A home is something you should eventually own, not perpetually pay for.
Many folks today think just the opposite.
The monthly payment mentality is strong in America. We own nothing and make payments on everything, it seems.
And you read a lot of stories these days about people in their 60's taking out 30-year mortgages, in their retirement. What is up with that?
Some are just broke - they have no money to buy a home, but might have a defined benefit pension and get a monthly stipend. Their only choice is to rent and apartment or buy a home. If they had been astute, they would have paid off a 30-year mortgage by now, however, and be living high on the hog. As it is, they have to hope their pension doesn't go bust before they die.'
Others are conned into this "opportunity cost" argument by investment counselors. They argue that they should invest their money and then get a mortgage, and make the mortgage payments using the income from their investments. It is a horrible idea for an older person, because if the market tanks, you have no income to pay the mortgage and end up in foreclosure at age 70.
Which is sad, because only a few years earlier that had enough money to OWN their own home, free and clear, and they decided to gamble it on stocks. At retirement age, you should be out of the gambling business.
This idea of being in perpetual debt, particularly in retirement, is a new one. Not too many years ago, people worked hard, saved their money and paid off their mortgages. A "mortgage burning party" was something everyone had at one time in their lives, at least.
When you retired, you knew you could retire on less, as your home was paid for. And since it was paid for, it was also an asset that could be sold when you wanted to go into assisted living or downsize to an apartment. It was a solid asset that was risk-free and you could liquidate to live on.
And paying off your mortgage is still a good idea and a good plan - over time. Heck, you have 30 years, right? Why not do it?
Well, the reason people don't is they want it all now. They want to refinance their home over and over again to pay off other debts - car loans, credit cards, etc. One lawyer cheerfully told me the other day that she is a "serial refinancer" - having refinanced their mini-mansion five times now. In addition to the constant resetting of the 30-year term, AND the added principle added on to pay off car loans and credit cards, she is adding $5000 or more in closing costs each time - or about $25,000 so far. Ouch!
Or, people keep buying and selling homes - often in the same town - so that they never get ahead of the game. They want to "upgrade" to a larger home, so they sell a home that has 10 years remaining on its note (when the principle amounts really start to become a larger and larger part of the payments) and starts over with a new 30-year note on a larger home. Higher mortgage payments, more debt, more time to pay off, it never ends.
Serial refinancing or serial buying also means that you are paying the most interest, over time. The first five years of a mortgage are almost all interest payments. So if you refinance (or buy a new home) six times, every five years, you pay nothing but interest and have little or no equity. The fellow who stays put owns a home outright - and he can retire if he wants to.
Get out of the idea that "I'll always have debt" or "I'll work until I'm 70!" or whatever, as these are really bad ideas.
And we are seeing the fallout from this trend already, and it will get much worse, over time. Seniors who are working well into their 70's, not for the joy of it, but to survive. And children having to probate their parent's estate, only to realize that it has a negative net worth - and they are left to clean up the messes and deal with the creditors in an insolvent estate. They might not have to pay off the debts, but they have to do all the paperwork, and for not even a cent. Gee, thanks folks!
* * *
Note that I am not saying everyone should own a home. There are many people out there who like to rent and there is nothing wrong with that - provided they have allocated money in retirement to pay this rent and have it invested in safe harbors.
And owning a home doesn't mean having no housing costs. Between insurance, taxes, utilities, maintenance and other fees, I estimate it costs me $10,000 a year to own my home with no mortgage. Ten grand ain't free. And when you consider that I can rent a similar home for about $1500 a month (or a smaller one for $750) the touted advantages of home ownership don't seem all that great. In fact, for the delta in pricing, one wonders why people buy at all....
If you are going to BUY rather then RENT, however, the touted advantages of home ownership evaporate pretty quickly if you never pay off or pay down the mortgage. And in fact, you may end up spending, over time, more than someone who rents, if your home is perpetually encumbered with a mortgage.
