A never-published sidebar.
In July, while I was working on the eleventh edition of Quicken 2009: The Official Guide for Quicken Press, I wrote the following sidebar for Chapter 13. But by the time I had completed it I realized that it was probably not a good addition to the book for various liability reasons. So I pulled it out and wrote this post, dating it to appear after the Quicken book was published.
I need to stress that the only thing I’m advising here is for people to be conservative when borrowing money. I don’t want to see the U.S. economy getting any worse, and I certainly don’t want to hear stories about people — especially people with families — losing their homes. Consider my advice and take it with a grain of salt. While there’s no reward without risk, there’s also a lesser chance of loss without it.
Here’s my unpublished sidebar:
Mortgage Options: What Does This Mean To You?
I’m not a financial advisor and I don’t feel comfortable giving financial advice. But here’s one piece of advice I feel I must give in this eleventh edition of my Quicken book: Don’t make unrealistic assumptions.
The mortgage crisis that’s currently going on in this country is due, in part, to unrealistic assumptions made by borrowers. Some people assumed that the home they were buying would quickly rise in value so it would be worth far more than they were paying in just a year or two. They reasoned that they could always sell it at profit if they had trouble making mortgage payments. Other people assumed that rates would continue to stay low or even go lower, so payments on their adjustable rate mortgages would stay the same or be reduced. And most people probably assumed that the economy would stay strong, fuel prices wouldn’t rise, and they’d stay employed.
Hindsight is 20-20. As we saw, the worst combination of economic changes recently hit the U.S. The “housing bubble” burst and home values declined. Soon, many people’s mortgages — some for 90% or 100% of the home’s purchase price! — exceeded the value of their homes. Some homes could only be sold at a loss, with the seller still in debt on a home he no longer owned. Interest rates rose and adjustable rate mortgages rose with them. The cost of living increased, making it difficult for many people to cover their living expenses and pay their mortgage. A rash of layoffs throughout the country left many people unemployed. It was the perfect storm.
When I advise readers not to make assumptions, I’m warning those of you considering a home purchase not to make the same mistakes that other home buyers made over the few years before the housing bubble burst. They assumed best case scenario and they were proven very wrong. It may be better to assume the worst case scenario. If housing values remain flat or decline, mortgage rates rise, the cost of living continues to rise, or you lose your job, can you still afford the home you’ve selected with the mortgage deal you’ve chosen? If not, perhaps you need to find a better deal or choose a more affordable home.
Be smart — not sorry.
You are so right on with this. A more timely post I could not have found. We just bought our first “real” home in 16 years and have been dreading the experience due to the fluctuating market. We planned on finding something simple and making our way towards our “dream home” but stumbled upon our dream home instead. So we’re watching mortgage rates and planning towards the worst case scenario so we can stay here as long as possible.
The stories of mortgage and home loss tragedies are now common place on the news every day. As new home buyers, we are taking your advice and planning to live within our means and plan for the worst case because the worst case is here, isn’t it.
Thanks for the confidence and advice.
The odd thing about this is that I wrote this text back in July. When I realized I couldn’t use it in the book and decided to post it here, I had to give it a date in the future so as not to get myself in hot water over NDA issues. It just happened to appear just as this financial crisis peaked.
I’m also in a weird situation right now. Financially, my husband and I are in good shape, with a house nearly paid for, virtually no credit card debt, and money in the bank. Our investments — like everyone else’s — are suffering, but they’re for retirement, which is still 10 to 15 years off (at least) so I’m sure they’ll bounce back before we need to dip in.
But as a freelancer and small business owner, I never know what the future might bring. I’m currently contemplating the purchase of a limited use recreational vehicle that will provide us with seasonal living quarters and help grow my flying business. While the cost isn’t outrageous, it is a big expense. Two months ago, I would have just dived in. Now I’m hesitating. I don’t want to tap into reserves I might need in 6 or 8 months. And I don’t want to go into debt.
And I think that’s the big problem with the economy. Even people who can afford to buy and spend may hold back. If we all do this, the economy will come to a grinding halt.
The advice I’ve given here in this post is advice I live by. In this case, I can afford this big purchase today, but market uncertainty makes it unclear if I can afford it next year. So I continue to sit on the fence, weighting pros and cons. I’m pretty confident that anyone else considering the purchase of this vehicle is sitting on their own fence right now, waiting to see what might happen.
Best of luck in your decision-making process, Lorelle. Some other advice I offer in the Quicken book includes going with the shortest term mortgage available, locking in at the lowest rate you can, and making additional payments towards a mortgage to shorten the payoff period. A mortgage is like a savings account — the more you put into it, the more equity you have in your home.