very adamant in her reply said, 'you don't need to put anything down to buy a house these days.'
I have worked with loan brokers before and looking back I have noticed the errors of my ways. They will load you up to the maximum with debt. When we bought our first home, this broker suggested that we put 20% down and take up an 80% mortgage, then on top of that he'll loan us another 10%, we agreed but thinking back we were actually getting a 90% mortgage, we didn't even realize it at that time. Why, now I am asking? We had lots of money in the bank even then- we had no understanding of how it works. They'll write you a 'no money down' loan in a heartbeat if the bank allows them and it you let them. Then they're on their merry way. It is not their job to educate you, nor is it their fault when things go bad.
It comes back to us, we're taking the risk and it is up to us to educate ourselves. The American dream is still home ownership. While it is a satisfying and fulfilling thing to own a house, it can be an albatross. Even in the best of times, when the housing market is hot and sizzling, caution in taking on the risk of home ownership should be the rule of thumb. The reason for the down payment is so that the loan amount is not too high in order to bury us.
The couple's sob story I read this morning, had a combined income of $90,000 a year, they bought a house costing $567,000 two years ago with no money down and interest only for the first 3 years. This is irresponsible even when things are rosy. $90,000 a year is not enough income, the loan amount is too big. What about the $6500 a year property tax, on top of which there is home owner's and earthquake insurance and the 2 car loans of $700. What's wrong with this picture? Everything. They can't afford that house in the first place.
When I bought this house 6 years ago, I sold another house and had a $150,000 down payment. I still had to get a jumbo loan of $350,000. The first 2 years I worked a lot of overtime and was paying $5,000 a month to pay down the loan. It is now at a very comfortable level. I want to pay it off in another 3 years, shortening the 15 year loan by 5 years. The word 'mortgage' comes from the French word 'Mort' which means death.
There are lots of books out there we can read to educate ourselves. The convention wisdom is we need a loan broker, Realtors makes you think that. They will steer their friends who are loan brokers to you. You don't need a loan broker, in fact, these days, you have to go to a financial institution first and be pre-qualified before you go house hunting. You can go directly to your bank. If their rules are strict (they should be), it is good for you too! The last few times of refinancing and financing I have gone directly to the bank.
In budgeting, when it comes to assessing your expenses, add 20% on top of it, when it comes to your savings, reduce it by 20%. Be ultra conservative. This will leave you lots of wiggle room. You can enjoy home ownership and not be strapped financially. There's still money left for those trips to Europe.
These are pretty postcards I bought on my first trip to Provence 6 years ago. I've been going there ever since.

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