Who says that a common man cannot affect the governments and the economy? One can look at the sub-prime crisis and can very well understand that any mistake committed even at the ground levels can see the governments’ financial condition in a state of sorry.
Mortgage foreclosure made American economy crumble during the year 2007-2009. Borrowers were finding it difficult to pay for their mortgages and majority of them were seen trying to refinance their mortgages. This problem of foreclosure was faced even by the high- end homeowners.
What started out as a means of great fanfare and a reason to smile for many who could not afford mortgages in the form of the sub- prime mortgages, soon gave way to a lot of worries to them at www.prnewswire.com/news-releases/bad-credit-loans-up-to-5000-launched-via-top-lender-242197291.html.
Expecting a rise in the property prices and the lowering of the interest rates a lot of people, even with lower affordability took to the mortgages even if it meant taking the loans at higher interest rates from the lenders who agreed to offer them loans as opposed to any of the banks who saw it as a risky affair.
Soon the rising interest rates saw debtors skipping and delaying their payments. This eventually gave way to defaults in no time and with the lenders pressing hard on the borrowers for their money debt restructuring and settlement became the most sought after services. A lot of people who saw their resources really under crunch and had their finances under strain, had no way but to agree to foreclosures. Lenders were again flooded with such cases and this saw a huge pile up of property under foreclosures waiting fro customers who could take them at lower rates. With buyers also ceasing to exist situation really turned to worst and even the lenders were out in the market posing as sellers of the foreclosed property. This led to the crash which was never to be thought of in the dreams.
All this was because of the mistakes of both the lenders and the borrowers and no one could be made solely responsible for them. So let us look at the different mistakes which brought the entire economy to its knees.
Here are the major mistakes committed by homeowners which create this situation.
Understanding adjustable mortgage rate
Many lenders offer adjustable rate mortgages to borrowers which allow borrowers to start the payments with a low interest rate for some period generally two to five years. Click here and At first glance it might seem favourable for borrowers as they can buy a pricey house with lower monthly payments and they can reset the high market rate afterwards by taking out equity of their homes and refinance it at lower rate.
But in some cases this might not work. Refinancing the existing loan can be difficult when housing prices tend to drop. This can lead to paying a high mortgage payment which can be double or triple of original payment.
Effect of down payment
Borrowers were offered no down payment loans by lenders during the subprime crisis. Down payment serves two purposes. Firstly, it reduces the amount of money that borrower owes on a home and increases the amount that one has in his home. Secondly, it ignites faith in the heart of lender that borrower is serious about his commitment. It is a common sense that borrowers making large down payments will do everything possible to make their mortgage payment as they will have a fear of losing their investment. While borrower who have made no or little down payment will likely become careless and will soon walk away as they have made no investment. By doing so, they will be owing more than home’s worth.
Loans without verification
During real estate boom, liar loans were quite popular. This type of loans requires no or little documentation. The main basis of lending this type of loan was borrower’s stated income, assets and expenses. So lenders were quick to offer liar loans as they know the stated financial condition of the borrower.
The term liar loan is coined because borrowers opting for this type of loan often lie about their income and would generally inflate it so as to get big loan. Some borrowers do not have a proper source of income still they apply for a liar loan. So they are always late on their mortgage payment as actual income not stated income matters while making mortgage payments. Hence the end result is often bankruptcy or foreclosure.
Understanding reverse mortgages
Reverse mortgage loan is often advertised as viable answer for all income problems. This type of loan is generally offered to senior citizen and it utilises the equity of home for providing the income flow. The equity made act as a source for income stream. This can be utilised monthly basis or as a lump sum.
A reverse mortgage has many drawbacks such as high initial cost, filling fees, insurance fee, attorney fee and other miscellaneous fees. All these factors can quickly empty the equity’s worth. This could lead to the worst case scenario that is losing ownership of the home. Bank will become owner of the home and the related family can only get the left of cash after making the payment of mortgage, charged fee and interest rate. In order to keep the home, family will have to convince the bank for making an agreement.
Long time period for paying off the loans
Some years back, 30 years was the longest time limit for paying off mortgage payments but now some companies offering a time limit of 40 years. These high period time limits in the range of thirty to forty years are gaining popularity. By making use of this scheme, a buyer can now buy a large house by making comparatively low payments. These log term mortgages make sense for a young buyer who plans to stay in a house for a longer period. For a 40 year mortgage, interest rate will be slightly higher. So the total amount due to this increased interest rate will be high than a 30 year old mortgaged. The extra 10 years with high rates can create a lot of amount.
This can result in less home equity for borrowers. In addition to this, the borrower cannot shift to another home as payments made in first 10 to 20 years will primarily pay down the interest. Besides, who wants to make mortgage payments in his 70’s?
Luring mortgage schemes
Some borrowers get into this mortgage business without understanding the difficulties involved with it. Lenders play with borrowers dream by offering exotic mortgage schemes and promising them for home ownership. Some borrowers can be lured by these schemes. For example, lenders offer interest only loans in which borrower has to only pay the interest for some years or name your payment loans which enable borrowers to state the amount that they want to pay every month.
The main drawback of these luring schemes is that a large sum of amount will come out of nowhere after some time. Borrower assumes that he is building up his equity but in reality he is building a negative equity. Virtually they are just ignoring the debt which is getting accumulated and it can hit very hard after some time. These types of schemes have only increased the total debt.