How to Own a Home — Revisited
5th October 2007
Note: I first wrote this article in 2006. It’s interesting to see what’s happened in the mean time. The much-hyped exotic loans have caused a collapse in the credit industry. Here’s an update to what I wrote back then. It’s sad to see how things have ended up slightly worse than what I predicted. Here’s the toll silly lending has taken:
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Not only are home owners facing a mortgage crunch, the banks that handed out the money are finding they aren’t getting the returns they hoped for.
LendingTree.com has had to let go of 255 people and is just one example of the credit crunch. Mortgage companies and banks have had to close, consolidate or cut jobs.
In a bit of silver-lining news, WaMu will apparently require more disclosure from brokers. That’s good news for everyone, if you ask me. Some sense being added to the whole process will slow the market for a while, but will keep the kind of collapse we’re seeing from happening in the future.
Here’s the original article:
Owning a home. It’s the American dream. This used to be easy - at least in theory. This is how I remember people it going:
- Save up 20% down.
- Get a 15 to 30-year fixed mortgage.
- Sign your name (about 100 times).
- Make payments and eventually own the place.
Granted, that was way back in the late 1900’s, so my memory might be off. Some people chose an adjustable rate back then, but many refinanced that (like I did on my first house).
My, how things have changed. Here’s the new way to buy a home:
- Save up next to nothing down.
- Get one of a variety of exotic mortgage products, including a variety of adjustable rate mortgages, interest only mortgages or even longer term mortgages like the new-fangled 50-year mortgage.
- Get a second mortgage to cover that 20% you didn’t have to put down.
- Sign your name like 100 times.
- Freak out when interest rates go up.
- Refinance.
- Refinance again to pull cash out of your home.
- Hit a snag when gas prices go up, or the economy goes down.
- Refinance your credit card balances into your home.
- Fall behind on payments.
- Sell the home or get foreclosed on.
Isn’t the 21st century great? This isn’t a plan for how to own a home, it’s a recipe for how to stay in debt forever. I just read that foreclosures are up as well as bankruptcy filings. It’s part of why I’m worried about the economy, but I can’t do much about anyone but me. I read that mortgage rates may have dipped a bit recently, so I’m going to try to get out of the interest only mortgage I’m in and get into something fixed and no longer than 30 years. Someday, I’ll actually own the place I call home.
ANOTHER UPDATE: I’ve gotten out of my interest-only mortgage and have a 30-year fixed. It has worked great for me. I can only imagine what my interest-only payments would be now.
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May 15th, 2006 at 12:50 pm
Very nice post. Too true about the “new way” to buy a house. Some people are going to get burned royally.
May 16th, 2006 at 6:38 am
You hit the nail on the head. We’ve kept the engine of our economy chugging along on home equity for a few years now. Consumer spending has been driven in part by people pulling equity our of their homes. They are using that equity as their own private bank. This can have a short term positive effect on the economy as a whole, as we’ve seen recently. If/when interest rates rise and/or real estate values level off, or god forbid, drop, we could all be in for a really bumpy ride. Hang On!!
November 3rd, 2006 at 8:58 am
I do agree that most Americans aren’t nearly as financially savvy as they should be. However, we can’t ignore the fact that the cost of nearly everything has risen at a tremendously higher rate than incomes over the past 30 years or so. I mean, back in the 50’s and 60’s couldn’t a family buy a new car with cash? Financing wasn’t necessary. We as consumers have fallen into the trap of borrowing to pay for things that have simply inflated beyond our reach. And the banks take full advantage of that.
There should be some sort of consumer strike…instead of stretching ourselves to buy cars and homes that we can’t afford, we should all band together and just stop buying until prices line up with incomes. Wishful thinking — I know. But I do fear that we are headed toward another depression in my lifetime.