First Home Buying

There are so many different kinds of loans out there it seems like some egghead in the finance field must make up a new one every week. I own a house that was built in the mid-1960’s. Back in the good old days (ie., in 1961), that house would have cost me about $7,500 brand-spanking new. The median income for a family in the U.S. in 1961 was around $5,700 per year. So we’re talking about single family home prices that were 1.3x gross salary.

Compare these figures with today and we’ve got a much different picture. Median income is in the $40,000 per year range, with median home prices across the U.S. just under $200,000. That’s about 5x gross salary!

It has become quite apparent to me that ‘the good old days’ ended way before I was born.

Even with the recession in housing prices, we are still well above our means when it comes to real estate affordability. This has resulted in a shift in lending practices toward saddling the average homeowner with excessive amounts of mortgage debt, especially for those in the first home buying category who don’t have experience or knowledge about what’s best for them. Unfortunately there’s a lot of smoke and mirrors used in the industry. I’m not trying to sound cynical on purpose (or maybe I am subconsciously), but the truth is that most newer mortgage formats have been created chiefly to make it easier for the working stiff to buy now and pay later. Dearly.

My ARM Is Growing

One of the most common unconventional mortgage loans created to get Joe Six-Pack into a home now and let him worry about how he’s going to make his payments a few years down the road is called an ARM, or Adjustable Rate Mortgage. They come in 3-year, 5-year, 7-year, and I believe less often in 10-year flavors.

The ARM allows a purchaser of real estate to enjoy a low fixed rate for the first part of the loan. When that time is up, the interest rate begins to change, based on the federal funds rate and other key market factors. These changes alter the amount of each mortgage payment, sometimes quite drastically. This can be a significant shock to dear Joe the homeowner, who may not have the income to support such a rapidly changing expenditure.

The Old-Fashioned Way

A fixed-rate mortgage is just that – it stays the same for as long as the loan is meant to last (30 years, in most cases). Your initial interest rate on a conventional mortgage will probably be slightly higher than the opening rate of an ARM or other teaser loan would be. But like a MasterCard™ commercial, not being surprised by a random payment amount every month? Priceless.