A lot of talk about the economy lately surrounds the "mortgage crisis," and I guess I didn't understand what the problem was. I mean, when I bought my house in 2001, I had a great fixed rate just under 6%. Even when I refinanced in 2006 with a no-cost loan, it was just over 7% (my thinking was that I'd refinance when I move, and the difference between the interest and the closing costs works in my favor for about four or five years). I wouldn't say my payment is particularly low, but considering what similar houses around my neighborhood are going for, I've got a shit load of equity if I could actually sell it.
So I'm watching ABCnews, and they profile a couple that bought their house for $174,000, bigger than mine, with an introductory rate of 9%. 9%! It's an adjustable rate mortgage, and they were now paying 14%! I had no idea that kind of thing went on. I mean, the credit cards I carry a balance on (business cards) are less than that. With their combined income around $80k/year, they were paying over $2k a month. That's insane.
The story made me wonder then how exactly we got to this point. Is it a lack of education? Poor credit ratings? Predatory lending? Gotta have a new McMansion?
When I think back to growing up, it occurs to me that I never had any formal education when it came to borrowing or saving. Those seem like two pretty fundamental life skills to be aware of. My first house buy was made possible from the sale of popworld.com, and after several cars I didn't find the mortgage process that different from a car loan (aside from the escrow account for taxes).
On the other hand, I wasn't that responsible with credit cards, starting about two years after college. I never got behind or in any kind of financial peril, but I was certainly pissing away money on interest. The popworld.com sale kind of bailed me out on that too. Later I'd rack up and pay off $10k balances during lay-offs and my self-employment efforts.
I always knew that saving money was important, but I never really did much of it. I have the equity in my house and a decent chunk invested, but getting to that millionaire status by 55 isn't going to be easy.
At least being alone for a couple of years gave me the chance to really stop and think about what the hell I was doing with money. I feel like I'm headed in the right direction, provided I stay with this job for the foreseeable future. I have no personal credit card debt, a low car payment and a mortgage I can afford. Even the business is starting to get under control, with debt under five figures and total interest expense last year around $500 (it used to be three times that).
Again, I wish that you learned about this stuff in school.
It's probably bad credit ratings and no savings. Anyone can get an ARM with a mediocre credit rating. Most people carry too much credit card debt and make the minimum payments, from what I can tell.
America has gone from our parents and grandparents who bought with what they had saved to today's generation of buying on credit. They never come out ahead. They spend to keep up with the Jones', never actually having the money in the first place. No one saves a bit extra for the incidentals.
Yeah, I believe there is a strong decline in the understanding of the value of money, how it can work for you and work against you. And how do you even begin to teach young people about the value of money today? No one carries it any longer. Everything is plastic from debit cards to credit cards.
If you have ever cruised you know that there is usually some kind of "sign and sail" program when you board. You sign and leave a credit card or cash balance and from then on there is no exchange of money on the ship. They have been in the know for a long time. When you don't hold the money and see it pass from your fingers, you don't think about (as easily anyway) what you are actually spending.
Take that concept and extend it to everyday living and you can see why many find themselves in deeper than they can afford.
There's a big difference between living within your means with a managed budget for where credit is applicable, and when one overexerts their funding.
That reminds me, I need to look into refinancing.
And Carrie -- EXCELLENT example. I can't wait for another sail and sign card in May... ;-)
Millionaire by 55?
Me thinks you should spend half an hour familiarizing yourself with the "FV" function in Excel (or Open Office).
2 Million is the bear minimum you'll need to show up with at 55...
Every time this issue comes up (which is often) I am reminded of a former co-worker who literally laughed at me for taking out a conventional 80/20 30 year mortgage at 5.5% when I moved back to Ohio.
Now he sits in his $150k house in Florida, with a $325k interest only mortgage wondering how the hell he is going to raise $325k to pay the principal balloon when it comes due, real soon.
The idea to get more house for your money was okay on the surface, but if you simply think about it, it was a bad idea.
Do I feel bad for the people with mortgage debt twice the value of their home? I am not sure. When the working poor are duped, I fel pity. When your everyday college educated middle class yuppie is duped - I have no sympathy at all. It's all about MORE MORE MORE and ultimately it will leave you with NOTHING.
It's not just people getting in over their heads for more house than they could afford (although that appears to be the greater part of it in CA and FLA), it's people who were more than able to pay their mortgage and then losing their jobs and not being able to find another one...especially here in Michigan when a good number of people were dependent upon their auto industry jobs.
Housing values have dropped more than 15% in Michigan so people like us, who have had to draw on equity just to make ends meet are now faced with a mortgage more than the house is worth and end up either walking away or going into foreclosure.
You have a good point Linda, I agree that there are people out there who are in situations that are not of their own making.
Overall though, I think they are the minority. As a nation we drive our economy by spending money on things we don't need. To accomodate this during the past decade banks made money easier to get and people spent and spent and spent, now they have nothing to show for it.
It's like the president's tax rebate idea. Great, I will get $1200 in the mail over the summer. Many people will pay bills (not an economic stimulus) and the government will go even deeper in debt. Our current government leads by example, spend what you don't have, and then wonder why we are in trouble.