Why do people take out Mortgages they can't afford?

[Rasulis]

Mortgage is a funny business.

Those that can afford it and less likely to default (20% down, good income & credit) will get the best deals (lower interest rate & no PMI). Making it even less likely for them to default.

Those that are borderline (3-5% down, less than stellar credit, borderline income) will be charged more (higher interest rate plus PMI). Making it even more likely for them to default.

[Seirith]

Also, really? You can get a usable car for 2K. 2K is NOT a lot of money. Ride a bike to work, they're vastly more efficient than a vehicle ever will be.

Sure, you can buy a car for 2k, but it will die soon after or you will end up having to fix a ton of things to keep it running. I did the cheap used car thing as a teen/early adult, I put in a lot of money to keep them running only to have a major issue in the end. I finally ditched that and went to news cars which I have no issues with.

Also, I am not going to bike 2 hours to get to work down an expressway in the winter to get to work and I am not going to move into the crime filled city to move closer. Not an option.

[Docturphil]

Meanwhile I'm an experienced professional and can't afford to get into the house market in Melbourne.

Are you married? Double incomes make a huge difference.

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Because society tells us to. If you have $1000 a month left over, don't save it. Buy a house. It's an investment.

What they don't tell you is that it's not an investment for you. It's an investment for the property developers selling them.

That's... not really true... at all. It is an investment for the purchaser as well as those loaning the money. It's mutually beneficial. You get to own a home that you can live in and sell in the future to get a monetary return on your investment if you wish, and the bank makes money off of giving you money from the interest. In most cases, the deal is well understood by both sides. Society is not tricking anyone on the matter.

[Pengekaer]

If you think about it logically, you should only be taking out a loan if you can make the payments. If you are cutting it so close that if rates rise, you can't make payments, then don't take out a mortgage.

Whatever happened to restraint and living within your means?

If you can't afford to purchase a home then rent or move elsewhere.

For once I agree with goold ol' Acy ;-)

Thing is, people who lack neurons to such a degree that they purchase a house with interest-only-loans probably cannot be truly redeemed. But at least the banks can make a fortune.

I, myself, wouldn't not loan money even though I live in a mediocre for-rent apartment atm. I do not trust the bank(s). Like, at all. Living in an old apartment sure beats having to trust a bank, at least I can sleep rather well at night ;-)
Heck, I would keep my money in a safe-locker in my basement if I could.

[Flatspriest]

A big reason people do this is because pricing is through the roof and only those who are very well off can really afford cars and houses now. My parents house cost a total of 45K when they bought it. The same house now was valued at over 200K even though nothing about the house has changed since it was originally built...other than upkeep, new wiring and plumbing, and the occasional new roof.

[Pengekaer]

A big reason people do this is because pricing is through the roof and only those who are very well off can really afford cars and houses now. My parents house cost a total of 45K when they bought it. The same house now was valued at over 200K even though nothing about the house has changed since it was originally built...other than upkeep, new wiring and plumbing, and the occasional new roof.

Mostly in major cities though.
Its not like its a human right to live in a major, fancy city.

[Docturphil]

The real truth is, most people don't know law or how the banks work, so they get scammed easily.

I think it's more about people being too naive. You don't have to be a lawyer or accountant to spot a shady mortgage lender. If the lender is dodging your questions or giving you indirect answers, get the fuck out.

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I refuse to live above 50% of my income.

Meaning all of my bills must be equal to, or less than 50% of my earnings.

I learned this from my parents. When my Step Dad died, my mother could afford the bills because they lived at like 80% of their combined income. Horrible move. I learned from their mistake.

If my G/F left me, or lost her job, I can pay all the bills myself and not worry about it.

A good rule to live by. That's pretty much what the wife and I do. In addition to being able to live on one of your incomes, you also get to save a shit ton of money while both of you have jobs.

[Trassk]

my mother lives in the house our family grew up in since the 1970s, and my dad when he finally retired used his retirement fund to pay off the mortgage, and when he died ownership passed directly to her.
She never had to worry about being homeless, however just because someone owns a home doesn't mean they are 'free' of problems. The old family house is old and falling to bits in places, piling wallpaper, damp in places, and despite my effort to help, I can't really spare any money to help her do it up, so its left in that kind of state its been in for years. You don't get support if something goes like electrics, piping, cracks, boiler breaking down, so unless you know some people who can fix you up for cheap, your paying out for all repairs you need done, and not insured for it.

