Wednesday, April 16, 2008

Understand The Rules Before Bending Them

"Before bending the rules, one must first understand them." ~ a former boss.

In general, many financial rules exist for a good reason. 20% down payments and debt to income ratios of 36% (28% for housing debt) have a good basis. People that met these guidelines were more likely to consistently meet their loan payments. In addition, these guideline provided a margin of safety for any short term financial issues a person might have.

I'm not against bending these rules. In fact, I bent the rules for my first home purchase, which did make my finances tight for a couple years. However, being an engineer, I was good at the personal finance math, was able to calculate my own mortgage interest and understood the risks of bending the rules.

For some, financial difficulties occurred because they didn't understand these rules that they were bending (or breaking). From what I've read, some sub-prime borrowers accepted the qualification by loan brokers as validation of their ability to meet mortgage payments. Also, the same assumption seems to happen with some credit card holders, i.e. it's OK to charge to the credit limit authorized by the issuer, even if the payments may not be affordable.

While mortgage brokers and credit card issuers may be experts, I realize they work for their companies and are not necessarily looking out my interests. Thus, to protect myself, I do my own due diligence or hire someone who can do it for me. Before bending the rules, I like to understand the rules and therefore, better know the potential downside risks.

For more on The Practice of Personal Finance , check back every Wednesday Thursday for a new segment.

This is not financial advice. Please consult a professional advisor.

Copyright © 2008 Achievement Catalyst, LLC

No comments: