The Conventional Home Loan – Don’t Mess It Up This Time Around



Conventional Home LoanAnother one bites the dust ….

It’s getting to be a sad site walking around our little neighborhood. All around us there are houses that have slipped into foreclosure.  It’s obvious when it happens.

First the house gets really quiet.  Then the yard starts turning brown and overgrown.  And then it becomes official – the bank comes along and posts a legal notice in the window letting everyone know that the people who used to live their let their conventional home loan slip into default.

It’s not a pretty thing to see.  That house used to be a happy place.  Those used to be our neighbors.  Maybe we’ll never know what unique situation occurred that forced this to happen.  There are certainly a lot of things that could be the reason:

 

Why Do People Default On Their Home Mortgage?

There are a lot of reasons why houses go under:

  • The people could no longer make their payments.
  • The couple that used to live there got a divorce.
  • The family moved into another house and could not unload the old house in time.
  • Sometimes the default is intentional.  If the value of the house is less than what the owner still owed on it, they might just “give up” and take the hit by quitting their payments.

We could debate for hours the root causes of these problems.  Some people like to insist that the mortgage industry sabotaged the general public by giving them loans that they couldn’t afford.  But I’m not so sure I buy that.

Didn’t everyone have access to the same information I did on conventional home loans when I got my first mortgage?

Didn’t they take the time to understand the difference between a fixed rate mortgage and an adjustable rate mortgage (ARM)?

Didn’t they sit down, look at their income, and make a grown-up decision about how much they could afford every month?

 

The Housing Market Rebound:

All those foreclosures and home loan defaults are the mistakes of the past.  And you can never change the past.  You can only go forward into the future.

But that’s what scares me.  As the economy shows signs of strength and the housing market makes a rebound, it would be foolish not to ask:

Are we going to let ourselves make the same mistakes again?

Like all things in history, we are doomed to repeat our mistakes until we make a conscious decision to prevent ourselves from ever letting it happen again.  It would be easy to blame certain mortgage products or services, but what about ourselves?  How can WE educate ourselves into not creating another housing bubble?

 

Conventional Home Loans Don’t Have to Be Complicated:

I remember when I first started pursuing buying my first house, my Dad gave me one simple piece of advice:

Know what you’re signing up for.

Conventional Home LoanWhat he meant by that was understand the terms of your mortgage BEFORE you actually sign your life away on the dotted line.  A mortgage is a contract that you make payments on for a very long time.  It will dictate how much or how little extra money you have every month to spend on other things within your family budget.  It is not a decision to be taken lightly.

The funny thing about mortgages is that they are really not all that complicated – so long as you don’t make them any harder than they need to be.  Essentially you are borrowing money for a fixed period of time at a known interest rate that you will have to pay back little by little each month for the next 30 years or so.  However, it still blows my mind how many people do not take the time to figure this out ahead of time.  That’s really too bad since you could easily use any number of Internet mortgage calculators to run different scenarios about how much you can afford.  Online mortgage calculators are an easy way to see just how much you’ll actually spend each month on your conventional mortgage as well as learn about other things like taxes, insurance, etc.

Remember: Your home is your castle.

It’s what you come home to at night.  It’s where you keep your family safe.  It’s where you create memories that last a lifetime.

Don’t jeopardize all that with laziness or lack of planning.  One thing I constantly promote on My Money Design is that you and only you are responsible for what you do with your money.  If someone offers you a financial deal that you don’t understand, you don’t take it.  It’s more important to understand what it is that you’re getting yourself into than it is for the chance to get wealthy.

Your house is no different.  It’s your responsibility to figure out how much home you can afford, how long you’ll be making those payments at that rate, and what the implications will be if you fail to do so.  If you need help, don’t be afraid to ask.  Don’t be afraid to get multiple opinions until you find one that you can trust.

Don’t let your piece of the American Dream slip away from under you.  Control what is yours, stick to the basics when it comes to the conventional home loan, and set yourself up for success.  Why settle for anything less.

 

Related Posts:

1)      Should I Pay Off My Mortgage Early or Look for a Better Return?

2)      How Much Money Would I Make If I Rented Out A House?

3)      Adventures in Refinancing, Chapter 5

Images courtesy of MMD | FreeDigitalPhotos.net

Comments

    • MMD says

      It’s amazing how many people have just walked away from their loans or not realized how out of control their ARM was going to get when the interest rate reset. I know there’s a lot of optimism when you buy a house that further down the line you’ll have more money to put at your disposal. But its still our responsibility to only buy what we can truly afford rather than what a bank offers you.

