During the recent financial crisis of 2007 through 2009, the United States faced a significant problem when it came to the number of mortgage foreclosures. The inability to repay their mortgages was a significant problem faced by millions-upon-millions of homeowners throughout the nation. In fact, during this time period eight out of 10 homeowners with an active mortgage were seeking out ways to refinance their original loan. While the dust as settled since this terrible time, this time period has taught us many things when it comes to handling mortgages. The following are the most common mortgage mistakes the average homeowner makes. By reading this article, you’ll have a better understanding of what to avoid when your either seeking out a new mortgage or seeking to refinance your current mortgage.
Mistake #1: Agreeing to Adjustable Interest Rate Mortgages
On the surface, an adjustable rate mortgage may seem like a dream come true. These mortgages generally being with a very low interest rate for the first several years, typically between two and five years. Generally, these mortgages give you the buying power to purchase a much larger house than you originally think and have much lower payments, which frees up your monthly budget. However, after the introductory period, the real nightmare sets in. With an adjustable rate mortgage, your interest rate fluctuates with the industry. This can mean your monthly mortgage payments can fluctuate by hundreds of dollars each month.
Mistake #2: Not Putting a Down Payment on the House
During the crisis that plagued the United States financial industry, the majority of lenders were offering no down payment loans. While this allowed millions of people to afford to purchase a home, without paying a down payment, your setting yourself up for disaster. A down payment is important for several reasons. First, it allows you to instantly increase the volume of equity you have within the home and ultimately reduces the total amount of money you owe on the loan. Secondly, a down payment gives you negotiation power within the actual loan. Because your already financially invested in the loan, lenders are more than willing to work with you when adjusting payments or determining your overall interest rate. If you have no money invested in the property, its easier for you to walk away something that is disastrous for lenders and borrowers alike.
Mistake #3: Liar Mortgage Loans
This unique phrase came into popularity during the boom that caused the financial crisis. With this type of loan, a lender requires little if any financial documentation from borrowers. With no documentation needed, the loan amount is based upon the income and assets the borrower states they have. This means a borrower can borrow more money then they can actually afford to repay. Typically, when this happens, the borrower is forced to file bankruptcy and have their home foreclosed on as they are unable to actually afford the monthly payments. Liar loans are generally closely associated with adjustable rate mortgages.