I think the lesson in this housing crisis is that it's a really good idea to buy LESS house than you can afford, and re-mortgage only to get lower interest rates. It seems like most of the stories I hear like this are from people who either bought more house than they could afford (living on the edge) or refinanced to get cash for other expenditures like high credit card bills (also living on the edge). I think I benefited from having a dad that was out of work a few times, because it was really important to me that our mortgage be manageable if something happened and we only had one of our incomes. The irony of it all is that with home prices so depressed, more and more young couples will get into more house than they can afford now, so I don't see an end in sight. And as an aside, I sure wish the public schools took teaching personal finance as seriously as they take teaching algebra (I mean, who uses algebra after high school anyway?
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This is what I've done in my two home purchases.
Well, the first home wasn't less than I could afford, it was exactly what I could afford! I was 25, single, with no dependants so I could afford a bit more risk. 3% down on a condo purchased at $108k, the montly payment (with taxes, homeowners, PMI and assesment) was less than what I could rent a comparable apartment for (and an apartment wouldn't have had an attached garage!). I sold it in 4 year for nearly a 50% profit!
Then DH (I'd since met and gotten engaged to my now DH)and I rolled that into a 20% down payment on a small (1300 sqft) single family home. If we both lost our jobs tomorrow and could only work 40 hours a week at McD's we could afford the house. We'd have to stop payments on our truck and CC's, but we could do it, and if we both got 2nd part time jobs we'd even be able to make the truck payment, at least long enough to sell it and get out of the loan. We'd be able to hang on long enough to get back on our feet and catch up. Our credit would be trashed but we'd eventually come through to the other side, either by being able to sell the house once the market comes back and clear our debts, or by paying it all off bit-by-bit the hard way.
But that's the worst case senario, the odds of both of us losing our jobs at the same time is astronomical, we are in two unrelated fields in an area with a very diverse economy. One of us getting laid off? Sure, but not both. The way things are set up we'd be able to keep going and pay everyone. We'd be eating a lot of Ramen and hot dogs, but we'd make it until the layed off spouse found decent work again. And in two years the truck is paid off, and in three the CC's should be gone, so we'll be in an even better situation then. In a few years if a job loss happens, while it would be hard it wouldn't be a disaster, not even close.
I understand those that don't understand mortgages or CC terms, some things that are easy for one person to "get" is imposible for the next, it's nothing to do with inteligence, just the way our individual brains are "wired". My DH still doesn't get why when I pay off the CC due at the end of this month why it still has a balance. I've explained I'm paying off last months purchases and this month's will be billed next month, but he doesn't get it. But he's just as smart as I am, just in a different way (he could sit there and tell me how the space shuttle works while I look at him with a blank stare, for example!).
But I'll never understand those that don't stop and figure out what they can afford, and then think about what will happen if their income drops. What actions will they need to take, what bills they'll need to let (possibly) slide and which ones MUST be paid, what help may be available from family in a short term emergency, at what point they'd have to sell assets (homes, cars, etc) and start over with an apartment and a job they can walk to. You may not understand the banking industry but everyone should understand they need a plan "B" if it all falls apart.
I am not in one of those no down payment, no etc loans. As a matter of fact the ONLY reason I only put 20% down was that I felt that the housing market was topping and the return on my last sale could make me MORE money in another investment (which has proven to be right)
). Except disney still owes me 100.00 where they said they would waive the 100.00 cancellation fee since I am not cancelling my vacation, just moved it to AAA since it saved me 250.00. So as soon as it shows, the check is in the mail.
