Since a mortgage is a loan that is used to purchase real estate... what percentage do you own when the entire purchase is financed? 0%! That's right ! Nada! A mortgagee usually has an equitable interest secured by the deed, but we go right back to ZERO again! Sometimes it is compounded by a second trust or home equity line of credit. The problem is that a lot of folks thought the same thing! Think about this scenario! Would you buy a luxury $35000 car on a credit card? OK, but you would buy a home or the obligation on a 250K home with a 100% loan that you didn't even read the big print!
It is a no win situation with no way out! The only way it could possible ever work is if prices rose at exponential rates. That can never happen because that is tied to salaries and income. When has your salary made you more money than you can handle? So now, that mistake compounds others! You cannot sell a home for more money just because you owe more on a home. A home over the long term rises in value, but the rise is not predictable and varies locally and nationally. The old plan used to be when buying a home is to start small and perhaps trade up. Starter homes was the perfect place to raise some cash. Buy low, and sell high! The larger the down payment for your next home...allowed for a more manageable monthly payment that normally was cheaper than rent. You could create a nest egg for your retirement, and a shelter for your family. It all made sense! Buying a home was not about a flip or short term investment. It was for shelter. The purchase of a home without a plan should not tear a family and a neighborhood apart because there was no plan or thought given to the purchase. Before buying, decide what your needs are, define your goals, and does it fit your budget? What about your budget 2 years from now? Does it fit? If not, you are impulse buying!
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They would have lost my sympathy with the returning from a cruise comment. As if they didn't know a 7-10 days before they were in financial trouble. Come on people. Get serious.
Jim, we're overrun with an instant gratification mentality. I want it all and I want it all right now. If that means I have to borrow money from the devil and promise my first born children to get it, so be it. Great strategy. I don't know where we went wrong but I swear some days I wish we could turn back the clock to a more responsible era in America. Personal accountability appears to be absolutely dead.
You're right--they lose the sympathy when they spend their money friviously rather than pay towards their investment which will, in the end, allow them to hopefully enjoy these things later in life! But, do you realize how many people, including the reporter doing that story, feel sorry for these people? And, they think we're just horrible for NOT doing so?! That is just as amazing to me!
Fairbanks, Alaska Realtors ~ Jesse & Kathy Clifton ~ "Personal accountability appears to be absolutely dead." It is! It really is hard to begin to find a solution. I would start by heads rolling in government agencies, but anyone htat worked for the government already knows you can't fire anyone. Then the poiticians! Then instead of holding hearings on sports figures, we should have public trials for mortgage fraud.
Randy L. Prothero - Hawaii REALTOR® Yes, it is very hard to get all worked up over these types of situations. Totally irresponsible. We are not talking about the person that has gotten cancer, has lost a spouse, or the auto plant closed devastating the local community. I have sympathy for all of those situations. The sad thing is how big this is! This is going to destroy many neighborhoods - vacant homes, vandalism, crack houses etc...
Debe Maxwell There is no other way to describe this other than instant gratification. The major difference is that when it is done right...you enjoy the later years of your life. I remember working overtime for a year to purchase my second home. I had to put down 20% and pay my own closing costs. When you put nothing down, you are always behind on payments. So, we limited ourselves to 1 car payment and low mortgage payment. It is about manageability.
Gayle Balaban/Norris Lake Tn. Real Estate Things have changed a lot. We recently showed a particular listing that is really great, and all the buyers are really worked up about buying it. The problem? Loan officers tell me 100% is basically gone! No offer when we were expecting multiple. It is still amazing to hear how cocky these buyers are. A great listing way below market, priced at a fire sale price and they've sent out feelers to come in 30K less plus closing costs etc. Entitlement.
The market here in the UK is lagging yours but we have similar exotic mortgages.
The one I really don't understand is INTEREST ONLY - that's right you only pay the interest and hope capital gains will pay off the loan! (the lenders are supposed to verify you have the means to pay at the end of the term - but anecdotal evidence suggests this has not been rigorous in some cases)
Effectively it is RENTING from the bank!
