Learning From Someone's Money Mistakes

I had someone tell me a bit of a depressing story about a month ago.  I'm sharing it here because I beelive we can all probably learn something from it.

This person's son and daughter-in-law were eager to buy a home in the middle of the job/housing boom.  They were told repeatedly by family members that owning a house would be better than renting, even though the couple really didn't have a down payment.  They took about a year of scraping together a 5% down payment plus the CHMC insurance fee and went off to see someone about a loan. 


They were turned down by a few places, being told their income wasn't quite high enough and that they should take care of their credit card debts first.  They eventually found someone who would give them a mortgage, but in order to help them make the payments set up the mortgage as an interest only mortgage.  The couple could make extra payments whenever they wanted, but the mortgagor emphasized that they would now own the home and the down payment was the hardest part.

Fast forward about 4 years and this young couple is regretting both the purchase and the type of mortgage.  They have found that the mortgage payments plus credit card payments have made life very difficult.  They wish they had put the down payment on their personal debt instead of the house.  They feel that the places that told them to take care of their debts first were right to tell them "no."

As for the mortgage, with money always being so tight they have made only a few small payments to principal.  As a result, with 4 years gone they have paid down almost nothing on the mortgage itself.   The mortgage renews next year, they still owe for 95% of the purchase price, and the house has actually dropped a bit in value since they bought it.  They are quite scared that they may lose their home, but they can't see any way of keeping it.

I have a lot of sympathy for this young couple.  They were given some very bad advice by multiple sources, and it looks like they were given one of the worst mortgage products they could have ever been offered.  While an interest only mortgage isn't evil by itself, it really isn't a good product for the vast majority of borrowers.  Most of us need a payment plan set in place to help us pay loans down rather than just interest only.

Hearing this couple's experience makes me want to emphasize to everyone the importance of getting good advice and then following it.  They were told by multiple people they should take care of their other debt first, but no-one can force you to listen to good advice.  It's unfortunate that this family had to learn some lessons the hard way, but it's often the way most of us learn.  Hopefully, by reading this, someone may not have to go through that same lesson the same way.

Lessons learned:

1. Interest only payments make money for the bank, but rarely are best for you.
2. Debt, even for owning a home, may make life difficult in the long run.
3. Be careful of where you get your advice from.

Jerry