In this mini-series “Buyer Beware”, we are going to give you our brutally honest opinion on a lot of financial products/services that are so common nowadays, but we believe the buyers should think twice before they get into it. The first one: mortgages. We have heard so much from our LA clients: “My realtor told me that I only need to put down a 0-3% payment, and get that 2 million house, is that true?” Yes, it’s true, but most people probably shouldn’t do it. It looks very attractive: instead of saving for $400K, now you only need to save for $0-60k. But, there’s a couple of things to consider: you are mostly aiming for a house that’s too expensive for you to begin with (otherwise why only a 3% down payment?), so the monthly mortgage is going to be very high for you. Your cash flow will get so tight - say bye-bye to family vacations, restaurants, gifts, that new BMW you’ve had your eye on, or any other “fun stuff.” Second, with so little equity in the house, if there’s a real estate price correction, say the market price drops 5%, you are now underwater on your mortgage. If some emergency happens right when the market drops, you have to come up with enough extra cash to sell the place, or you could end up in foreclosure. Third, if you lose your job/income, you certainly can’t afford those high monthly payments anymore - you may get into a vicious cycle of late payments and penalties. Dan briefly went over what banks consider when they approve you for a mortgage. But please remember, what the banks see is only what’s on paper! They don’t know that maybe you need to pay a medical bill for your mother, maybe vacation is a “must” for you considering how stressful your job is, or maybe the house you’re about to get has some “surprise” waiting for you to be fixed. Sometimes the banks may approve you for more loans than you can truly afford. 1-3% down payment may work for Jeff Bezos because he has other assets to back it up. But if you are doing it because you can’t afford the house, please be careful!
