Me Myself N My Mortgage Theories

The financial meltdown (2007-2009) has indeed taught us a few things that perhaps we never wanted to learn. So far, we’ve believed that “Home prices never go down”, “Our 401k Plan is one thing we can depend upon at retirement”, “Buying a house is a long term savings strategy” and so on… But the financial meltdown seems to have proved us wrong. Here are the 3 things we’ve learned from the financial crunch that crippled our personal finance and the financial market as a whole.

1. Buying a home may not be ideal to build up long term savings

It’s been a common practice for home-buyers to take out equity loans on their homes in order to pay off debt, save for college expenses as required by their children or raise their retirement savings. Any investment relying on borrowed money is a bit risky. Prior to the financial crunch, more and more homeowners got lured by the easy lending criteria of home equity loans. They applied for such loans as they wanted to use their home as a source of investment.

However, with the financial meltdown getting deeper and home prices going down each day, borrowers with equity loans owed more on their mortgage than their homes were worth. Not only did they lose their savings but also they couldn’t sell their homes without paying a lump sum towards clearing the mortgage debt.

2. Housing prices may go down sometimes

The Great depression of the 1930s did prove how far home prices can slide down. Even the downturn in the housing market in 1990 wasn’t enough for us to take steps to avoid getting into mortgage/housing problems. So, when the real estate market did pretty well in 2005, everyone had the belief that as long as our incomes went up, we could surely afford bigger homes.

However, our incomes didn’t go up keeping pace with home prices after the recession in 2001. Moreover, several borrowers were approved without checking whether they had the financial strength to pay back the loans completely. Appraisers were under the pressure to provide inflated appraisals and underwriters got too casual when it came to determining the risk in offering home loans.
What followed next was the financial crunch, rising foreclosures and housing market crisis. Till now the market hasn’t recovered; home sales continue to slide down across several states and things may not look good in the next few months too. So, we need to take wise home buying decisions so that we don’t get affected severely by the downturn in the housing market.

3. A 401k or IRA plan isn’t enough for our retirement income

The dot-com bubble burst in 2000 was a warning sign as to what we’ve accumulated in our 401k or IRA account may not be enough for our retirement. However, the market recovered smoothly which made us stick to the belief that having a 401k account or an IRA was enough to keep us financially fit in our retirement years. Moreover, certain shortcomings in the retirement system made people invest into flipping homes in order to supplement their savings plan. But the scenario’s quite different today. Considering the fact that the financial crunch has affected our personal finance in some way or the other, most of us are prepared to work longer so as to accumulate enough savings for our retirement. Also, we need to look out for suitable investment options to build up our savings.

The financial meltdown has taught us to take wise financial steps and invest our money keeping in mind that the market may turn around thereby wiping away our chances of earning a profit. What’s most important is to not go after something which we can’t afford, thus saving ourselves from getting into a financial mess.

This entry was posted on Friday, September 18th, 2009 at 5:34 am and is filed under Personal Finance. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.