When I read about people who are facing down foreclosure on their homes, I tend to feel sorry for them a little bit.
When you buy a home, you think that this is going to be the place where you live for many years, or may even retire and die in.
But sometimes people get so over their heads, that I simply must ask what they were thinking when they bought it, like this guy:
When Domenico Colombo saw that his monthly mortgage payment was about to balloon by 30 percent, he had a clear picture of how bad it could get.
30%!?!?! What the fuck kind of mortgage loan did he get??
His payment was scheduled to surge by an extra $1,500 in December. With his daughter headed to college next fall and tuition to be paid, he feared ending up like so many neighbors in Ft. Lauderdale, Fla., who defaulted on their mortgages and whose homes are now in foreclosure and sporting "For Sale" signs.
Ok, so let's do some math real quick, a bump of 30% that's $1,500 means his monthly payment was $5,000 a month and now was going to be $6,500 a month.
At $5,000 a month, unless he got his loan through the Mafia or something, he bought roughly a $750,000 to $900,000 home.
Granted it's in Ft. Lauderdale, Florida, but I find it VERY hard to believe that this guy is living in a shack or a 2 bedroom condo for that price. If he is, he should have laughed at the realtor for trying such shenanigans.
Colombo did manage to renegotiate a new fixed interest rate loan with his bank, and now believes he'll be OK -- but the future is less certain for the rest of us.
So he'll be alright simply because the bank knows that he's been making his payments and the extra will force him into foreclosure.
Serves the banks right for such blatant attempts to squeeze every dollar they can out of people. But of course, Colombo should also get a nasty punishment too for having to little brain matter to understand that this can happen when you sign such exotic loans.
Banks count on that you'll move heaven and earth to keep your home and make the mortgage payments. So they are more then willing to accept a few mortgage defaults to keep making money on higher interest loans.
There are even interest only loans. Those are loans that you pay and you literally have paid for nothing but the privilege to live in the house....that's called rent folks.
If you really want a house, take my little formula and you'll never go wrong. Take your gross, not net, income, including your spouses. Multiply it by 3, and that's roughly how much home you can afford.
So say a young couple just starting out, together makes $40,000 a year. They can afford roughly a $120,000 home. Sure, they might be able to stretch it to $130 or $135, but I wouldn't go any further then that.
You stick to that formula and you won't have many problems if something catastrophic happens and you still need to make your mortgage payments.
"We haven't faced a downturn like this since the Depression," said Bill Gross, chief investment officer of PIMCO, the world's biggest bond fund. He's not suggesting anything like those terrible times -- but, as an expert on the global credit crisis, he speaks with authority.
"Its effect on consumption, its effect on future lending attitudes, could bring us close to the zero line in terms of economic growth," he said. "It does keep me up at night."
We've had economic growth for decades, and then the banks decided that they wanted to make more money and they convinced people to overstretch themselves to buy a home they couldn't afford. It's as simple as that.
They tried to tell people "oh you can refinance within a year" and people bought into it. They made the assumption that within a year, they'd be ok.
Don't make assumptions with your personal wealth and home. If you do, you're opening yourself up to financial ruin.
Travis
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