Get a Mortgage Like Your Grandfather Got

| February 16, 2007 | 0 Comments

I was reading an article about the basic principles concerning mortgages when it dawned on me that maybe this information wasn’t basic enough.

The article covered the different types of mortgages available, the interest rates, and even the pros and cons of each of these points. What the article didn’t cover is that the lender is out to make a profit off of the borrowers back.

Up until recent history, borrowing money was a dangerous endeavor. If there were circumstance that kept a person from paying back the loan then the lender had the option of sending the borrower to jail, selling him into slavery until the debt was paid off, or even selling the children to pay off the debt.

Since that day, the government has stepped in. The consequence for not paying a debt is just a mark on your credit record. Many people don’t think about borrowing money because there is “nothing” to think about.

The lenders have also stepped it up. In the past, mortgages were short term loans (especially compared to today). The average mortgage would not go beyond seven years. In addition, the payments for these loans could only be up to 25% of one borrower’s net income.

Today, it is possible to get a loan that will not be paid off until your grandchildren are in college. Mortgages can be extended to fifty years. Payments can be as much as 50% of the household’s gross income. It amazes me that the industry is shocked at the continued rise in defaults and foreclosures.

Is it still possible to buy a home today without extending credit to the end of the century? Yes.

Will you be able to buy an average home for the amount you will be borrowing? No. (Keep in mind that the average home in the United States is over 3500 sq ft. in most communities and even higher in some others).

Here are some basic keys to getting a mortgage today with the benefits that your grandparents received.

1. Rent first and save for a down payment. Even though many programs allow for no down payment, don’t take advantage of it. Save your money so that your initial mortgage can be less than 80% of the purchase price.
2. Start small. Because most people are looking at buying larger homes, the smaller home market is ripe for buyers. Shop around for a true starter home. When this one is paid off, then buy larger if it’s needed. The first home can be sold or it can be used as a rental property.
3. Borrow no more than 25% of one partner’s NET income. Take out taxes and insurance and then use what is left to determine the amount of payment you can afford.
4. Borrow short term. Get the least number of years on your mortgage that is possible. The payments will be higher, but the pay off will be much faster. Plus, the over all cost (including interest) will be much less than a long term loan.
5. Pay extra. Since you are using such a low figure to come up with your payment, use the extra money you have coming in to make additional payments on the principal.

It’s just a few things, but following these guidelines when you are looking at your first mortgage (or even a remortgage) will help bring you to a life of debt free living.

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