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
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
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.