As someone who is looking forward to purchasing a condo next year, I have been doing a crazy amount of research on mortgages. Honestly, I keep stumbling upon mistakes that people have made with mortgages. Since I don’t want to be someone who makes a mistake with their mortgage, I’m planning on soaking in all useful advice and attempting to make the wisest decisions I can going forward!
So, what are the worst mortgage mistakes one can make? Well, I’ve compiled the top five mortgage mistakes and hopefully you can learn from what other people have done wrong and not make the same mistake!
1- Taking out an adjustable rate mortgage
Can someone say 2008?! This is what caused our most recent recession among some other things. An adjustable rate mortgage plays into the greedy side of Americans and allows you to buy a bigger house than you can afford. The first few years, you’ll have a really low interest rate but then this rate ends up shooting up over time. The problem with this is that you’ll end up drowning in interest payments and more than likely lose your home! Talk about humiliating…
2- Settling for a reverse mortgage
For the crowd of age 62 and older, a reverse mortgage may seem inviting but it’s designed to bite you in the butt. What a reverse mortgage does is provides a stream of income by pulling out funds from your home equity. This can be paid out through an annuity or monthly payments. It’s up to you what poison you pick because either way, you’ll be faced with hefty fees and you will slowly lose ownership over your home and have to hand it all over back to the bank. Does not sound like fun to me!
3- Skipping the down payment
If there is one thing you need to remember from this article, it’s that you NEED to put down a down payment! Why you ask? It’s not unusual to find yourself upside down with your mortgage if you don’t. You can end up owing more money than your home is worth. At this point, it’s flat out painful. You want to avoid this situation.
4- Can anyone say exotic mortgages?
I bet you’ve never heard of these bad boys. Exotic mortgages may sound enticing but they are dangerous financial vehicles! Instead of building up your equity, exotic mortgages produce negative equity. Yes, you’re naming your payment price, but at some point, all the debt you took out for your mortgage is going to come due. As the years go on, you are increasing the amount you owe. It’s counter-intuitive and I advise that you avoid this at all costs. Owning a home is not worth this risk!
5- Liar, liar, pants on fire: liar loans
Liar loans make me sick just thinking about them. Not only are they irresponsible to take out but they can ruin your financial life. At the core of a liar loan is that you don’t need to produce any verifiable documentation in terms of income and job stability. In theory, people can lie on these loans and the bank will just assume you’re telling the truth. Because you lied on your income statement, you will soon find yourself not being able to make the monthly payments.
Don’t fall for these mistakes!
In conclusion, don’t fall for these bad decisions. While they may seem cool and unique, they are designed for your failure. There is something to be said about ethical mortgages and choosing responsibility over showing off a big house. At the end of the day, you should only be buying enough house for your needs. It’s anti-American to do that but times are changing!
I agree that everyone should be going with a fixed mortgage in today’s economy – the variable has nowhere to go but up! If you want to take a chance on the variable staying low for a while longer, then you should be budgeting for “higher” mortgage payments… and sock away the savings for the time being.
I totally agree with all of these, especially point #1. In the Philippines, low interest rate home loans are becoming common, but they are fixed only for a year. Most people don’t know the consequences of having an adjustable rate mortgage. Thanks for the post Jon!
You made the right choice. Experience is the worst and best teacher. To erase the worst portion, the best is to learn from others’ experiences and mistakes.
In addition to this, avoid PMI! It’s an added expense to protect your lender and does not do anything for you except pulling some funds. Get ready with at least 20% payment.