Have you ever done something so incredibly stupid that years later you STILL can’t get over how absolutely ridiculous it was? I did said stupid thing right after college graduation. I was 22 and had just gotten my first real job. I was “all grown up now” and thought the most logical, grownup thing to do was buy a house. And I thought it was a GREAT idea to buy a house with an 80/20 loan. For those of you that aren’t aware, this is a mortgage option that was offered during the housing boom with literally NO down payment. How it works is you take out two separate loans: one for the main mortgage amount (80%) and the other for the “down payment” funds (20%). This was a way to get a mortgage without having to fork over a penny and also a way to avoid paying mortgage insurance. I thought this was the best idea ever! I had a full time job with steady income and the mortgage payment would be about the same as what I was paying in rent so why not?
I was approved to purchase a beautiful 4 bedroom, 3 bathroom, 2500 square feet “forever” home using an 80/20, 30 year loan with a 3 year ARM (adjustable rate mortgage) at 7% and a monthly payment amount of $700. After the first three years the loan would adjust every six months based off of current market rates. No worries. I was certain I would have a much better job in three years and I would simply refinance from the ARM loan to a fixed rate loan. Brilliant!
Did I mention I graduated college in 2005? Fast forward three years to 2008 and we are in the middle of a financial and housing crisis. Homes are foreclosing in every neighborhood, jobs are scarce, and there are news reports of layoffs and major banks failing almost daily. People were just glad to have ANY job, forget about climbing the corporate ladder. I was working in retail banking and was glad to not have been one of the many people in the industry that were laid off but I had definitely not increased my salary since graduation as previously planned so the option to refinance prior to the adjustment period of the mortgage was not going to happen because I was actually making LESS money than I was when I graduated in 2005. The recession definitely was not kind.
On the first adjustment, the mortgage payment rate went up to 9% and the monthly payment increased to $1000, a $300 increase from when I purchased the home. The mortgage adjusted two more times in the next year until we were paying $1,200 a month! Needless to say, my brilliant idea to purchase a home with an adjustable mortgage was not so brilliant. Thankfully, once Mr. Bug and I were married, we were able to refinance to a fixed rate FHA loan with a 5.5% rate and $1,000 monthly payment.
I bought the house during the housing market boom with a questionable mortgage type on a home I should have never been approved to purchase. Do I blame the big banks and lenders? Do I blame the government? Nope. I completely blame myself. I should have known better than to purchase a huge home that I didn’t really need and certainly couldn’t truly afford.
Thankfully there have been many regulations to mortgage lending and predatory lending practices and 80/20 loans aren’t even offered any longer. However, there are still many people trying to keep up with the Joneses and they subsequently spend over half of their before tax income on housing payments, which is still perfectly acceptable to most lenders. I will NEVER be one of those people again. I learned my lesson, and it was a very costly lesson to be learned for sure!
I am a huge fan of home ownership and highly recommend it to anyone who can afford it but the key is that you can AFFORD IT! Anyone looking to make a huge purchase/investment like a home should make sure to have the down payment money plus an emergency fund for any repairs/unforeseen costs that may pop up. I also recommend you spend no more than 25% of your monthly before tax income on a mortgage.
My hope is that others can learn from my idiotic mistakes, this being one of my top stupid items. Always buy what you can afford today, not what you hope to be able to afford tomorrow.