During the recession period of 2007-2009, many homeowners in different parts of US had lost their home. At that time, 80% of the mortgage borrowers were suffering from foreclosure problem. It is seen that high end homeowners were also facing troubles to make their monthly payments on a regular basis. Even in 2015, a lot of people are making the same mistakes and losing home to foreclosure.
If you don’t want to be one of them, then just have a look at those mortgage mistakes that homeowners made during that time.
1. ARM (Adjustable Rate Mortgage)
Every homeowner mostly prefer adjustable rate mortgages. For the first 2 to 5 years, you’ll get lower interest rate in ARM system. Adjustable rate mortgages can be helpful for getting a big, costly home with affordable low monthly payments. But there is a great probability that interest rates will increase during later phase of the loan term. In that situation, homeowners can use their home equity and refinance to a lower rate once it resets.
It is not always possible. If the home price falls, the equity value will also drop. In that situation refinancing is a tough call. Borrowers may have to make 2/3 times bigger monthly payments in order to retain their home. The situation becomes financially critical and homeowners may have to face foreclosure.
2. Liar Loans
Before the subprime meltdown started in 2007, (during the real estate boom) the term “liar loans” was immensely popular. The borrowers were quite eager to opt for this loan. Lenders were also very quick to lend them out as no documentation or verification was needed. The loan money depended upon the borrower's assets, earnings and mentioned expenditures. Borrowers were taking out this loan by giving false income statements. They manipulated their monthly earnings and on the basis of that, they got the loan.
Some borrowers even took the loan despite of being unemployed. The problem started as soon as the monthly payments began. Since the income of the borrower was actually much lower, they started lagging behind the payments quickly. They faced foreclosures within a short span of time. So, borrowers are always suggested to keep safe distance from this kind of loan. It is for the safety of their homes.
3. Zero down payment loans
During the recession, many homeowners were offered zero down payment loans. It is because banks wanted to raise their business even in the subprime crisis. But it was a great mistake to avail this loan.
Now, making a bigger down payment has two main benefits:
(i) Your home equity will increase. The total outstanding balance will drop gradually.
(ii) Bigger down payment means you are investing a certain amount of money towards your home.
This big investment will provoke you to not lose hope. It will help you for doing every possible move to keep your home mortgage payments regular. Borrowers who did not pay a handsome down payment, often found losing their investment and the home. The more the borrower owes to the lender, the more they intend to give up.
4. Reverse Mortgages
In various popular media, a reverse mortgage is portrayed as a full solution of all your income based problems. But is it really true? A loan given to the senior citizens at the age of 62 and above is called a reverse mortgage. The senior citizens can use their existing home equity and cash out a stable monthly payment out of it. The available equity may also be available in form of a lump sum amount.
But reverse mortgage has some drawbacks also. You will have to bear several high costs like the origination expenses, upfront cost, title insurance, private mortgage insurance, appraisal fees, fees charged by lawyer and many more from your existing equity. You will lose your ownership rights over the house. The bank or lender would be the new owner. If the borrower dies, the estate of the borrower can be used to pay off the loan and related fees. If there is any equity left, only the family member can claim it. Certain agreements will be needed and family members will require to make monthly payments to keep the family home.
5. Longer timeframe
Generally we are aware of the 30 year loan term. But do you know that few lenders are promoting such loans which will have 40 years loan term? This kind of loan can help you to get bigger and costlier house with a low down payment. But it has some cons too. This loan is not for every individual. A 20 year old person can get this loan and pay it up for next 40 years. But it is not possible for older people to pay the mortgage till their 70’s or 80’s. Besides, the interest rate is quite higher than the normal 15 or 30 year mortgage plan. If a borrower wants to stay in the house for 15 to 20 years, then 40 year mortgage plan is not for him. After 20 years, the borrower will not get as much equity as he would’ve expected.
Lenders often came up with lucrative offers like interest-only loans. These loans are quite popular as you can decide the amount which you will be paying per month. The monthly payments can be reduced by 20-30 percent as you are not paying the principal. But it is a drastic measure to take being a homeowner. After a certain period, you may have to pay the principal as a balloon payment. Through out your loan term, you are not gathering any equity. Rather you’re piling up the amount you really owe to the bank. So, a sudden mortgage debt payment will come to you as a disaster and you might end up being underwater.
As you can notice, taking a proper step towards mortgage is not a cup of tea. If you can avoid the mistakes that many homeowners did and you can fulfil your dream of a nice home without any hassle.