Oh Those Unknowing Borrowers

This post is going to be sort of a sequel to the previous. My friend and I made a loan calculator earlier today and decided to explore the financial background when buying a house. It just blew my mind when I saw all the incurred interest on conservative pricing. Lets wander back to 2006 when the housing boom was at its peak. You see a nice house in a nice neighborhood in the San Fernando Valley. It's going at $800,000. You get a 30 year, 7% fixed mortgage rate. You put a 20% downpayment on it. Assuming you met your bill each month and never paid more than you had to, at the end of 30 years you would have paid nearly $900,000 in total interest. Over 30 years, you would have paid about $1.7 million for a $800,000 house. That is around $4250 a month. Quite a bill to be held accountable every month for 30 years!

Now lets take this $800,000 dollar house and have a person with a lower credit score apply for a loan. Looking at the higher interest they would have to pay would no doubt catch Freddie Mac's eye. Sure I would love that person to pay me a million dollars in interest spread out over 30 years. This is where the greed set in. People like Washington Mutual lent these kids adjustable loans. They had the luxury of paying very little interest for a set period of time. They thought the idea was amazing. Now they could afford this house that was out of their league. Once that adjustable rate kicks in and that interest jumps to 9.5%, they can't seem to find money to pay for their house anymore.

This started happening all over the place. Short story, defaulted loans and billion dollar write offs have pushed us to a financial crisis never seen before. When I said in the previous post that debt should be the first thing paid off before buying that new car or investing in the market, I think I was onto something. If you pay off the debt and save some of that $900,000 in interest payments, I guarantee you will have enough money in the long run to buy an even nicer car. This does not just apply to mortage payments. Even credit card payments can rack up the interest. Be smart about where your money goes and in the long run, you really can be better off than the Jones'.