Tuesday, 02. February 2016 by Renee Ellison
A mortgage is laced with a false promise. It purports to be doing one thing when in reality it is doing quite another. For the first decade or so, new homeowners come to realize slowly and gradually that their principal is hardly budging—despite their faithfulness month after month in paying what is required. The bottom line? The bank will get its money—by using yours. It is rigged to do that. Banks live on floating interest from one investment vehicle to another. But what about you?
Look at it this way. For a good long while, as a new homeowner who didn’t make much of a down payment, you will actually only be renting your house from the bank, with none of the freedoms normal renting allows. All of the house maintenance and improvement expenses will be yours. No one else will cover these costs for you. The yearly taxes and insurance will be yours as well. And you may find yourself trapped in immobility, if you should be offered a better job at more pay somewhere else, until you can sell the house.
In the end, when a “home owner” crunches the numbers on a 30 year fixed mortgage, he may be dismayed to discover that he has paid nearly double what his house originally sold for— because of this steady, relentless, compounded extraction of interest. Debt is never the best scenario—no matter what golden package it is presented in by our culture. The individual pays dearly for this false hope, and the country eventually collapses under it.
The American Dream based on these easily-acquired nothing-down “no collateral needed” mortgages has now turned into the American Nightmare, while a slew of investors became rich on derivatives—worthless mortgages re-packaged in bundles and re-sold. But now the false lie crumbles down around us like a house of cards. Now, as a country (and as individuals) we finally pay the piper. T’aint purty. Our economy is contracting by the day, and the stock market is staggering under the debt load.
So what is a young couple to do, who want to own their home? The only way you can work down that principal on a mortgage is by paying two payments a month. The first will satisfy the bank’s insatiable hungers; the second will apply directly to the principal. Banks won’t let you get at that principal-reduction any other way.
But what is an even better way? If the couple is willing to become “saving-money-maniacs” for a time, working hard, taking on one and a half to two-PLUS jobs each (i.e. working one of the weekend days, and working evenings for an hour or two) and living as frugally as is humanly possible (either in a rental, or in your folks’ driveway in an RV, or in the house that you are buying), not even buying such things as toothpaste or deodorant (make your own—you get the point) for four years, throwing $25,000 a year into savings from their combined earnings—at the end of those four years they can own a $100,000 house debt-free. This saves the couple $80,000 that would have otherwise been wasted in interest via a full term mortgage. Think of the vacations that could have been taken or the second house that could have been procured, that they could instead have re-invested in a second modest house that now earns them rental income for the remainder of their lives.
It is even better to begin this bull’s eye focus in your early teens, making every day count toward building this nest-egg of savings while still living for free in your folks’ home.
Either way, it is best to earn the money before you even make the house purchase. If, on the other hand, you were to follow the American Dream [Nightmare] and take on a mortgage to “buy” a $100,000 home before your four-year stint at “work-mania,” you must realize that you will waste something like four years of payments going only to interest. It is a wash either way, whether you buy or rent. You’ll lose the money both ways. Moreover, if you take the buying route you will incur hidden additional costs for upkeep and improvements—diminishing the speed at which you can save.
Of course, be extremely careful what you buy, keeping in mind these vital house purchase principles:
—Buy a house with a good foundation and roof—a structure that only needs cosmetic repairs. If, however, you are buying it only to improve it and flip it, earning profit from it, use your own free elbow grease to improve it. Concentrate on making the kitchen and bathrooms the best they can be. And put extra effort into making the yard gorgeous for curb appeal.
—Buy the poorest house on the block. That way you can improve it and not out-price it for that neighborhood to be sure to get your “improvement-monies” back when you re-sell it.
—Wait for a smoking deal. Don’t fall in love with any house emotionally. Stay detached until you get the “deal of the century.” Remember that there will always be another house and a better deal somewhere else. There is a house on every corner. Don’t rush to do this. Watch the market for a while—do research—knock on doors and ask the neighbors what they like and what they don’t like about that house and about their neighborhood—and keep your eyes peeled for the desperate homeowner who must unload his home quickly, at way below market value, because of extenuating circumstances.
Let’s crystalize even further what we are proposing is your best route to long-term financial success. A home mortgage can be a good investment tool IF:
• You have the savings to afford it AND all the other expenses. You must be able to make a sizable down payment—i.e., at least a quarter of the total sale price of the house—and STILL have $1,000 saved for emergencies, PLUS all the money you expect to need to fix the house up, PLUS 3 months of living expenses. (If you don’t have enough savings to do all 4 of those, you are NOT ready to have a mortgage.)
• You are able to negotiate a screaming deal. There’s a house on every corner, and in between—and you never can make as much money as on the day you make your house purchase, by agreeing on a price that is well below market value, after you have counter offered. Don’t fall in love with a house. Stay committed to your principles and look for God to honor your respect for His principles. Realtors and sellers are not focused at all on those principles. Of course they want you to fall in love with it and give them all your money—and then a lot more.
• The house is in a highly re-sellable location, in a non-faltering economy. There are economies that are good to buy in and economies that are not good to buy in. It’s up to you to weigh the outside economic factors. If the stock market is tumbling day after day, that can burst a housing bubble in a hurry. In that scenario, people get stuck owing their bank more on their house than they can now sell it for. This has happened and does happen; you have to watch the news carefully. Remember, the root of the word MORTGAGE is mort (death) and gage (covenant or agreement). Once you sign on the dotted line you become a slave to that mortgage. Therefore, if you are going to have a mortgage you want it to be in an area where you have a high possibility of pulling your investment out of it if and when you must leave it.
• You plan to stay there indefinitely—i.e. your income/employment situation there is very stable. Otherwise you get into the nightmare of needing to live somewhere else but you are straddled with a house you can’t sell.
• A building inspection is a necessity. Does it have a good roof and a good furnace? How solid is its foundation? How well is it insulated? Older houses tend to have very poor insulation, which means way higher heating and cooling bills. Ask to see the utility bills for the last three months; those can be hidden bills you didn’t anticipate. When you are a home owner you are on the line for all of these repairs: roof, foundation, etc.
Work, and work hard while you are young and you’ll gain yourself elderly freedoms and financial advantage galore. Nearly all of your peers will not be on this fast track; most of them will spend a lifetime enslaved to someone else’s agenda for them.
To read more on this topic, read our 10 Extraordinary Stories of Ordinary People Who Got Free of House Debt and Sure Financial Steps for Beginners.