MoneyWise | February 14, 2020

Mortgage Traps

Show Notes

It’s Valentine’s Day! And if you needed that reminder you’ll probably have to make a last minute stop on the way home to get candy or flowers for that special someone (or you could just buy a house!). Kidding of course—a house is a bit much for Valentine’s Day; but we are talking mortgages today on MoneyWise where Host Rob West chats with mortgage expert Dale Vermillion about pitfalls to avoid when you do buy your next home.  A possible trap you can get into with a mortgage is making the interest rate your number one consideration.

Dale Vermillion is author of Navigating the Mortgage Maze, available at MoneyWise.org.

  • Never extend the term of the mortgage if you refinance to a lower rate.
  • Next, the payment reduction trap. Let’s say you’ve had your mortgage for a few years and you’ve built up some equity in the home. Then you decide to do a cash out refinance and you use the money to pay off debt. Your monthly payment is lower than all of those combined bills. But a year later you realize you’re in worse shape than ever. Not only did you use credit cards and run their balances back to the limits again, but since the car was “paid off” (but not really) you financed a new one! Consolidating your debts with a new mortgage does nothing to solve the real cause for your debt, your spending habits.
  • The next trap is focusing on short-term gains. In the years running up to the housing collapse in 2006, millions of unsuspecting borrowers fell into this one by taking out adjustable rate mortgages. The lower payments were great at first. But as interest rates increased and their payments rose with them, many ended up in foreclosure, and this led to the collapse of the housing bubble.
  • Another trap is missing the big picture about debt. Let’s say you have $30,000 in consumer debt but you don’t want to include it in any refinancing because it’s personal debt, not mortgage debt. You then refinance to a lower rate and reduce your payments by, say, $200 a month. But again, a few years later you have even more consumer debt and you’re struggling to make the payments.

In this show we also answer your questions:

  • I’m 60 years old. I have property worth $350,000. But this past year we borrowed $100,000 to redo a lot of things in the house. And I just took out a home equity line of credit. I’m concerned that interest rates will rise in the future. Do you have any tips for my situation for paying this off?
  • My parents are 87 and they’ve now asked me to take over their investments. I don’t know much about this kind of thing. What’s the best thing to do here?

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