Mortgages | Giftie Etcetera: Mortgages

Thursday, July 31, 2008


What kind of mortgage do you have? We just have one straight-up fixed rate mortgage. We pay about $100 more than our monthly note, so that we can build up equity. For those who have visited, our house is small but comfortable for a family of three. For our soon-to-be family of four, it would be a good size except for the lack of storage space.

But when we first got the mortgage, we only were able to put down 10%. So we had a variable-rate loan for the rest of the 20% down payment. We paid it off quickly, in less than a year, I think, but had much longer to pay it off.

Also, we were approved for about $10,000 more than we qualified for. The thing is, we have high outstanding debt (almost exclusively in the form of student loans that we are paying over thirty years). So banks limit the cap on borrowing based on that. And, since my business hadn't been open for 3 years, the bank would not consider my income. Nonetheless, they upped our approval based on the fact that the local bank where I applied knew I was a practicing lawyer in town and our credit scores were almost perfect. (Alan's, I believe, was right at 800! Mine was close.)

What if we hadn't of paid off that extra loan? Would we be screwed now? Would we be part of the mortgage crisis? Especially considering my illnesses, pregnancy, and the slow demand for lawyers at the beginning of the year, would we have had to move out of our home?

We worked hard to pay off that first mortgage, but as the bank easily approved us, I just figured we were okay with that loan. Now that I'm a curator (attorney for a missing person) on several defaulted mortgage suits, I know that the bank is not the best judge of whether you can pay. That could have been us!



Brien said...

I've had 80/30 split loans as well as straight-up fixed loans, and the answer to your question is - it depends. Generally, the mortgage issue isn't so much that interest rates are going up (they have gone up, but it's not like the late 70s where people were having to pay on double digit interest percentages) but that people were allowed to borrow more money than they could afford. In your case, you borrowed a reasonable amount, so you might have had to tighten the belt a bit, but not drastically so. Also, in a typical 80/20 loan (what you had - you take out a second home equity loan to claim a 20% equity, thus avoiding paying extra on mortgage insurance), the 20% portion minimal payment would be very small (relatively), giving you some flexibility if you had a bad month (but not a series of bad months). The bottom line is that if you were able to make your payment, you wouldn't lose your house - you might be prolonging the payments and obviously in the long-run loosing more money, but it wouldn't have been dire. The biggest problem for most people in the mortgage crunch is that they either were just barely able to pay on the mortgage and the rise in interest rates push them over the edge, the amount of money spent on daily or monthly living goes up due to increases in pricing, or unfortunately events (like loosing a job) occur. You can't 100% guarentee that things like that won't happen, but you've done a good job mitigating the risks (get a house you can afford, pay down the mortgage with the higher rate first). The ideal thing would then be to pay off the next highest interest loan, unless of course you can invest that money somewhere and earn more than what you are paying on the loans (difficult and risky at this time). The best lesson to learn from the mortgage crisis is that the person best suited to look after your own interest is you.

Stac Cole said...

I agree with Brien. The "mortgage crisis" is not for people with fixed rate loans. It is for those who took out adjustable rate, or interest only loans. For the first 2 years, you may pay only 5% interest, but when it adjusts in 2 years, that interest rate sometimes jumps up to 8 or 9%. On a $200,000, that's a large increase. On top of rising gas and food prices. Thus, the mortgage crisis. Given a choice, most people would choose to lose their homes than give up an extravagant lifestyle.

You need more storage? Deck more of your attic. Easy and cost effective. Also maybe look into putting attic access in your little storage shed off your carport.