adding lyrics is baffling to me...

[Nancho Alvarez]

I use a different version of lilypond (2.1.25) but I think the problem 
is that you do not specify correctly de duraction of each sylable.
Try this
\context Lyrics \lyrics {
On8 Mon- day I went to my home,8*5  And8
there I was paint- ed in blue.8*5 I8
sang a nice song,4 etc
}
Observe that you do not need to use 8 in each sylable because by defect 
the last value is used. Observe also that if you want a sylable
expand for 5 eights you can write 8*5

Also in the begining of chords section, I think you mean a 8 rest, not a 
2. one.

Anyway I recommend the use of \addlyrics (or \lyricsto in the newest 
versions), look for it in the documentation.
With this you do not have to worry about duration of sylables, it is 
taken automatically from the music.

I hope this helps you.
                                                         NANCHO