Was talking to someone about whether she should buy a house last night and it dawned on me: Most people, even really smart people, don’t understand what they’re doing when they buy a house with a mortgage.
Most people think, when they get a mortgage on a home, that they’re borrowing against the home.
Wrong.
They’re borrowing against themselves!
Sure, the bank gets an appraisal to make sure the property isn’t a total disaster. But what the bank is really focusing on is the borrower.
After all, the bank is depending on the borrower to keep paying that mortgage, even if the property value declines.
So, when you’re thinking about buying a home with a mortgage, think: In the event of recession, when the value of my home is likely to dip, am I likely to be laid off and, if so, how long could I afford the mortgage?
If you are either confident you’ll keep your job or have other assets sufficient to allow you to pay the mortgage in the event you’re fired, borrow away. If not, think long and hard before taking on that debt.