Mortgages

Why is the housing foreclosure situation a surprise to people?

Five years ago, when we were buying our first house,we started applying for pre-approved loans. Our credit was excellent so that was in our favor. We had a significant amount of money in our retirement accounts so we were a good risk there as well. The down side? Dear husband's salary was very small and I didn't work and we had (then) 7 children and one on the way.

Would you believe we qualified to borrow $225,000?????

On what planet? We KNEW we could only afford a $500 per month payment tops, a house that would cost LESS than $100,000. If we had borrowed all of the money that was offered to us, we would be in foreclosure right now too.

First of all, if WE knew we could only afford < $100,000, why didn't the bank?
AND do other people really borrow whatever the bank offers them? And if they do, why do they not know that an adjustable rate mortgage will kill them a year or two from now?

We needed to get two mortgages to cover our cost. The first we locked in at 5.5%. The second we secured an adjustable rate of 4% for a much smaller amount of money. We were diligent in paying extra on that one every month so that we could pay it off as soon as possible. After just ONE year, the interest rate had jumped to almost 8%! At that time we just put the remaining balance on a 0% for a year credit card and paid it off. We used the system to our advantage.

However, I was shocked that in just one year the interest rate had doubled..making the amount of money we owed significantly more than we bargained for (if we had held it for as long as we contracted.)

If those who borrowed borrowed the maximum allowed AND did an adjustable rate, of course they had to foreclose.

Why aren't the banks educating their clients? Why are borrowers not educating themselves?
Is the banking system designed to cheat, I mean make a profit at their clients' expense?