So its a double edged sword, in not having a mortgage, your forever paying your tenant, but your get help if things get bad, or your own it, and your need to pay out loads for if anything goes wrong. I guess the upside is your never be evicted from your home, even if it is falling to bits.

[Mormolyce]

Are you married? Double incomes make a huge difference.

Yeah but wife is out of work

[Rasulis]

I think it's more about people being too naive. You don't have to be a lawyer or accountant to spot a shady mortgage lender. If the lender is dodging your questions or giving you indirect answers, get the fuck out.

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A good rule to live by. That's pretty much what the wife and I do. In addition to being able to live on one of your incomes, you also get to save a shit ton of money while both of you have jobs.

I think part of the problem is that borderline borrowers do not have the option to pick and choose. For those that qualified, the process is actually very simple.

When we did ours three years ago, we went with an investment bank. For the preapproval, the bank did not bother asking for our income. They asked for 3 months’ worth of bank, 401k, IRA, investment account statements, list of properties that we owned, 5 years of tax returns, and permission to run credit check and IRS verification. Then they did their own investigation.

They gave us a preapproval with amount and interest rate. Take it or leave it. They also offered to discount the interest rate if we open a checking account with them (0.1%), direct deposit (0.1%), auto pay for the mortgage payment (0.1%), auto pay for utilities (0.1%) and open IRA account (0.1%). In the end we ended up with a 30-year fix mortgage at 3% APR. Once our offer was accepted, they closed the loan in 28 days. It was pretty amazing.

[Hiricine]

People had this idea they literally could take interest only mortgages that could only become solvent if the value of the home increased and they refinanced, that was really the extreme of what we're talking about. They could buy the house at, say, 200k, wait for the price to go up to 400k, then sell the house and make 200k in profit.

Of course, when house prices managed to actually correct for the first time in recent history, it caught everyone off guard because inflationary home prices was seen as a given.

People take out mortgages they cant afford for the same reason they do anything they cant afford--- because they can and they aren't good at planning. You ever see the person in their 20's who lives in a city apartment that barely gets by that goes on an exotic trip? The idea today is that its become square to buy a cheaper house you can actually afford, or if you have cash to not just dump it all at every opportunity. Meanwhile the squares who saved their cash have to keep hearing about how they missed out on all the fun.

Unfortunately, you can't tax fun. So when the day of reckoning comes for those who are bad with money, they start gunning immediately for the people who are good with it.

[Yvaelle]

Because before (and now after) it was made illegal to do so, banks would (and now once again are) pressuring people into signing, often by misleading them or in some cases outright lying.

I recommend the book (or movie) The Big Short to explain in detail. And keep in mind that all those things the banks did, were made illegal by Obama and now legal again by Trump.

^ This.

The way people who didn't major in finance know if they can afford to make payments on a mortgage, is by consulting a financial expert. Financial experts are employed overwhelmingly by the FIRE sector ('banks'). Banks are legally allowed to mislead people, so they can bankrupt them, take all their stuff - and claim it as their own.

For some banks, that's their entire business model.

If anything goes wrong, they have an alternate revenue stream whereby they bribe politicians to reimburse them (with extra!) for any damages they suffer by fucking up the economy, at taxpayer expense.

The simple answer, Tennisace, is that people don't take out mortgages they know they can't afford. They consult an expert, and are told they can afford a mortgage, and then it turns out the expert they consulted was part of a grand con, and they just got fucked.

[kneehidude]

Rent is way less. A 2 bedroom is like $1000-1500 a month lets say. A far cry from what a mortgage is gonna cost. Plus the renting fee usually includes electricity, taxes and other utilities.

I beg to differ, last year my brother had a mortgage payment for a 3 bedroom house for ~$800/month. At the same time, my cousin had a 3 bedroom apartment for ~$1600. Even if all the other bills pile up to be more than $1600 for my brother, he is still building equity in his home. That makes it more effective in the long run.

[Kujako]

I beg to differ, last year my brother had a mortgage payment for a 3 bedroom house for ~$800/month. At the same time, my cousin had a 3 bedroom apartment for ~$1600. Even if all the other bills pile up to be more than $1600 for my brother, he is still building equity in his home. That makes it more effective in the long run.

It really depends on where you are...

[monkmastaeq]

It is mostly true. Not everyone lives in Vancouver or San Francisco.
Let's say you're in a more pricey city.

