Home loans, lessons on saving and the credit crisis

Home loans, lessons on saving and the credit crisis.

The current loan crisis is an example of what happens when the whole world overspends. Although the exact reasons for the depression we are now experimenting are unclear it does seem like bad management of banks and the regulators that are supposed to police them is at the heart of the problem. This issue does not only affect international banks and the stock marktet, I believe we all have a lot to blame. The western world culture of buying the best there is whether you can afford it or not and the financial institutions that foment that attitude must be at the heart of this crisis.

What lessons can we learn?

Go back to basics. We often want what we can’t have when we forget how much we already have. Having a house is a sound investment, if nearly always is better than renting a home. The payments of home loans and rentals tend to be either similar or much cheaper to buy. Now, just because buying a house is a good investment, it doesn’t mean that all houses are a good investment, or a good investment for you. If we remember that having a house is owning a place where you can keep  safe, warm, dry and with the people you love we might not fall into the trap of seeing a home as a status symbol or some strange measure of your success.

Buy what you can afford?

When is a house too much for you to afford? This is a hard question to answer. Some would answer that question with: “When you can’t afford to pay it cash”. As desirable as it may seem to pay a house outright with cash, very few could afford it. This would mean that only a small number of us could afford it until we were in our middle age if we saved avidly through our younger years. This might seem extreme, although I will never laugh at the principle of saving before buying. Another option is to save a significant portion of the price of the house and only using the home loan for the balance. A house normally costs 10% more than the price tag just to pay the conveyance costs and the tax. Make sure you have saved for these costs and at least 20% of the house price. Having only to get an 80% loan will help you not only to be in less debt but also to have more leverage with banks and finance companies. It will also save you money on insurance policies that are required by law in many countries and states if you borrow more than 80% of the price of the house.

In a nutshell, we should save more and spend less. Look for a house that is safe, large enough and sellable. Don’t go for the top of the line even if you think you can afford it, these houses are hardest to sell in a crisis, like this one.