Balloons Pop
Balloon Mortgages get the prize for the worst kind there is. There are two ways that these are generally sold. The first is marketed to those to believe their income will be going up significantly within the next couple of years. They are told that they can start out with a low payment for the first 36 to 60 months and then refinance before the balloon is due. What usually happens is one of those setbacks in life. You lose your job or don't get that promotion you were counting on. You income does not increase enough to qualify to refinance your house and suddenly you're facing foreclosure.
The other way lenders market these loans is to people who believe that they are going to move before the balloon payment is due. What if you got into an automobile accident and ended up disabled? Suddenly you find yourself on disability and your plans in ruins. The only place you will probably be moving is to a rental as your house goes into foreclosure. Gambling on how the future will turn out is always a losing bet in the end.
Misconception #4: A home-equity load is a good emergency fund.
As we discussed before, and emergency is exactly the time when you don't need more debt. Unfortunately, the lenders have done an outstanding job in marketing these financial vehicles. They tell us to use the equity in our homes to pay off our high-interest credit cards (which most people just run up again), start a business, go on vacation, buy a boat, or just for an emergency fund. The problem is that you have now put your house at risk to take the easy way out. Just ask all those people whose company just closed how much of a difference that loan payment makes in their ability to pay their living expenses. Ask how many lost their homes because they borrowed more against them than they are now worth.
Misconception #5: You can't pay cash for a home.
Yes, you can. What's hard is finding the people willing to sacrifice their lifestyle for a few years to do it. Are you willing to live a cheap apartment, take no vacations, and buy only the minimum needed to live on for three to five years? If so, you can save enough to buy a house for cash. (And believe me, you can get a much better price on a house if you can pay cash.)
Let's say you are starting out and don't have a mountain of debt yet. You just got married and the two of you make $60,000 a year. You commit to saving up to buy your home, so you find a way to live on $20,000 a year (a lot of people do) and put the other $40.000 away in your house fund. In four years, you would have over $160,000 to pay cash for a house. With no payments after that, you could build wealth very fast. Will your friends and family think you've gone crazy? Probably or at least until they become envious when you accomplish it.
Freedom
Congratulations. You are now debt free and no-doubt loving it. Not many people will have the commitment to accomplish this moment. Statistics show that it takes about seven years to complete the process and pay off your mortgage. That's a lot of commitment, but the rewards are a lot greater than the sacrifice.
Financial security is not the only gift of getting out of debt. You will find that your spouse and you will have a closer relationship through your effort together and you will teach your children financial lessons that they will receive nowhere else. What a legacy that is to pass on.