I Told You So

I just have to bring up the issue of bad mortgages again. Most of you won't remember this, so let me give you a bit of history.

I've written all sorts of posts on what I call "evil house loans." A few of them are as follows:

• 50-Year Mortgages
• Interest-Only Mortgages
• No Money Down Mortgages
• Other risky loans 
• 43% of First-Time Home Buyers Put No Money Down

In almost every case where I discussed these issues, I had one (or several) people tell me how I was wrong, how the loans were actually good, etc. I even had a mortgage broker join the fray and we went back and forth on the issue. But those people are pretty quiet now that we've seen the truth in what I was saying -- that many people who had no business borrowing as much money as they did were over-extending themselves and asking for financial disaster. And many of them are now living with the consequences of that financial disaster.

It's funny for me to see the press tout that people are headed back to "traditional" plans for buying homes -- selecting a home you can afford, putting a good downpayment on it, and so on -- exactly the sort of stuff I recommend in my formula for buying a house.

People, this isn't rocket science (otherwise, I couldn't write about it.) Personal finance really just boils down to a few, simple concepts that everyone can understand and everyone can follow. If you do decide to follow them, you'll end up being well off. If you don't, well then, you're going to face challenges in your finances.

I'm not saying "I told you so" to brag or to say "see, I was right!" but to remind you that next time you're tempted to go against sound financial principles, think long and hard before you proceed. The people who took out subprime mortgages thought they were "getting a good deal" or "making a good money move" or simply over-extending themselves. They went against wise financial counsel, thinking they were smarter than everyone else. And now we're seeing the fruit of those decisions, and it's not good.

Don't let the same thing happen to you.

Comments

[Beastlike]

-FMF,
In your Formula for Buying a House, you mention becoming debt free in 7 to 10 years. Of course this means paying off your home in that period of time. From what I remember, I thought you believe in investing your money into stock vs. paying off your home?

[Moneymonk]

I say go for a 15 or 30 year fix mortgage. If you do not qualify, walk away until you can qualify.

Personal Finance is taking personal responsibily.

Don't be so anxious to buy something that you will pay any amount to get it !

[cory]

Actually, my $0 down mortgage is still looking like a pretty smart deal. I've made a ton of income off of the rental property and built way more equity in the property (well over 20%) than I would have if I had continued renting while waiting to save a 20% down payment.

Theses "evil" house loans are great tools if you're smart enough to use them properly.

[FMF]

Beastlike --

I did both -- I kept fully funding my 401k while paying off my house. But I didn't keep the mortgage and put more into the market instead of paying it off, if that's what you're asking.

[Lord]

Just about anything can make sense in the right situation and under the right circumstances, but you really need to know when and where they apply and be able to adapt to changing times. Not too many people with fixed mortgages are in trouble.

[jw]

I'm always surprised by people who ignore fundamentals. It happened during the dot.com boom too. As soon as I read that incomes in Southern California were not keeping pace with house prices, I knew the boom couldn't last. However, it was hard to stay on the sidelines while others bought with nothing down. My husband and I did bid on two houses and were outbidded because we tried to not go overboard.

[Mhurst86]

I wish we could afford to purchase a house right now! Paying $850 in rent is not fun, when you know you will have nothing to show for it when you move out. All of these new "extreme" loans are very tempting. The 0 down one is particularly hard to resist. I am trying to be strong an say NO!We are moving to the east coast in less than 3 years (more like 2) and I just can't see buying a house now and getting out so quickly. Also, we have very little down, so I think that we should just continue to save what we can. When we do purchase a home, I want it to be for the right reasons, and be able to maintain our current lifestyle. The goal for now is to pay off our other debt, and then purchase a home, so it is our ONLY debt.