Observations of the Mortgage Crisis

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Ah, home ownership, the epitamy of the American Dream! In the past few years that dream has turned into a nightmare for many families who found themselves in over their heads faced with adjustable rate mortgages or foreclosure due to layoffs and job losses resulting in the inability to keep up with the payments.

Who to blame? There's enought blame to go around. Let's start with the definition of home ownership. Think about this. When you fill out loan/credit applications there is a question - do you own your home or do you rent. In reality, we're all "renting" until the last morgage payment is made. We own the home when the bank no longer holds a mortgage and the deed to the property is in our possession.

The belief that renting is just throwing money away month after month where with a mortgage you build equity. Have you SEEN a ,mortgage loan amortization schedule? For the first five years or so, you're mostly paying interest, not really building equity.

Lack of an emergency fund, much less one that is adequately funded. Having cash on hand for up to six months of living expenses just isn't as tangible or exciting as that 3 bedroom 2.5 bath home with the well manicured lawn.

Lenders. Back in the day when I first started buying a home, the bank required a 20% down payment MINIMUM and they would lend the remaining 80%. This was their way of managing the risk that the property value could drop as much as 20% and they would still have value. CREATIVE financing that included no downpayment and even 125% value to equity loans attracted many people to the housing market that were poor financial risks. Some lenders weren't even verifying if borrowers had incomes or if those incomes would be adequate to not only cover the mortgage costs, but leave a little for food and utilities. Lenders also used to use a 2.5 x your annual income as a ballpark method of estimating how much they would lend you. While you could get into a pretty good size house, what happens if one of the incomes is lost due to layoff, illness or divorce? AND that pretty good size house comes with pretty good size utility bills, property taxes and upkeep.

Just because the financial institution will lend you money, doesn't mean it's a good idea to take it. I use the 30% rule in determining if I can AFFORD a house. Take into account the mortgage, taxes, insurance, utilities, anything that it takes to keep you living in your home. the monthly costs should not exceed 30% of your monthly take home pay. If you do those calculations and find that you are paying more than 30% it explains some of your financial stress.

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2 Comments

Justine said:

What you said is very true. The common mindset for people is "why should I rent a place rather than owning one? I will be paying about the same amount every month anyway". This fails to provide for a long term view of a mortgage commitment. I read this article about rental over mortgage interesting as well. Borrowers has to realize that a mortgage is a 30 year financial commitment rather than just a monthly payment.

ROBIN KULECK Author Profile Page said:

A 30 year mortgage is not necessarily a 30 year commitment. Unless the mortagage has a prepayment penalty, homeowners could pay extra with each payment, and shorten the length of the mortgage. One strategy is to pay half the mortgage every two weeks which effectively makes one additional payment each year. Some mortgages are set up this way but sometimes have additional fees, reducing the effectiveness of this strategy.

Another thing people need to keep in mind is that even though you prepay your mortgage, you are still expected to make the payments as scheduled, rather than thinking you have paid ahead.

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