Many people who would like to buy a house are worried about the current housing situation. They see that so many people who thought they had made a good purchase are now facing foreclosure.
I know of a person, let’s call him Willy, who bought a house for $622,000 in 2003 with 97% financing. Willy knew that the rate on the loan he got would adjust after a 5 year fixed rate period. But if he got a 30 year fixed mortgage he wouldn’t have been able to afford the monthly payments.
Willy’s mortgage broker told him that he should refinance the mortgage before the rate started to adjust. The mortgage broker told Willy that he would be able to refinance at a lower interest rate after the property appreciated in a few years. Can you guess where this is heading?
With the appreciation rates they were seeing at that time they expected that in a few years the property would have appreciated enough to get the property reappraised and refinanced at less than 80% Loan to Value which would qualify for a more affordable payment.
What Willy didn’t know was that the property value was going to stop going up in 2006. He waited for the property to appreciate some more and then he saw the property value was dropping.
He hoped it was a temporary glitch in the market, and he decided to wait it out, but by the end of 2007 his property value had depreciated to less than what he owed. Now Willy was unable to refinance into a more stable loan.
In 2008 Willy’s mortgage started to adjust. One day he got his statement and the payment was almost twice his original payment. There was no way Willy could afford the new payment without getting some additional income.
Willy took on a second job with a network marketing company that promised big results, but didn’t deliver. He ended up with a garage full of products that would take him months to sell.
Eventually, Willy ended up losing his house to foreclosure.
Willy had thought he was making a shrewd investment in his future, but it turned out to be a big mistake. He put too much faith in his mortgage broker and in the market continuing to appreciate.
The mortgage broker was only interested in making money, not in finding Willy the best loan. He knew that the more Willy spent, the bigger commission he would get. He also knew that when Willy came back to him to refinance, he would earn another commission.
When Willy bought his home it was his first experience with mortgages, appraisals, and market trends. He didn’t know any better than to listen to the advice from his mortgage broker.
He didn’t understand terms like Loan to Value, Equity, Appreciation, Escrow and many other words that are commonplace if you are in the real estate business. These terms can seem like a foreign language to someone buying his first home.
To avoid costly mistakes when buying your home it is important to learn the basics of the home buying process. Here are some traps to avoid.
- Blindly believing that a real estate agent or mortgage broker is always acting in your best interests
- Taking actions that will hurt your credit score
- Not knowing what you can afford
- Not understanding all the terms of the mortgage or purchase contract
- Misjudging the neighborhood
- Putting off buying too long
All of these can seriously affect the outcome when you purchase your home, which is often the biggest investment a person will ever make.
It is a good idea to learn about the home buying process before you are caught up in the middle of things. It is easy to just accept whatever you are told and sign the papers when you are overwhelmed with many new concepts.
You can get a free 6 part email course on the home buying process simply by entering your name and email address in the upper right of the blog under the heading Subscribe to Newsletter
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