I think it all comes down to responsibility. I think I've mentioned before that my sister's car was repossesed. Well, I had no sympathy for her when that happened because she couldn't afford it when she got it and she knew that. She couldn't afford the $2,000 down-payment that she paid absolutely no utilities to be able to save up for. She couldn't afford the $460/month payments. We told her. She knew it. But she got the car anyway. So, when they took it back for non-payment of the loan, I had no sympathy for her. My other sister's house was foreclosed on last month. I had no sympathy for her when that happened because I told her that, with a little budgeting, she would be able to keep up the payments. But, her daughter HAD to go to this certain private school (that she couldn't afford) even though she lived in a city with a great public school system. She HAD to take these trips with her Girl Scout Troop 3 or more times per year. The list went on. So, when she told me she had to move and that they were taking her house, I just thought, "Oh well."
With our children, we have consistently taught them almost from the beginning that you can't get something for nothing. If you want it, you're going to have to work for it - contribute something. It doesn't necessarily mean money either. Do extra chores around the house. Stuff like that. But mostly, you put up a certain amount and we'll pay the rest so you can't get IT until you come up with your part.
People who have nothing invested in a home have nothing to loose. If you didn't have to put out any sweat to get it, you won't put out any sweat to keep it.
~Renae
Judy Tuscano, NH Real Estate Professional Thanks for sharing. That is not the case in Atlanta. In the last few years over 52% of every loan written in the state was no money down, interest only. Too many persons that should never have purchased a home did so. Their car payments, gas prices, inflation, and credit have done them in. There was little or no planning, they had no cash reserves...and guess what? They cannot make the payments. In the best of times 100% financing does not work! It never has.
Roger Hollingsworth I suspect there was no verification of income! I believe it was out right fraud! Interest only only can work in a rising market. Everyone was thinking the same thing. A lemming attitude...and then they all went over the cliff at the same time. And you are rgiht, it is no difference to renting back from the bank if you have no equity, except that you have more legal obligations. Renting would have been much smarter!
Renae Bolton ~ Marketing 4 Realtors Let's all go back to basics. You want something? Work for it! Roll up your sleeves, work overtime or take a second job until you have saved up enough to make it work, and then negotiate the best deal out there! Then do some sweat equity. Make your changes a little at a time. After you are in the home, maintain it, and don't over improve it! Do you have extra money or refund from taxes? Prepay your principle down on the mortgage! Have the goal of paying off the mortgage! Keep your charge payments cleaned up at the end of the month. Don't buy anything until you have the money to pay for it. Society doesn't owe anyone the right to own a home. Some people should just rent!
They should have left the cruise part out if they wanted more sympathy. You hit the nail on the head with your post. Buyers didn't think about the consequences of their actions when they bought homes with no money down or with teaser rates.
I agree wholeheartedly, Jim! When my husband and I "grew up," right around the time when we were expecting our 2nd child, we realized that our priorities were all screwed up and we needed to get our acts together for our childrens' sakes. Setting a budget that we could stick to was first and foremost. Then, it was getting our credit reports cleaned up. Then, saving for things we wanted. Our goals are so completely different now that we feel like totally different people. Our goals are to pay off our car notes, starting with the highest one first, and then start making extra payments to pay down the principle on our mortgage.
As for my sisters, I guess they just haven't "grown up" yet. You're right - they should just rent. I've told them that myself a couple of million times in the last few months.
~Renae
Renae Bolton ~ Marketing 4 Realtors When you think about it there are a lot of rewards for achieving your goals. Self esteem, self actualization, accomplishment, a good sense of pride. It is good to show your children how to approach life. Just because you want something, is it just good to get it?
Jim - Great article and great points! We're constantly bombarded by the media and every form of advertising to live for today and "enjoy the good life" regardless of our financial situation. Our nation's "charge-card" mentality coupled with low savings rates puts the average household at risk during any economic downturn. We're starting to see the effects of that now.
Kelsie Compton, Cary NC Real Estate I agree. The other day I was thinking about when we were children a lot of the fables the ant and the grasshopper was meant to show that we had to put something aside for a rainy day! Today kids are taught about alternative family life, and instant gratification from video games.
Bronson Barber I fully agree. Years ago I had moved into a new home with a higher mortgage, and shortly after I became sick, and within a few months I was unable to work. I had equity in the home, that a lot of friends told me to tap into. I didn't. I held out as long as I could. When I really needed it, I had something to fall back on as an absolute last resort.