The history of mortgages is quite interesting. Prior to the 1930’s, it was not uncommon to buy a home with 50% down, then 5 years of paying interest only, and then a huge balloon payment to pay the loan off. The name ‘mortgage’ comes from two Latin words; MORT (death) GAGE (pledge)…so when the note is paid, the pledge is dead, or as we call it today: Paid Off. But the desires of people to have bigger homes didn’t fit that crude loan model, so more and more people began to default on their loans, which led to glorious amortization loans. The borrower now had longer to pay the loan off and the interest was figured in with payments. So eventually, rather than only 5 years, we ended up with 15 to 30 year loans with equal payments. Roosevelt introduced his “New Deal” (No, not the GREEN new deal) to make home-ownership more consumer friendly. Fannie Mae and Freddie Mac and the FHA all helped regulate and provide financial aid when someone wanted to “Live the American Dream” and get a big ‘ol fat mortgage.
So how did we go from that to where we are today? Almost 20% fewer people claim to be DEBT FREE now than ever before. Massive debt easily builds after education and credit cards with their incentives to load up on debt. But that doesn’t explain owing over $133,000 by the time you’re only 35-44 years old.
Well, it ‘s clear when you look at two major expenditures: cars and houses. In the “old days,” people bought cars on the basis of safety and reliability. But later…they wanted a shinier one, one with all these ‘extras’ on it. A truck wasn’t enough: they wanted an extended cab, with huge 4×4 tires, monster gas-guzzling engines, extra chrome and more buttons complete with electronic gadgets that would put Apollo 11 to shame.
And so it is with homes as well: it’s not enough for just a comfortable house – but it needs a pool, a BIG pool, extra rooms, bigger lots, the latest appliances and competitive exteriors.
But guess what did NOT change? The person’s ability to pay for those things. The banks were more than happy to “help” by extending loans further and longer. More than a decade ago, U.S. auto loan terms were typically 36 months to 48 months, with an unusual high of 60 months. Now with the demand for “goodies” and simply more, the average new car loan has reached a record 72-85 months! That’s up almost 25% from the previous year.
The simple truth is that, due to ease of funding and social acceptance/pressure, people are more and more comfortable living well beyond their means. Nobody is sitting at that closing table with you, reminding you that adding those extra months to the loan is cramming your hard earned money in lenders’ pockets. The difference in overall payments for a $400,000 loan from 15 years to 30 years is almost $200,000! Paying $1,000 more a month to cut the term in half makes a HUGE difference. Someone may comment “I don’t have an extra $1,000 a month!” so then the question is: “Then are you willing to pay a $200,000 convenience fee or would you rather wait a few years?” Another option to help offset would be by putting more down at the time of purchase. Of course in order to do this, people need to be saving regularly… And let’s not go there.
The point I am trying to make is that there are PLENTY of options to help you bear the burden of loans and long term payoffs. But the real question is…do you really need ALL THAT!? Your body will digest a $2.00 taco the same as $50 steak; you don’t have longer energy or better health because one cost more than the other. The car that costs $200/month gets you to your job just as efficiently as the new one with current average payment of $531/month.
The struggle is real. It seems EVERYONE wants you to buy bigger and better. Lenders, agents, realtors, builders, manufacturers – they all make more when you spend more; so don’t expect them to ask you whether you REALLY need all that home or all that car. They just want to be sure you qualify and can make the payments. But you, as a responsible consumer, need to ask yourself these question FAR IN ADVANCE of sitting there looking at that sexy car calling your name and making purchases based on emotions rather than clarity. And be the one to put your foot down when that base model car starts adding up with XM radio, parking assist and chrome plated license plate holders. Know your limits and stick to them!
My humble suggestions?
- Always pay yourself first…put it in the bank and FORGET about it. If you don’t pay you first, there will never be “enough” left over. Limit your desires and throttle your needs.
- Think about the future MORE than you think about ‘right now’. 29% of households have less than $1,000 in savings…what do you plan to live on in your future? Your kids? You might better run that by them first. The government? Ha! I think that ship done sailed.
- Don’t let someone else convince you of your financial capabilities.
- Have an exit plan. Life happens fast and just because you can afford it today, doesn’t mean in a year you will be in the same position. What happens then? Do you walk to work and sleep under bridges?
I was recently looking to buy a home and the lender told me what I qualified for and I laughed because I KNEW that even though according to his algorithm, I may qualify for that amount, but I would have NO Wiggle room. If anything every went wrong, I would lose it all. I refuse to take that risk. So I decided to wait. Sure, the house I was looking at was awesome and I could see myself in the back yard BBQ-ing or in the spacious living room kicked back watching the Cowboys lose, and all I had to do was sign the papers and it was ALL mine (in another 30 years). But at what cost? What would I need to sacrifice in order to make that happen? It simply wasn’t worth it. Believe me, I have made some horrible financial decisions in my life. I guess I am just tired of making them. Take control of your life and be a bully to your natural desires.
Great article!