  1. says

    I 100% agree that in the end you and only you are responsible for your decisions, and especially for something this big it only makes sense to educate yourself and know what you’re getting into. With that said, it would be nice if the banks made more of an effort to help people only buy what they can really afford. Although I guess they’ve determined that’s not a good business decision, so it’s unlikely to happen. Hopefully people have learned that houses are not infinitely appreciating assets, and that in many cases they are actually a bad idea. We’ll see.
    Matt Becker recently posted..The Key to Your Investment SuccessMy Profile

    • MMD says

      I think we’ve got a long time before a bank is actually looking out for your best interest. They are here to make money, and you are simply another transaction for them. I’d like to think they learned their lesson by the great housing bubble of ’08. But greed condemns us to repeat our mistakes over and over again.

  2. Justin @ The Family Finances says

    I totally agree. Our old neighborhood had quite a few foreclosures, and they pretty much always followed the pattern you described. There are multiple factors that help explain how and why people end up in these situations, and each one of them is sad. Job loss, divorce, or just buying more house than they could really afford.

    I work in banking, so understanding mortgages and finance is second-nature to me. But there are a ton of people out there that honestly just don’t get it. They want to buy the most expensive house they can possibly get approved for, not necessarily what they can afford. And there’s a big difference between what the bank will approve and what you can realistically afford.
    Justin @ The Family Finances recently posted..5 Ways to Improve Home Value Without the StressMy Profile

    • MMD says

      At the end of the day it really does fall squarely on our shoulders to know what we’re getting ourselves into when it comes to money. I guess that is just part of being an adult. Just because someone makes you an offer it doesn’t necessarily mean you should take it. We should know what our finances are capable of and where their limits exist.

  3. says

    My inlaws went through a foreclosure. They owned their home for over 20 years, but got into lots of debt and rolled everything into the mortgage. When they lost jobs, the payment was too high. Never put unsecured debt on a secured asset! Even if their credit would have been ruined (it is anyway), they would have at least had a house.
    Kim@Eyesonthedollar recently posted..My Almost Free Summer VacationMy Profile

    • MMD says

      That is a sad situation and a good lesson for the rest of us to learn. Even after all that time in your house you still have to make smart financial decisions. Your assets are always at risk and no one is around there to look out for them but you. Make sure that you do.

  4. says

    Its a great shame to read stories of mass foreclosures in neighborhoods. In addition to the financial hardship and emotional toll on the foreclosed family, it can impact others in neighborhoods by bringing down home values of other homes in the area as well as destroying the neighborhood feel of whole areas. If people exercise just a little restraint in buying what they can afford, they’d avoid much of the pain.
    Integrator recently posted..Retire at 30: Can this be done?My Profile

    • MMD says

      Showing restraint is hard when you try to keep up with the Jones-es. I think people generally fall into that trap of thinking that everyone else has it good so they should too. But they don’t realize that a lot of it is a facade; not real.

  5. says

    One of the quickest and simplest ways you can avoid defaulting on your home loan repayments is to make sure you are paying the least amount in repayments for your mortgage. Its very simple yet so often overlooked. No one wants their loved home put up for foreclosure.

  6. says

    We no longer see foreclosures in our area. It looks like the market is picking up, but still many people here are still under water, myself included. Many times I was thinking myself to give up as I cannot sell and I am paying more than ht the property is worth. Hard time.
    I remember when I was first dealing with buying our home I talked to my broker when planning what payments I could afford and she told, that if anything would go wrong I would always be able to sell. Not anymore.
    Dividend investing Martin recently posted..Diversify Your InvestmentMy Profile

    • MMD says

      We’re still underwater here too. I remember hearing that same advice from my real estate agent. “You could always sell in 5 years” the voice echos in my head. Yeah right!

  7. says

    Oh, I really hope people have learned from the mistakes of the past. I think people should redefine the American Dream. The American Dream means modesty, honesty and freedom from debt. Live within your means. If you cannot afford something, then do not buy it. You do not have to pretend to have it all.

    • MMD says

      A lot of people really struggle to obey this one simple task. They do feel like they have to put on a show for the rest of the world, even though most of the rest of the world is really only putting on a show for them as well. I prefer to avoid the whole thing and just stick to what I can afford.

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