Mortgage Help

Mortgage Dos and Don’ts

We all hear that a home is one of the biggest investments we will make in our lives.  For many of us this would probably be true.  But, how does one save up enough money to to buy something that costs that much?

It’s actually a calculated decision.  One looks at how much one could make if they invested their money (their return on investments) vs. how much they would spend if they paid money by borrowing.  There are many more advantages, such as mortgage interest credit.

Much like an APR (annual percentage rate), one has to figure in, the actual cost of borrowing money now, vs. having the cash to use now.  What is the future value of money?

Borrowing Money

Many people talk about borrowing and lending incorrectly.  They say, “Hey.  Would you borrow me 10 bucks?”  Money is not borrowed to someone.  It is lent.  Correctly they would say, “Hey.  Would you lend me 10 bucks?”  Or, the person would say, “Hey, would you lend me 10 bucks?”  If I was the person with the money, I would say, “No.  I won’t lend you 10 dollars because you’re an idiot.”

This brings me to the next item.  Risk.

 

Risk

There is always some level of risk involved when someone other than you uses something that is yours.  When you lend money to someone, the idea is that you want it back.  That’s why it is called lending.  Otherwise it would be called a gift.

When you allow someone to borrow money, or any other things of value, from you, there is always a chance that you won’t get it back.  So, you are taking a risk by allowing your thing of value to be used by someone else.

For future reference, we’ll call this ‘thing of value’, an asset.

How do you evaluate the level of risk you are willing to take?  First, you have to decide how valuable the asset is to you.  Is just makes sense that if you value your asset at a ‘level 10’, you would be more concerned about who you lend it to.  (Notice I didn’t say, “… borrow it to.”?)  If you value your asset at a ‘level 1’, your concern of who borrows it is less.

The Borrower

Typically the borrower is evaluated in 2 ways.

  1. What is their willingness to repay the asset (money)?
  2. What is their ability to repay the money?

One of the best ways to determine a borrowers willingness and ability to repay money, is to take a look at their previous behavior; their history of repaying money.  The history of whether or not someone repays money is to get what is commonly referred to as a ‘credit report.’

Willingness to Repay a Loan

A credit report that shows that someone always repays money they have borrowed, means that they have both the willingness and ability to do so.

Ability to Repay a Loan

However, you might want to look further into a person’s ability to repay money is to find out is they make enough money to pay it back.  Let’s say that I borrow $1,000 from you and you expect me to pay you back at the end of the month.  If I don’t have a job or any other way to get money, then I don’t have the ability to pay you back.

Interest Rates

Interest is the amount of money someone has to pay to you for the privilege of using your money.  There are a few things that would effect the amount of money you would change someone who borrows money from you.