OK, I just don’t understand people. How can they be so dumb about finances, especially when it comes to purchasing a home?
Many years ago, I watched a builder/developer start building homes on a piece of land near where I worked. He would complete a couple and put them up for sell. His big gimmick was, “no down payment and no closing costs”, just move right in. That sounded like a dream come true to many folks and this developer sold his homes as fast as he could build them and he kept building them.
Then the problems started for a few. Some people were transferred to other sites and some took new jobs and had to move. They put their “new” homes up for sell, but that is when they realized that they were in trouble. Their “new” home was used and they owed more on their mortgage loan than the house was worth new. So why would anyone want to buy a used home for more money than a brand new one just a few doors down the street that didn’t need a down payment like a bank would ask for and also didn’t ask for any closing costs?
These poor home owners, even if they had been paying on their loan for a couple of years, had not even paid off their closing costs. Even though these loans where long term, they were similar to short rate discount loans where the first payments are almost 100 percent interest.
How could that be? How could they owe more than what the house was worth, even though the original selling price was set at a fair market value? It wasn’t because of decline in the housing market. It was because of the no closing costs and no down payment. There were closing costs, and lots of them. They were not just forgotten about and erased, but they were added on to the loan.
I was told and I do believe that when purchasing a home, that you should put at least 20 percent down and pay all closing costs and take the shortest duration loan whose payments you can afford. And when you are figuring what you can afford, add in ten percent of the homes value per year for upkeep and maintenance. If you can’t afford this, then look at less expensive property or rent or lease.
This probably happened elsewhere and through out the years. If so, it makes it a lot easier to understand why so many people lost their homes when the economy got bad.
A lot of people have always tried to live above their means to show others how good they are doing. I prefer to live below my means. I sleep much better that way.