During the financial crisis of 2007-2009, the US economy collapsed owing to an issue with mortgage foreclosures. Borrowers across the nation had problems reimbursing their mortgages. At that time, around 80% borrowers were striving to refinance their mortgages. High-end homeowners too were facing problems with foreclosures. Keeping all this in mind, let us discuss some of the greatest mortgage mistakes made by homeowners.
1. Adjustable Rate Mortgages
An adjustable rate mortgage gets you started with a low rate of interest for the initial two to five years. They enable purchasing a bigger house that one can normally afford. The interest rate becomes higher after two to five years, but that is not an issue since borrowers can simply take the equity from the homes and refinance to a lesser rate.
However, sometimes, on decline of housing prices, borrowers find themselves incapable of refinancing their existing loans. Hence, they face high mortgage payments equivalent to twice or thrice their original payments.
2. No Down Payment
At the time of the subprime crisis, a number of companies were giving borrowers loans with no down payment. Borrowers placing down a hefty down payment would probably try all means to pay off their mortgages because they do not wish to lose out on their investment. Several borrowers putting almost nothing down against their homes face an upside down situation with respect to their mortgage and just walk away.
3. Liar Loans
Liar loans became very popular during the real estate boom before the subprime meltdown which started in 2007. Mortgage lenders rapidly handed them out while borrowers quickly accepted them. The liar loan usually does not require any documentation and is based on the stated expenses, stated assets and stated income of the borrower.
The problem begins when the purchaser gets in the home. As the mortgage payments need to be reimbursed not with the stated income but the actual income, the borrower becomes incapable of making mortgage payments consistently.
4. Reverse Mortgages
It is a loan for senior citizens aged 62 years or more which utilizes the equity from the home to render an income stream. The equity is paid out either in a steady flow of payments or as a lump sum such as an annuity.
There are several drawbacks of reverse mortgages. First of all, they come with high upfront costs. Moreover, attorney fees, appraisal fees, title insurance, mortgage insurance, origination fees and other miscellaneous fees rapidly eat up the equity. This results in the borrower losing complete ownership of the home.
5. Longer Amortization
Mortgages with a time frame as high as thirty five and forty years are gradually gaining popularity. These enable individuals to purchase a bigger house for considerably lesser payments. A 40 year mortgage might be suitable for a 20 year old youth who intends to stay at the place for the coming 20 years, but for many people, it does not mean anything worthwhile. Again, a 40 year mortgage will obviously come with a higher interest rate compared to a 30 year one. Borrowers would have less equity so far as their homes are concerned. Moreover, it would not be a great thing to pay off mortgages in the 70’s.