Whether you are buying for the first time or the third, getting financing can be a stressful task. While most are happy to take practically any deal, you need to do some planning to avoid problems later on.
Getting financing can be stressful because doing so tends to play on our insecurities. At its core, you are asking someone to look at your financial life and pass judgment. On the positive side, you have held down a job for a number of years. On the negative side, you may not make as much as you would like. You also may have some credit problems such as missed payments that are very embarrassing. All of this can lead to a situation where you apply for and accept a mortgage that really is not in your best interest.
You hear it over and over. You are crazy if you do not buy a home. Real estate is the pillar of the great American Dream. If you own it, you will be building a nest egg of wealth as your equity grows through appreciation while at the same time you pay off the debt. Oh, and you get to deduct the interest you pay on that mortgage. It all sounds so great and it is so long as you don't get in over your head.
When applying for a mortgage, you need to have a firm grasp on your financial situation. You need to analyze it in this moment in time, but also need to focus on the future. As we are seeing now, a lot of people did not do this the past five years. They are now in trouble because they went with a mortgage that had a time bomb written into it. The bomb is now ticking down and a lot of people are in trouble.
So, what is the mistake people make with mortgage loans? They bet on a rosy future based on nothing other than a dream. The number one area this occurs with is the infamous balloon mortgage. A balloon mortgage works by giving you relatively low payments for a set period, such as five years. This lets you get into a home that you really can't afford with a normal loan. The time bomb with such a loan is that the entire amount comes due after the initial low payment period. Assume you take a balloon loan for $500,000 and make payments of $1,500 for the first five years. In year five, you suddenly are required to pay back the remaining balance, say $490,000. All of it. Immediately!
So, why would someone do this? Well, they have a rosy view of the future. They think the home will appreciate dramatically and they can sell it. Alternatively, they will refinance the loan to get around the problem. All of this assumes the market will not have a down period. If it does, such as now, they are deep trouble. They can't sell the home because the market is slow and they can't refinance because rates have risen and they can't qualify for a new loan given their finances. In such a situation, the only answers are to give the home back to the lender or face foreclosure. Neither is a good choice.
This scenario plays out over and over with a variety of loans. From interest only to hybrid loans, you must know what you are getting into and have an objective solution for how you will get out of them. As suggested by this article, this requires that you objectively plan for your mortgage needs now and in the future.
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