I was reading some articles this morning written by Dr. Jack Guttentag, Emeritus Professor of Finance at the Wharton School of the University of Pennsylvania. One of the issues he wrote about was ‘payment myopia’ – a phenomenon where people base decisions solely upon the affordability of monthly payments. Myopia is ‘near-sightedness,’ a defect in the eye where one can see close objects clearly but distant objects appear blurred (wikipedia, not an opthalmologists definition). What a great analogy for examining a very common mistake …
Unfortunately, many people are payment myopic when making major purchases. The questions are often “What will the monthly payment on that house be?” or “How much would my payment be if I want this car?” What is wrong with those questions? Loan products can easily be manipulated to provide almost whatever monthly payment you’d like (just take a closer look at some of the available products – 40 year [or 50 year] home loans, interest-only mortgages, negative amortization loans, etc.). Focusing on the payment is a short-term (“near-sighted”) focus. Short-term decision making seldom results in long-term success. So what would be a long-term perspective in this example? Contact the lender after having already reviewed your budget to determine what YOU can afford based upon how quickly you would like to repay the debt. Ensure that YOU are comfortable with that payment relative to your other financial goals (savings, investment, and other objectives should be considered).
The “Mortgage Professor” (as Dr. Guttentag is referred) has a website with a lot of great housing resources. The site isn’t the prettiest, but the content is solid. Here are a few links to direct you to some of his resources:
- Mistakes in Buying, Financing, and Refinancing a Home
- Mortgage Calculators
- Mortgage Spreadsheets
- Table of Contents