Wednesday, October 22, 2008

Messy Mortgage Math

Tell me something. Why is it that everyone thinks that they have to own a house? What is the great thing about being a homeowner? Other than you own it, that is? You don't have to own a house. There's nothing wrong with renting. But you'd think that there was, considering all of the people who bought houses that they couldn't afford simply because they wanted to "own their own home". I think it's because somehow, somewhere, people got it stuck in their heads that if they own a home they will have instant access to unlimited cash through something called "equity. The problem is that the equity concept has been twisted and warped to a point where it's not even recognizable any more.

See, equity is the value in your home that is above what you owe on it. It used to be that if you took out a "home equity loan" it was for improvements on your home. Banks were fine with doing those types of loans because it would improve the home and increase it's value due to the improvements and then when the home was sold, that money would come back. Sure, that makes sense. But then....that's right.....stupidity took over.

People started seeing their home as a big, shingled ATM. Oh, need some cash? I'll just take it out of my equity line of credit! Yeah, that's all well and good IF you can pay it back. But, surprise, as it turns out, a lot of these people who were taking the home equity lines out could NOT pay it back. (Obviously. If they couldn't make their house payment, I highly doubt they're going to be able to squeeze in another payment.) Shocking, I know.

I had read an article in the rapidly declining in quality San Jose Mercury News about a couple who had bought a home that they were spending 80% of their income on to the tune of about $6,000 a month. (Please note the bars on the doors and windows in one of the photos below.) That doesn't include the $7,000 a year tax bill. The couple said they had bought the home in 2004 because they had hoped it would pay for college for their children, ages 4, 6 and 13. And it's going to do that...how? Again? Are you planning on selling the home in 4-5 years when the 13 year old is ready for college? How much equity did you really expect to have? 4-5 years is not a lot of time to wait for a house with bars on the windows to appreciate in value enough to pay for three children to attend (I'm assuming) a four year college. (Keep in mind that a report that was released by some group trying to sound official and like they know what they're talking about, said that the average cost of state college for four years was around $6,600. That figure is definitely low for some states and definitely higher for others. But that's what makes it an average!)

Why would it not have made sense to these people to not buy a home, but to rent one instead for, say, half that amount? Then if they took the other half and put it in the bank or bought CDs with it or set up a Roth IRA, they would be accomplishing their goal in a much more efficient manner, as that $6,000 a month that they're paying right now is mostly interest. They're not seeing the balance of their mortgage go down a whole heck of a lot; no one does at the beginning. So how that plan made sense to them I have no idea. None.

If we do the hypothetical math on this one and assume that they can find a place to rent for $4,000 a month. That would be with or without bars on the windows; their choice. That gives them an extra $2,000 a month down from the $6,000 a month they're paying now. With 12 months in the year, that's $24,000 a year they can save instead of spending that money on a mortgage payment. Based on the earlier average state college cost of $6,600 combined with the three college bound (expected) children, they would need about $20,000. With my plan, they've done that in ONE year. They've been doing their plan for four years so far. Granted, this is totally hypothetical as far as the situation goes, but what they are currently paying for a mortgage and the reasons why they have stated they are doing that are not hypothetical. Why does my way not make sense to them? Why?

But here's how it made sense to them. When asked if they regretted the decision to buy the home, this was the answer the woman gave: "That's hard to say. I don't, because I wanted the stability of not moving my family around every few years. But we're paying about $6,000 a month. I mean, sure we could have more money and go on vacation, but it's hard to say. The stability of being in one place with your children and not having to move means a lot to me. I didn't buy my house to make a huge profit. I bought it so if my children wanted to go to college, we'd be able to pull money out later on."

You're going to pull that money out...of...where....exactly? Your ass? What do you mean? Are you aware that you are going to have to pay back however much you pull out? Apparently not. But the part that just kills me is the part where she says that if they had more money that they could go on vacation! NO!! THAT is the problem! Here's a tip for you: You do not, repeat, DO NOT have to spend EVERY single dime that you earn!! You are allowed to save it!! Yes! If you were spending less money and you did NOT go on vacation (just like you're not going on vacation now, I'm assuming) you would be able to SAVE some money. And you know what that means? That means that when your kids are ready to go to college (and they can't go out and get a job and work and go to school at the same time like some of the people writing this blog did) you'll be able to pull money out of the method in which you saved it! Then, because it's already yours you (get ready for this one) do NOT have to pay it back! Oh, sweet mother of God, WHAT?!?! What a crazy notion! Why would someone do THAT?! After all, they can go on vacation! ::::sigh::::: My head hurts.

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