You’ve seen recent headlines where homeowners all over the country with Adjustable Rate Mortgages (ARM’s) are losing their homes due to default and foreclosure. You may even know someone close to you who is experiencing this hardship.
It has been a common practice, up until just recently, for some prime and sub-prime lenders to allow persons on a fixed income, first-time buyers, and/or with a not so great credit score to borrow up to 125% of their home’s appraised value. Have these lenders done these homeowners or even our economy a favor?
The enticement of a low introductory rate ARM, which made an incredibly low house payment, led many persons to buy homes above and beyond their means of income. Sure it was affordable at first, but when the terms of the mortgage contract increased the house payment, the homeowners then began defaulting on their payments, making it impossible to refinance to a fixed rate mortgage, which ultimately led to foreclosure.
How do you avoid the ARM plague? It’s quite simple. Avoid taking out an Adjustable Rate Mortgage in the first place, especially if you are not financially secure to do so. Having a Fixed Rate Mortgage allows you to know exactly what your house payment will be now and all the way through the life of your loan. If a fixed rate payment is too high for your income then your options are to consider purchasing a less expensive home, wait for the interest rates to drop again—but that’s a gamble, or improve your financial status.
There are many ways to improve your financial status such as getting a better paying job, paying off as much debt as possible, making sure to keep your credit in tact by paying all your bills on time, and building a savings account for your new home fund. It’s also important to plan if, how, and when your retirement income will factor into your home loan. The less money you will need to borrow then the more equity you build in your home and the sooner your home will become 100% yours.
Make sure you consult with your financial advisor to thoroughly plan what is best for your family's situation. In the end you will be far better off by avoiding the ARM plague altogether with a fixed rate mortgage, and borrow the least amount as possible. The less you borrow the more equity you build in your home, the sooner your home will become 100% yours. Sounds simple, right?
In general, we Americans are ineptly a "borrowing society". We tend to mortgage everything to the hilt, have high debt in credit cards, and huge car loans. Perhaps, we shouldn't rush so fast into homeownership and adopt the methods of other countries where it is customary for children to live with their parents, grandparents, or siblings until they have saved enough money to pay cash for their homes. In doing so, we could gain freedom from the mortgage "ball and chain" giving us the ability to savor what's really important in life...our family, friends, and a better chance to do a little good will for others.
Please note: Always consult with your financial advisor to thoroughly plan what is best for your situation. Proper planning is the ultimate key to how successful you are with making the right decisions when building or buying a home.