Mortgage interest MYTH- it's a rip off!

[C.Ann]

Grrrr... I hope you are not one of those people who are in front of me in the grocery store paying for a $2.50 salad from the salad bar with a check!

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Nope.. I'd be the one putting it back because I didn't want to write a check for $2.50.............

 

[Nora94]

I think that paying off extra on your house is more the idea he was going for instead of the idea of paying cash for the whole purchase of your house. Every year you pay extra in the beginning pays off extra at the end. We can have a 30 yr mortgage, with a lower monthly payment that is more flexible if our income goes down for some reason, and still pay an extra $50 an month on it, thereby making the extra principal payment over a year's time and cutting years off the age of the mortgage.

I also think that no one with any brains will argue that having an apartment where you pay rent is smarter than having a house where you pay mortgage. The only way it makes no sense to not have a mortgage is if there is no rent either.

I also totally agree with the credit card being a good way for some people. I have always paid off our credit card every month.

As far as the FICO score, due to ours being so high (829 and 795) we got an accident forgiven on our car insurance, thereby saving us hundreds of dollars a year in what would have been higher insurance costs.

It is always smarter to pay off unsecured high interest debt first, but also smart if you have a little extra to pay extra on your mortgage.

Nora

 

[tlbwriter]

I also think that no one with any brains will argue that having an apartment where you pay rent is smarter than having a house where you pay mortgage. The only way it makes no sense to not have a mortgage is if there is no rent either.

You know, I don't think this is universally true any more. I was listening to a story the other day on some financial news show that featured a California man who rents his 1-br, 1-ba house for about $2000/month. To buy a similar house in his neighborhood, his mortgage would be $6000/month. They felt people in this situation were better off renting, since (a) the huge discrepancy between rental prices and mortgages meant the homes were very overvalued (well, duh!) and (b) there's no way he'd get $4000/month more (equity, tax benefits) out of owning that house.

 

[Nora94]

but when it's all said and done, I have some equity in my house, my money went to something that I can use and also will be worth more. The renter walks away with less money.

I wouldn't say that he should rent, I would say he needs to move to a different part of the country.

My brother lives in San Jose and pay $3000 a month in RENT on a house that is the size of mine that I pay $1000 a month for mortgage. After 5 yrs I have put money into the equity, and saved on my taxes. He has been paying rent with no end product produced.

I can sell what I have, he can't. He just keeps paying rent. I will come out much better in the end for owning and having a mortgage than he will by renting. When I want to retire, I will have this house as money when I sell. He will not have anything like that.
Nora

 

[tlbwriter]

Yes, but you are assuming that when he buys that overvalued house, its value (and his equity) will continue to rise. And that's not necessarily the case. He's obviously living in an area that's on a bubble, and when the bubble bursts, home prices will plunge. And then he'll be stuck with a $750K mortgage on a house that's now worth half of that. If renting cost anywhere close to buying in that area, I agree he'd be better off buying. But the point they made was that when renting in the same area - on the same street! - is so much cheaper than buying, it means something in the market is out of kilter, and it will eventually right itself.

Would you brother be able to buy that same house for $3000/month? Or not much more than that? If so, he should buy. But if it would cost $6-7000/month for him to buy it, he should consider putting the extra money somewhere else, rather than into a house that isn't going to hold that inflated value forever. Sure, he might sell at the right time and make a huge windfall. But he might not.

 

[arminnie]

I also think that no one with any brains will argue that having an apartment where you pay rent is smarter than having a house where you pay mortgage. The only way it makes no sense to not have a mortgage is if there is no rent either.

There's always the exception - and I always seem to find them. I wish I had rented in Texas in the early 80s instead of buying - no matter how much rent I paid (which would have been less than mtg payments) I wouldn't have lost over $120,000 when the market crashed, and I had to sell. When you end up with NEGATIVE equity that is NOT a good thing.

