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Your Mortgage Pride and Prejudice

Your Mortgage Pride and Prejudice

| January 26, 2018

We all have our preconceived opinions not based on reason or actual experience. It's called a prejudice. That's a bad word in today's culture and I'm accusing you of being prejudiced. Once you stop clutching your Victorian pearls in offense, allow me to explain. I'm talking about your mortgage prejudice. You see many of us are instilled with a hatred of owing on our house and a great pride in owning our house. Open your mind and allow me to disabuse you your pride in ownership and your prejudice in owing. This isn't the complete list of points to be made, just some of my favorites.

If It Pleases the Crown
You don't own your house free and clear once the mortgage is paid off. You will always have property taxes. You may even have a homeowner's association (HOA) fee. You will probably have homeowner's insurance. If you fail to pay property taxes or your HOA fee, what do you think happens? It's not pretty.

With unpaid property taxes, a lien will be placed on your property (in the great State of Florida). That means when you go to sell "your" home the state will be paid. If you linger too long with unpaid property taxes the lien will be sold so that the State gets paid. You still must redeem the lien if you want to stay in your home. By the way, the amount of the lien has been increasing with interest at a rate set by an online auctioning process. Again, this varies by state and you should consult an attorney if you find yourself in this situation. Source

With an unpaid HOA fee in some states, things can escalate to eviction and/or foreclosure. "Your" house is yours to use and profit from as long as you are current on your property taxes and HOA fee. Essentially you are a vassal to the benevolent royals who really control your property. But wait there's more.Source

Cents and Sensibility
If your home is your greatest asset, it behooves you to understand how that asset behaves. First, the value of your home is dependent on several factors. Buyers are asking for great location, top school districts, stylish upgrades, spacious closets, solid construction and a host of things your realtor can explain to you. When you go to sell your home, does the buyer ask you how much you owe on it? No, because it doesn’t matter. The value of your home increases and decreases based on supply and demand of your type of house in your location.

Let's say you bought your home at $250,000 and carried a mortgage for $225,000 and sell it for $500,000. Over the years the increase in sale price had NOTHING to do with how much of that $225,000 you paid down through your monthly payment. Your principal payments simply increased how much of your own money you'll get back at closing. The interest payments simply provided you with the time for the value to go up based on market factors. So, in this scenario interest payments are a good thing.

What about a worst-case scenario. Let's say you bought your home at $500,000, put $275,000 down and carried a mortgage for $225,000. Years later it is appraised at $450,000. Over the years the decrease in sale price had NOTHING to do with how much of that $225,000 you paid down through your monthly payment and NOTHING to do with the $275,000 you sunk in a down payment. Your principal payments simply increased how much of your own money you'll get back at closing. The interest payments simply provided you with the time for the value to go up or down based on market factors. However, because you put $275,000 down you have lost the opportunity to invest it elsewhere. Real estate isn't a sure thing. A smaller down payment also mitigates realized losses if circumstances force you to short sale.

A Tide in the Affairs of Men
For generations, home ownership has been a great source of American pride. It's the American dream after all. It's so strong that Congress has incentivized it in myriad ways over the last 100 years. Not only is mortgage interest currently deductible (within limits), but monetary policy of the Federal reserve have kept rates low. But the tide is turning.

Whether these government machinations are beneficial is a topic for another blog. With exceptions, the left wants to tax us and spend on welfare entitlements; the right wants to tax us, and deficit spend on warfare. Pick your poison. We are printing money to pay our debts. Suffice it to say, current tax and fiscal policy favors inflation and/or rising interest rates.

Thanks to inflation a principle and interest payment on a 30-year fixed mortgage of $1200 per month would have less and less impact on your monthly budget. The payment gets easier as time goes by. Here's why, your income is going up but that $1200 stays steady. Property taxes and insurance costs could rise, but the payments on principal and interest stays the same. If your income grows at the rate of a 2% inflation, then the impact of your payments shrinks by a third. Think of it this way: you earn $14,400 to pay the mortgage today, but in twenty years that $14,400 of income would increase to $21,398. Better yet, ask your parents or grandparents what they paid or are paying on their mortgage. They'll tell you that the early years were a stretch, but over time inflation was a good thing.

The Summary of all Fears
In conclusion, prejudice can lead us to let fear overtake analysis. These principles discussed above may help. However, beware of making your decisions based on blogs or books you read. Your unique home mortgage situation is a but a chapter in the book of your financial life. Take everything you've read here as a perspective that can educate you. When you need to make an informed decision, let's meet and write the next chapter of your financial life. Interested in talking about this, click here.