What’s the biggest mortgage mistake you can make as a homeowner?
Some years ago, from 2007 – 2009 precisely, as a result of the financial crisis in the U.S., the economy was in a bad shape due to a mortgage foreclosure problem.
Homeowners across the country had a tough time paying their mortgages. During that period, eight out of ten homeowners were actually making efforts to refinance their mortgages.
Even homeowners who are rated as high-ends who bought luxury homes in expensive areas were struggling with foreclosures.
Yet some homeowners had no problem with their mortgages at all. Why were so many people struggling with their mortgages?
Mortgage Mistakes Homeowners Make
Mortgage Without A Down Payment
During the economic meltdown, many lenders were offering borrowers loans without a down payment. On the surface, this might seem like an advantage for the borrower, but on a closer look, it is not.
Firstly, a down payment raises the amount of equity that a homeowner has and lowers the amount of money that he or she owes on a home.
Secondly, a down payment ensures that you have some leverage in the game. Borrowers that make a huge down payment often do everything possible to pay their mortgages because they risk losing their investment if they default.
Also, borrowers who invested a small amount of money or nothing at all on their homes as down payment often end up as upside down on their mortgage and in many cases, they just walk away.
This is because many of them end up owing more debt than the actual worth of the property. So the bigger the debt a borrower owes, the higher their chances of walking away.
One of the most common assumptions about mortgages is that 30 years is the longest period of time you can get on a mortgage.
But do you know that some lenders offer loans with a lifespan of 40 years? In fact, 35 and 40 years mortgages are gradually spreading in popularity.
Lenders who offer these loans allows borrowers to buy larger homes at lower prices. But these loans doesn’t make sense to a whole lot of people.
It can be a good option for a 20-year old who intends to live in the property for the next 20 years or so.
However, a 30 year mortgage interest rate will be slightly lower than what is obtainable on a 40 year. So you’ll end up paying more for a 40-year mortgage.
Even more, a 40 year mortgage gives borrowers less equity on their homes. A large part of the payments for the first two decades will go down to service interests. This makes it almost impossible for the borrower to relocate.
Aside all these, are you really interested in making mortgage payments in your old age?
This type of loans were common during the popular real estate boom that precedes the economic meltdown that started in 2007.
During that period, mortgage lenders were easily approving liar loans ad borrowers were quickly accepting them.
Liar loans are loans that involves little to no documentation. This type of loan doesn’t need authentication.
Liar loans depends on the borrower’s acclaimed income, assets and expenses.
These loans are known as liar loans because they open the door for borrowers to tell as many lies as they can to get a bigger loan. Some applicants who got the loans don’t even have a job.
But the entire lies will get back at the liar once they move into the home. The mortgage payment is expected to be made with actual income and not stated income. So liars are always unable to meet up with the payments as expected.
So they default on their loans and face bankruptcy and foreclosure.
Odds are you’ve seen a reverse mortgage ad on TV where it is said to be the solution to whatever income problem you have.
Are reversed mortgages the solution to all your income problems as many lenders claim?
First, what’s a reverse mortgage? It’s a type of loan that is meant for senior citizens who are within the age of 62 and above that makes use of your home’s equity to offer you a stream of income.
Whatever equity is available is offered to you in a regular stream of payments or you can have it in a huge sum such as an annuity.
There are several reasons why you shouldn’t consider a reversed mortgage. The mortgage comes with a high upfront expenses.
Several different fees that can easily add up to bite a chunk off your equity and they include
- Origination fees
- Mortgage insurance
- Title insurance
- Appraisal fees
- Attorney fees
- Other miscellaneous fees
The outcome of this is that the homeowner will lose the total ownership of their property. Because whatever equity they have left will be gone.
As such the homeowners family will only be allowed to take whatever is left after the proceeds from the deceased’s property has been utilized for the payment of mortgage, fee as well as interest.
The family will attempt to work out a deal with the lender in order to make mortgage payments so they can keep the property.
Adjustable rate mortgages
This type of mortgage may look as if it’s the best thing to ever happen to a homeowner. Adjustable rate mortgages kicks off with a low interest rates within the first two to five years.
This mortgage makes it possible for you to buy a bigger home that you wouldn’t have been eligible for along with reduced payments that you can afford.
But after the first two to five years, the interest rate will reset to an increased market rate. This is usually not a challenge because homeowners can just take equity out of the property and then refinance to a lower rate as soon as it resets.
Problem is, sometimes things doesn’t work out as planned. When the prices of property nosedive, it makes it almost impossible for borrowers to refinance their current loans.
As a result, the borrower may end up with high mortgage payments that doubles or even three times higher than the initial payment. What was once viewed as a dream property easily transforms into a nightmare.
Exotic Mortgage Products
Sometimes, potential homeowners do not understand the risk they are undertaking until it is way too late. Lenders are smart and they design a wide array of exotic products that makes the dream of being a homeowner an easy reality.
Some of such products include interest-only loans can reduce payment by 20 – 30 percent. This type of loans makes it possible for homeowners to remain in a home for a few years by only making interest payments.
Also, name-your-payment loans allows homeowners to say precisely how much they intend to pay on their monthly mortgage.
The appeal is that a huge balloon principal payment will be due at the end of a precise period.
Products and offers like these are negative amortization products. Rather than help you build up equity, thy end up being a negative equity.
These products raise the amount that borrowers owe every month until whatever their owing is too large and they crumble under its weight.
In fact, exotic mortgages are some of the reasons many homeowners are underwater on their mortgages.
It is obvious that that route to homeownership is filled with so many loopholes. But you can prevent financial troubles by avoiding these loopholes. One easy way to do that is to avoid the types of mortgages mentioned on this article.