But on the good side - when I moved to CA in 1989, I rented for five years before buying. I lived in a very nice place and my rent was much less than a house payment. Again the market crashed there, but this time I was on the right side of the equation. My condo cost me $100,000 less that it would have when I first moved to CA. I am so glad that I waited to buy.

Housing prices do eventually go up but not always in a straight line. There have been dips over the years and if you get caught having to sell during one it can be VERY painful.

 

[dvcgirl]

Yes, but you are assuming that when he buys that overvalued house, its value (and his equity) will continue to rise. And that's not necessarily the case. He's obviously living in an area that's on a bubble, and when the bubble bursts, home prices will plunge. And then he'll be stuck with a $750K mortgage on a house that's now worth half of that. If renting cost anywhere close to buying in that area, I agree he'd be better off buying. But the point they made was that when renting in the same area - on the same street! - is so much cheaper than buying, it means something in the market is out of kilter, and it will eventually right itself.

Would you brother be able to buy that same house for $3000/month? Or not much more than that? If so, he should buy. But if it would cost $6-7000/month for him to buy it, he should consider putting the extra money somewhere else, rather than into a house that isn't going to hold that inflated value forever. Sure, he might sell at the right time and make a huge windfall. But he might not.

Well, first of all, while I think that there are definitely areas that are *way* overinflated in real estate, I don't believe that we'll see any areas (even the Silicon Valley) drop by 50% when housing cools off. It won't be the big "POP" that we all heard in March of 2000 when the Nasdaq started to plunge. It will be more of a "hissssss" if you will...a slow leak. A 5-10% drop is a more likely scenario, followed by a fairly long period with no growth.

The problems will begin with people who are new real estate "investors". These are the folks who are late to the game and are buying properties thinking that the market will just continue to go up Up UP. And they're buying houses with very risky mortgages thinking they'll be able to unload them in short order. "Hey, why not use the banks' money right?" When the market cools, those people will be the first affected, because they're not able to flip the house for a quick sale, and perhaps the rent revenue isn't covering the mortgage.....foreclosure city here we come.

So real estate investing will slow, causing building to slow, causing manufacturing to slow....and the economy will slow down with it.

The next group of people it will hurt is first time home buyers, because they may now own a home that is worth slightly less than they paid for it, so they may have little to no equity if they've taken out one of these risky home mortgages. It will surely suck for them to be paying on a home that is worth less than it was when they bought it. Even if it was worth 5% less, it would still suck. And it'll suck even more that many of those folks won't even start to pay down prinicple for up to five years in....and if the market is still flat....that they've been paying five years....for nothing. They could have lived in an apartment all that time and been in the same spot.

And then when you factor in that people have been pulling equity out of homes like crazy..."hey my house is worth 3 times what it was worth when I bought it!!" "Now I can afford that new kitchen!!" Yeah, but you need to pay the bank back for that new kitchen. And well, so your home apprecicated? That's all great, but it means nothing unless you are selling and moving into a cheaper home. On the contrary, when your house value goes up 3 times, unless you're ready to unload it, what it will most definitely mean is that your property taxes are going to go up. Yay? I think not.

So with all that equity no longer being pulled out....well, watch consumer spending drop. Home equity loans are a big part of what is holding those numbers up right now. I'm betting it's also a big reason why Disney World happens to be seeing record numbers this year....

 

[crisi]

That's really hard to say. Housing prices in San Jose could plummet if a combination of factors occurred. A couple of big earthquakes. A tech bust on top of what we've had for a recovery. Continued "flight" from California (the company I work for is HQ near San Jose - I know a dozen people who have left San Jose and either telecommute from Texas, Colorado, Minnesota, Seattle, etc or just up and quit selling their homes at a huge profit, to move to the middle of nowhere New Mexico - they are looking around and saying "I can't afford to live here.").

