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Payment Myopia

There are many mistakes and bad decisions that borrowers can make when securing a principal mortgage. There are also additional errors made by borrowers after their first mortgage is secured.

While these mistakes differ from one another in many ways, many of them have a single, underlying cause, that of focusing only on the affordability of current monthly payments, as opposed to building equity in the home. This approach is known as payment myopia, and takes into account only the present, often ignoring even the immediate future.

Payment myopic people are likely to take on a loan type that may not be advantageous to them in the long run. For example, they may decide on an adjustable rate mortgage (ARM) without fully considering the risks of higher payments down the line associated with this mortgage, or their ability to pay should payments rise.

Another common mistake made by payment myopic borrowers is engaging in lots of debt consolidation. Debt consolidation can be achieved through refinancing to pay short term debts at a lower rate, saving money overall. However, many payment myopic people use the extra savings to take on more short term debt, leading to a spiral of more consolidation at higher rates. The end result is little home equity or savings when retirement age is reached.

Another mistake is always choosing the highest possible term for your mortgage. This increases greatly the amount of interest borrowers have to pay, though it reduces the monthly payments. It also lengthens the amount of time it takes to build equity in your home.

Finally, payment myopic borrowers tend to be attracted to low or no down payment loans. The mistake here actually comes from lacking the financial discipline to save for a down payment. Not being able to pay a down payment results in losing money through higher interest rates and mortgage insurance premiums.

 

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