6 comments:
When we were in the Real Estate business, the statistic touted to us was that the average person moved every five years.
I don't know if that is true or not, but if it is, most people would be better off renting. Why? The closing costs on both ends of the transaction wipe out any appreciation you may make on the home.
Sadly, it seems, a lot of people are paying MORE to own than they would to rent. Just so they can say they "own their own home."
And the media and politicians tout this as some great freaking deal. If you are losing money at it, it ain't!
I agree Robert. Looking back now we probably should have stayed in our previous home in the city. We love living where we are not but the costs are astaunding. $7K property tax, large property to look after, unfinished basement-we finished our in the last one so now here we are aagin finshing an unfinished basement. Endless thoughts of renovations. But now every time I think of a home improvement I say that it is taking it away from our retirement funds. We don't want to move yet again and downsizing after all means moving into a smaller house which we don't want. As well, when you are use to a lot of room in between the houses, we don't want subdivision living. So what do you do....
Wow, sounds like the house we bought in New York, down to the unfinished basement and property taxes.
As I get older, my desire to own a home has diminished. I've owned nine, I think now, most of which were investment properties.
It was kind of cool to have five bathrooms until they all needed new flush valves and I had other plans for the weekend.
Today, a park model would suit me just fine. Keep the money in my pocket, not in a house.
As for "home improvements" see my earlier posting on that. When a developer offered me $300,000 over market value to BULLDOZE my house, I realized that home improvements were just silly.
I try to minimize that sort of nonsense nowadays...
The large house comment is interesting and the subject for my next post. Many folks buy homes for their furniture. Garages for their cars. Lakefront for their boats. Walk-in closest for their clothes (that they never wear).
Paying a lot of money to own "things" is really not smart. Sell off the things and live in less space with less things and enjoy LIFE. Life is not all about owning stuff.
Possessions are slavery. The material is mortal error!
My only other comment is that you moved to a new house, and already are thinking about an eventual downsizing. This is a lot of moving in just a few years. If you sat down and thought about the transaction costs alone, it would make you weep.
But you can't unbark the dog, as they say. Just have to make the best of what you have.
Your house will be worth about the same with or without a finished basement. After all, YOU bought it with an unfinished basement, right? So think hard about plowing more money into a money pit.
Renters are smarter, I think, sometimes.
Here is the last basement project we did. Sold the house a year later. Was it worth it? Lost $100,000 on the house. It made the house sell quicker, though.
http://www.facebook.com/media/set/?set=a.145216864352.106890.566574352&type=3&l=6a64c524aa
BTW, we sold that house, downsized to our retirement home are debt-free.
It is much more relaxing than having to make mortgage payments - particularly when you are self-employed.
We are lucky that we own our own home (paid cash when we bought it 4 yrs ago)
The things that bug me is the ongoing cost of the maintenance. We have 2 kids so there are 4 people living in a 2600sf house. I don't call that very large but then again if we finishe the basement that adds another 1300sf to it. The kids and their friends drive us nuts. I want them hanging out down there instead of in their rooms. When the kids leave the nest (and who knows when that will be these days) we will probably move.
finishing a basement can be a DIY project. Paying someone else to do it can be expensive.
And what a good way to put all that youthful energy to work - and teach kids carpentry skills for life!
Sheetrocking is not hard. What you lack in skill, you can make up in the time you spend on it. A lot of thin coats and a lot of sanding, and well, eventually you get there.
Wear a dust mask!
Price of sheetrock went up a dollar a sheet the other day.
P.S. - make sure you have good drainage in your basement. My boss at Carrier spend a year making his basement into a family room, complete with bar and home theater. Wall-to-wall carpet, the works! A week later we had a huge storm and power failure and the sump pumps stopped working.
He had to tear most of it out and start over!
I am not keen on below-grade living anymore. I'll take a slab, thank you, or preferably something on stilts!
Good Luck!
Post a Comment