It is important that from the whole mortgage/housing crisis that we learn some lessons. Lessons to be learn not only by the professionals that influence the housing market, but also by everyday homeowners. People Were Overspending – For many people who where buying at the height of the market they were surprised when they spoke with their lenders that they could afford a lot more then they originally thought. Instead of buying a step up from their current housing situation, they were going two or three steps up. Simply put, they overspent. One of the reasons this happened was due to loans that had attractive rates, thus attractive monthly payments…only for the first couple of years. Adjustable Rate Mortgages (called ARMs) were very attractive to many buyers as it allowed them to spend much more on a home for a much lower monthly payment. However, what the buyers didn’t understand is when these loans adjusted the payments would often increase sometimes by hundreds of dollars a month. Lesson #1: Don’t overspend – Know your monthly income and your expenses both fixed and variable. A budget can help you understand where your money is going. Keep in mind that what a lender thinks you can afford could be very different from what you feel comfortable affording – possibly two very different numbers. Don’t get your self into a position where you can’t enjoy life because you are “house poor.”
Borrowers Didn’t Know Their Loan Terms – For many buyers they couldn’t sign on the dotted line fast enough. They were so excited for their new home that they forgot to ask questions. Important questions like: Is my rate fixed? Will the payments be adjusting? Is there a pre-payment penalty?, etc. In my mind the most important part of the transaction is understanding your loan and the terms of your loan. Yes, it is important to buy a good home and not put your earnest money in jeopardy; but your loan has a much bigger impact on you. A bad home can be sold; you can make more money to recoup lost earnest money. But defaulting on a loan, can impact your credit and life for many years.
Lesson #2: Ask Questions – First of all, when you sit down with loan officer ask for their licensing information. Every loan officer must be licensed in Colorado. Talk to your lender often with any questions you have. It is so important to try and understand all of the terms of your loan. Ask your Realtor too. You should know all of the terms of your loan before you agree to them.
Lesson #3: Buy When the Time is Right for You – Don’t feel that because your friends are buying and you aren’t, that you are a failure. Buying a home must fit with your financial position, first and foremost. Buying a home is a personal decision and one that should be made only when the timing is right. Don’t let anyone influence you into buying except you.