Thinking about buying a new home?
Be very careful about how you go about paying for it. Mortgages are loans for new homes. Few people can pay for an entire home outright, so they finance it through a lender, who buys the home and requires the homeowner to pay it back through monthly payments. If the homeowner can’t, the lender sells the home.
Bad mortgages are rampant in the American landscape. They played a large role in the financial collapse of 2008, and despite some new, well-meaning laws, hundreds of thousands of people are still straddled with bad mortgages.
One problem comes from the fact that people want homes. It’s the American dream, right? White picket fence, a lush lawn, neighbors smiling over a charcoal grill… People want that space, that ownership, and they take out a bad mortgage to get it. Then all goes to hell and they get evicted out tens of thousands of dollars and without a penny of interest in the property. Here’s how to avoid being one of them:
Types of Bad Mortgages
- Balloon Payments – Some mortgages require increased payments over time. So, you might start by paying, say, $1500 a month and end up paying $6,000 a month in six years. You cannot predict the future. If you can’t make the payment now, don’t agree to make the payment later.
- Increased Interest – Some mortgages require interest (aka mortgage, APR) rates over time. So, you might start by paying 3% but end up paying 12% in five years. Any mortgage with a balloon payment should almost always be avoided. Again, you cannot predict the future. If you can’t make the payment now, don’t agree to make the payment later.
- Additional Collateral – If the mortgage requires you to put your vehicle or other property at stake, don’t agree to it. Losing your home is bad enough. You don’t need to lose your car/boat/cottage/artwork as well. Again, if the mortgage gives the lender rights to a piece of property other than the home itself in the event you don’t pay back the loan, don’t agree to it.
- Sleazy Lender – If the lender offers you a mortgage before he can remember your name, or if he just genuinely seems as though he’s more interested in your money than your financial well-being, try a different lender.
- Simply too Expensive – Some people agree to mortgages that they simply can’t afford, or can barely afford. Even if they are otherwise fair and devoid of increases, they are still bad mortgages.
How People Justify Bad Mortgages
When someone agrees to a bad mortgage, they usually reason that they can afford it for some reason or another. Here are the common, fault justifications:
- The home value will increase- Some lenders and investors might reason that the property value will increase over time, which will help you pay the mortgage, notably when you sell the property. This is dangerous logic. It’s very hard to predict whether a home’s value will actually increase and how much. Do not justify a stiff mortgage with potential value increases.
- My job will pay me more – Some people believe they’ll be able to pay off a mortgage in the future, because they’ll get a better-paying job. Like the home’s value increasing, it’s impossible to determine what you will get paid in ten years. If you can’t afford a mortgage now, don’t assume you will be able to later.
- I can always take out another loan – This is the worst idea possible, yet many people do it. They take out additional credit cards or loans to try to keep up with payments on their mortgage. Paying a debt by taking out more debt is, quite simply put, a terrible idea in almost every case.
Learn more about what is a mortgage.
If a mortgage sounds like a bad idea right now, learn how to rent an apartment.