One of the biggest lessons we've collectively learned over the past three years is the importance of having a mortgage that is not only affordable, but sustainable, as well.  (By the way, my friend Julie Miller started the consumer advocacy group Lenders Who Care - www.LendersWhoCare.org - based on this principle during the height of the real estate boom.)  What exactly is affordable and sustainable?  An affordable and sustainable mortgage is simply one that allows you to make your monthly mortgage payments while reaching your other financial goals and objectives. 

 

An affordable and sustainable mortgage does several things:

 

1) Has a payment that fits into the home buyer's budget.

2) Leaves room for the abililty to save income on a monthly basis.

3) Has a payment that is low enough for the consumer to stay out of non-preferred debt, including credit     cards and installment loans, many which have very high rates of interest.

4) The consumer should be able to afford the loan only considering their BASE income, and not                      overtime, commissions (unless they are 100% commission based), bonuses, tax refunds, or any              other income that has the likelihood of decreasing, varying greatly, or going away altogether. 

5) If the homeowner has deferred student loan debt, they should consider these payments, even if they     will not be a factor for more than a year, into their affordablilty analysis.

6) If your spouse currently works, but is thinkng about cutting back or staying at home on a permanent          basis, this should factor into your monthly payment objectives when considering your mortgage.

7) A sustainable mortgage program should NEVER have a pre-payment penalty.

8) A sustainable mortgage should NOT have a "teaser" payment.  So many people that are in trouble            with their mortgage now were lured into low payments that simply were not realistic over the long haul.        Many of these loans were "option ARM's" in which the monthly payment that was due was actually less        than the interest that was acruing.  While this type of loan was affordable in the first few                            months, when the loan began to "recast" and the payment increased to make up for the negative              amortization, these loans quickly became unaffordable and therefore not sustainable.

9) Interest-only loans were very popular over the past several years.  These loans, while suitable for              some self-employed or commission-only consumers, were not the best choice for many home-buyers        who were only looking for a low payment.  At some point in every interest-only loan, the payment              adjusts in order to get the loan paid off on time, in most cases 30 years.  That means after 3, 5, or 7        years, the payments go up, sometimes dramatically.  

10) ARM's....An adjustable rate mortgage, if managed correctly, can be a valuable tool because the rate          on an ARM is almost always lower than the rate offered by it's fixed rate cousin.  However, if a home          buyer spends the payment savings, as opposed to saving it or applying it towards principal, the ARM          mortgage plan at some point in time becomes unsustainable.  

Remember:  there is a difference, sometimes a HUGE difference, in what you can qualify for and what you can actually AFFORD relative to your mortgage.  Many mortgage loan originators simply look at getting you QUALIFIED for a loan and do not offer advice based on what is best for your overall long-term financial health.  Be sure to be working with a mortgage planning professional who offers advice that will allow you to not only qualify for a loan, but obtain a loan that is affordable AND sustainable.