 

[CarolA]

I've never understood this logic either. We have a number of rewards cards (all cash-back types) that we use to their fullest. We have never paid any interest or late fees, etc. There are no annual fees on the cards. We pay our balance every month. Why is this worse than not having credit cards? It isn't the card issurer's fault if people can't manage their money. I suppose if NO ONE used credit cards, the stores wouldn't have to build the money they pay to the credit card companies into their prices. Since that is unlikely to happen, I might as well take advantage of the cash-back cards.

Beth

I find this "blame the credit card companies" amusing... Lets see they MAKE you spend money and run up interest charges??? You have NO choice in the matter and when you wind up in debt it's not YOUR fault? LOL! This line of reasoning sounds like something a 5 year old would say "all my friends did it"

I don't see anything inherently WRONG with credit cards. GASP! (Please don't send me NASTY PMS telling me what and IDIOT I am.... I figure those of you who do are the ones with the MASSIVE DEBT you want to blame on someone else?)

I did have some credit card debt years ago. I paid it off and became responsible enough not to do it again!

 

[dvcgirl]

I find this "blame the credit card companies" amusing... Lets see they MAKE you spend money and run up interest charges??? You have NO choice in the matter and when you wind up in debt it's not YOUR fault? LOL! This line of reasoning sounds like something a 5 year old would say "all my friends did it"

I don't see anything inherently WRONG with credit cards. GASP! (Please don't send me NASTY PMS telling me what and IDIOT I am.... I figure those of you who do are the ones with the MASSIVE DEBT you want to blame on someone else?)

I did have some credit card debt years ago. I paid it off and became responsible enough not to do it again!

This is why it's not usually a good idea for people in deep credit card debt to consolidate their loans to lower their payments. Before that's even considered people in deep debt need to take a good long and detailed look at how they got there in the first place. A really strict budget needs to be initiated. But what usually occurs is that the debt is consolidated and the credit cards aren't used at first...but then little by little the debt is run right back up again. It's a vicious cycle.

 

[CarolA]

You know at my last job we had to fire someone over the CC issue. This guy REFUSED to use a credit card even an Amex (which had to be paid off monthly) provided by the company.

However, none of the rest of us wanted to support him while we traveled for work so he was told that if he could finance his trips in cash he could refuse to use the card. Of course he couldn't do that....he was fresh out of college and some months it was several thousand dollars and there was a two week lag on reimbusement. So he just quit going to the field sites. If you don't show up at work you lose your job! He kept telling us that credit cards were the work of the devil and he couldn't use them...Claimed his minister told him so. I hope his minister paid his bills after he lost his job.. Personally I thought he was psycho so I wasn't sorry to see him go.

 

[tlbwriter]

There's always the exception - and I always seem to find them. I wish I had rented in Texas in the early 80s instead of buying - no matter how much rent I paid (which would have been less than mtg payments) I wouldn't have lost over $120,000 when the market crashed, and I had to sell. When you end up with NEGATIVE equity that is NOT a good thing.

That's funny... when I wrote that, I was thinking about a guy I know who rented a McMansion in Texas for less than $1000/month... I think he could have paid for the house in cash, but he refused to, because he knew he'd be stuck with it forever.

 

[dvcgirl]

That's funny... when I wrote that, I was thinking about a guy I know who rented a McMansion in Texas for less than $1000/month... I think he could have paid for the house in cash, but he refused to, because he knew he'd be stuck with it forever.

Yes, that's true. For some reason Texas hasn't seen the growth that much of the nation has seen with the latest real estate boom. Houses are still incredibly cheap there....Houston especially.....you can buy a huge home there for very little.

 

[tlbwriter]

Yes, that's true. For some reason Texas hasn't seen the growth that much of the nation has seen with the latest real estate boom. Houses are still incredibly cheap there....Houston especially.....you can buy a huge home there for very little.

Well, it's not just that the houses are cheap (at least in his area), it's that there was a boom and too many large, expensive houses were built, and now that the jobs have vanished, no one can support those big houses. I live in an area where housing is pretty affordable (those of you in CA or NJ would weep to see what you can buy for $300k here ) but you'll have no trouble selling your house. In his area, houses are cheap because no one is buying them.