Foreclosure: The Latest Trap

The rising rate of foreclosure has caused a lot of grief for US economy and global economy as a whole. I often wonder if the home loan system has any earnestness. Most of the loans are given for a period of 30 years (some even go till 50 years). It is solely based on the principal that you buy a home and the bank gives you a loan which you pay back in a period of 30 years. So far so good: you pay a small amount every month and after 30 years voila you are the owner of one beautiful house. Is it that simple?

Let’s consider a scenario:

A person buys a home and makes a down payment of 20%. I say 20% because that is the requirement for a prime mortgage, but the average mortgages (especially sub prime mortgages) are way below that. People usually pay around 10%. The banks are now even ready to lend you money for no down payment if you have a good credit score. The easier the banks lend money the more people will come in the market to buy homes. This will increase the demand for homes and eventually there prices.

How does one pay back this loan? Before I go any further let me put forth two statistics. First, the average age of home buyers is 39 years. Second, the average retirement age is 60 years. The only way through which the buyer pays back the loan is his consistent income. From here the whole situations branches out into two scenarios.

First, everything goes well, income keeps flowing in and he pays back the loan. Merry!!
Second, something goes wrong, either he/she loose his/her job, falls sick or dies. Then what?? Heartbreak!! The payments stop. Bank starts sending notices and finally forecloses the home.

Think carefully and think again. Does a loan of 30 years make sense?

I hope you agree with me that the sole way to repay loan is consistent income. And the requirements for income are: job, good health (so that you are in a condition to work) and you are alive.

Someone can speculate (not guarantee) that they will have a job, good health and will be alive for maybe the next 5-6 years. But what if somebody says I will have all the three for the next 30 years. Does that make sense? Here we are not talking about some small amount that God Forbid if anything happens somebody else can repay on behalf of you, we are talking about huge amounts. It is a very huge responsibility on ones shoulders.

Foreclosure is no joke (I pray it doesn’t happen with anybody). Because they happen when families are already broke. Don’t you think the mortgage system is fundamentally flawed?