A Mortgage Case Study

In speaking with clients this morning, they lamented the situation of their son who is, like many people, dealing with a substantial drop in value of his primary residence. To compound their worry, they gave him a gift when he purchased the house so he would have more than a reasonable down payment. In the succeeding few years, he has made his mortgage payments, but because he has had a drop in income, his housing expenses currently take up in excess of 50% of his income. The remaining mortgage is greater than the fair market value, and short of trying to do a “short sale,” the prospects for selling the home in the near term are dim.

There are a couple of morals to this story.

First,

as we have previously discussed, it is our opinion that your mortgage payment should represent no more than 25-28% of your gross income.

Second,

under few circumstances should you get anything other than a fixed rate mortgage?  If you are purchasing a home and can guarantee that you will be moving within the interest rate guarantee period, I can see the use of a variable rate loan. Currently, that would be the only exception.

Do not be bashful in dealing with a mortgage broker or lending institution. Ask questions and make sure you receive answers to your satisfaction. There are lending and disclosure forms that you are obliged to receive. Even though they may be in your possession does not necessarily mean you understand them. Until you do, do not sign anything, and if you follow the two rules listed above, you will not be in the same predicament as the young man described above, but will be in a loan which fits your particular financial condition.

Before you commit

to any mortgage it is important to have a complete understanding of how a mortgage amortization works. definition In the tables below you will see how a $100,000 mortgage is amortized monthly over a fifteen, twenty, and thirty year period.

Amortization Table