You can rent a 2 bedroom apartment for $1700 or take out a mortgage on a townhouse which costs 700K. Which is more wise if you are living on the edge? Renting obviously.

Nothing wrong with renting if you can't afford to buy.

This is just silly, you rent because you can't buy bad credit no down payment etc.

Here's a great example you are saying that the rent is 1700 but they cant afford a townhouse at 700k.

So i have two rental properties , a 4 plex and a condo. Lets use the condo as the example , 2 bedroom ,2 bath, den and living room, its a fairly nice place. I rent this for 1250 a month , I wont say exact numbers but my mortgage+fees+property tax doesnt add up to 1250 or over. I make money and gain equity because they rent, if they had a better financial situation they could buy and save a few hundred dollars a month.

this is literally how rental properties work , no one is renting for less than their mortgages unless they 100% had to for some reason.

[Nakotsu]

I guess I need to see these lies and misleading offers. I bought my house right before the bubble pop and while I was offered plenty of money, there was a number of ways to see what the payment was going to be and I knew pretty close to how much I could really afford. I just don't know how people who were making 50K a year thought there was anyway they could afford a 300-500K house. Being willfully ignorant is a shame. Something had to be telling them the offers were too good to be true.





Calling people really stupid isn't a completely accurate statement. You start out getting a car loan, and then later you get a credit card with a decent limit and then you get more bills. If you're not paying attention or even worse, something major hits you in the wallet, you suddenly find yourself in trouble. For some, getting out of the trouble becomes a challenge and sometimes it feels like the hole just gets deeper and deeper.

Yes we all make stupid mistakes from time to time. Some are just worse than others.

what if you make 50k a year you should be able to afford a 300k house in 25 - 30 years. Well unless your ridiculously spending money like johny depp.
Even if you only save 20k a year out of your 50k you should have no problem paying that home off in 25 year mortgage.

[Tennis]

This is just silly, you rent because you can't buy bad credit no down payment etc.

Here's a great example you are saying that the rent is 1700 but they cant afford a townhouse at 700k.

So i have two rental properties , a 4 plex and a condo. Lets use the condo as the example , 2 bedroom ,2 bath, den and living room, its a fairly nice place. I rent this for 1250 a month , I wont say exact numbers but my mortgage+fees+property tax doesnt add up to 1250 or over. I make money and gain equity because they rent, if they had a better financial situation they could buy and save a few hundred dollars a month.

this is literally how rental properties work , no one is renting for less than their mortgages unless they 100% had to for some reason.

Exactly. They're renting an apartment because they can't afford what they really want, a townhouse/detached house.
Not to mention you're skipping over the downpayment. How quickly is a family making median income going to be able to afford 140K?

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Honest question: Do you pay for your own place and do you work?

To some degree.

Not really relevant to the topic at hand.

[Mad_Murdock]

what if you make 50k a year you should be able to afford a 300k house in 25 - 30 years. Well unless your ridiculously spending money like johny depp.
Even if you only save 20k a year out of your 50k you should have no problem paying that home off in 25 year mortgage.

A 50K a year job, gives you what, roughly $33K, or roughly $2700 a month take home cash. A 300K 30 year fixed rate loan at 3.25% would be roughly $1500 a month payment. That leaves about $1200 a month for everything else. Using my family as an example, Gas and Electric is an average $200, Phones\Cellphones another 150, Grocery an easy 250, Internet\TV $100. So yes, fairly doable for 2 people, but if there is a plan for kids, the remaining $500-700 a month is going to get sucked up fairly quickly, and there isn't much wiggle room for unforeseen events, say the car breaks down, roof needs replacing, Central air breaks down right after the warranty expires...etc..etc

Now depending on your area and other factors you mostly can trim the fat and if you're single it's obviously much easier. With Wife and kids, I promote a conservative approach. I'll concede that my initial statement was probably too broad, as I mostly think in terms of family of 4 versus singles or just couples.

[Tennis]

Because unscrupulous lenders approve them. Watch the big short, it's on netflix.

Why is it legal then? Time for a significant downpayment.

[Drakain]

Why is it legal then? Time for a significant downpayment.

Because it's very hard to regulate something that's happening that government doesn't really know about, and by the time it becomes a problem is such a humongous problem the government has to step it because the economic consequences of lenders going under would be catastrophic. It's a combination of sneakiness, laziness, fear, and magical thinking. The end result is the lenders stay in business, still make money, and their victims get screwed over.