Owning your own home is great. It is the American dream. There is this thing called a “mortgage” which makes home real estate possible. I can’t help but make a few observations about mortgages.
First, you don’t own your home. The bank, Savings & Loan or Mortgage Company owns it. You have a legal document making it yours and the lending company has a pile of “rights” should you default. If you really think you own your home, default on payments and you’ll find out who the eight hundred pound gorilla is. Normally you take hard earned savings and put 10%-20% of a house’s value into the mortgage. The bank puts in the other 80-90%.
Second, Adjustable Rate Mortgages (ARM) are very dangerous if you live on a budget. “Adjustable” means just that. If interest rates go down, you should get lower rates. That is nice. If rates go up, your mortgage cost which includes the new mortgage rate will go up. That is bad. Right now for people with a mortgage tied to the clever banking rate (which changes daily) called “prime”, could be subject to mortgage rates over 10%. That is just plain ridiculous. Mortgages are usually long term instruments of 15-30 years. Interest rate cycles are usually 3-5 year cycles. Don’t do the adjustable rate mortgage unless you plan to hold a house less than 3 years. As a rule, don’t do ARM’s. Lock in your fixed long term rate.
Third, home equity loans are an attempt to take what little equity you have in your home and borrow on that. Most banks and S&L’s send out an appraiser to look at your house and you are left believing that your house is worth much more than you thought. What the hell! Just tap some of that equity with another Adjustable Rate Mortgage. No! No! No! Now, if you fail to make payments on your home, the bank will make sure it gets sold and you will have nothing left because you used up all the equity. Ugly, ugly, ugly. Some mortgage companies will lend you up to 125% of the value of your house. Don’t do it.
Some people insist on paying down their mortgage by making “extra” principal payments. It can reduce the amount of time it takes to pay off your home from 30 years to 20 years. There may be some good reasons to do it, like your retirement coincides with your last mortgage payment. Many times there are better financial decisions. If you have 30 years of fixed payments at 5%, why pay it off. The interest is tax deductible, both Federal and State, which takes the effective rate to less than 4%. Take that same money, put it into a 401k at work, have the company match your contribution and earn 6-8% over time. All 401k money is deferred until you pull it out. Paying off your mortgage might bring peace of mind. Then do it. Paying off your mortgage may not be the best financial decision. Since your mortgage payments are fixed, you will be paying cheaper inflated dollars in the future. That is really good.
A final thought. If you think your mortgage company has your best interest at heart, you are living in a fantasy world. If you think they will be compassionate when your financial budget gets tight, you live a fantasy. If you think they will hestitate to put your house up for sale or auction if you default, you live a fantasy. Lah-lah-lah-lah.
Mortgages are a fact of life. They make houses available to 70% of all households. Use the mortgage wisely.
Love,
Dad