I feel bad about all these people losing their homes because they couldn't pay their mortgage. On second thoughts...why should I feel bad? It was their decision to buy a house when they didn't have enough money in the bank to buy the whole thing in one stroke. In the movie Million Dollar Baby, Clint Eastwood gives good advice to Hilary Swank when he advises her to pay cash to buy her first piece of real estate...a house.
For the past couple of years, I had been reviewing real estate in a lot of places: Newton, the North End, Charlestown, etc. But now I am going to wait a bit and buy real estate after I make enough money to pay cash for the whole thing. With only a single source of income (that is, a monthly salary), it could probably take a couple of decades. But you know how the saying goes: Necessity is the mother of invention.
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4 comments:
Gopi,
You would definitely save the money from the interest by waiting until you can pay the entire house in one fell swoop. But on the other hand, you also have to deal with landlords, not having full control over your apartment, the possibility of the landlord not renewing your lease, etc.
Having a mortgage isn't necessarily bad monetary policy, and you can deduct the interest payments on your taxes. It's just bad monetary policy to get in over your head with a mortgage that's too high. And this is often created by the mortgage companies. They convince people to use variable rate mortgages by showing them how low the payment is in the first couple of years, and if those people are not savvy, they don't realize their payments are going to skyrocket in a few years.
Mortgage companies are also known to do everything they can to screw you out of interest points. Example. A co-worker recently bought a condo. They were approved for 80% of the loan for 6.5% and the rest at 10% (they have very good credit scores and are putting at least 10-20% down). They fought tooth and nail and got it in writing that they had 6.5% for the entire mortgage. Come closing day, the mortgage company wrote up papers for the higher interest rate, and wouldn't change it until they threatened to walk out on the closing. I don't think most people read through every word of the closing papers like these people did, and would have been gulled into it.
"you also have to deal with landlords, not having full control over your apartment, the possibility of the landlord not renewing your lease, etc."
Obviously if you have a family to take care of, yeah, renting could be a real pain. With the frequency at which tenants keep moving in and out of my building, I am in no fear of losing my lease. Even if my landlord does not renew, I will just move into the next building :) That is the rental situation in Boston this days.
I understand that some people probably find it practical, in terms of convenience like access to school for their kids and places of work, to buy a place rather than rent one. So like you say, "It's just bad monetary policy to get in over your head with a mortgage that's too high."
However, what I would like people to realize is that, until it is fully paid off, a house is a liability (most think of it as an asset). They will need to work to pay their mortgage (in addition to the myriad amount of maintenance they will need to undertake). If they don't work, they can't pay mortgage...regardless of how well a deal on interest they might have made.
You're right, a house is a liability as well as an asset.
"They will need to work to pay their mortgage (in addition to the myriad amount of maintenance they will need to undertake). If they don't work, they can't pay mortgage...regardless of how well a deal on interest they might have made."
This is very true. However, if you don't work, you also can't pay your rent, regardless of how good a tenant you've been. True, there are expenses as far as maintenance is concerned (for condos these are often taken care of with the condo fee).
The thing is, even though our housing market is slowing down, the cost of houses isn't actually going down, it's just taking longer to sell them. Over time, the cost of those houses will go up. So it's either get a mortgage now and pay interest, or get a much more expensive house later. Hard to know which one would be more expensive on the whole.
The important thing to remember is to get a mortgage which is affordable, to lock in a fixed rate, and to keep a couple months mortgage in savings, just in case.
"However, if you don't work, you also can't pay your rent, regardless of how good a tenant you've been."
You are right, Raina. And this is why people need to learn proper money management before they invest in a house and stuff. Then they would know to keep a good bit of "emergency" fund handy to pay either the rent or the mortgage for at least several months while they look for a new source of income.
"Over time, the cost of those houses will go up"
...and that is the only reason why I would invest in property :) So I can make a bit of profit from the appreciation of an "asset" over time.
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