Mortgages

I suspect most people visiting this site know what a mortgage is. For those that don’t, let me sum it up for you as briefly and as plainly as I can.

It’s basically a loan which has a lot in common with an auto loan, which most people are probably familiar with. The main difference is that the amount of money you borrow is commonly a lot more than you’ll take out for a car loan unless it’s a Lamborghini or something.

Just like a car loan, a mortgage is considered a “secured loan.” With your car loan, your car is the bank’s guarantee that you’ll make all the payments. If you stop making your payments, you’re quite likely to get a visit from the repo man who will take your car away some night while you are sleeping soundly in your bed.

Obviously, they can’t send out a repo man to take your home away, but if you stop paying your mortgage, the bank will likely foreclose on your home. In other words, they’ll kick you out. As I understand it, the foreclosure process usually takes six months or so before you are actually thrown out of your home. Legally, I suppose it never really was “your” home in the first place since it belongs to the bank until you make your last mortgage payment.

I’ve heard a lot of financial experts over the years say that having a mortgage is better than buying a house outright. To that I say: Rubbish!

Unless you are quite wealthy and plan to stay that way for a long time, actually owning your home is a much better position to be in than having a mortgage.

Not a whole lot of people have enough capital laying around to buy a home outright but some people do. Maybe it was someone who managed to save a lot of money over a period of years or perhaps received some type of inheritance or legal settlement. In any case, I’d buy the home outright every time if I had to choose between that and taking out a mortgage.

Things change. The economy (as we are now seeing) can go downhill rather significantly and if you lose your source of income or see it reduced, you’ll get a rather unpleasant reminder that having a mortgage is taking on risk. Either you make the payments or you’ll end up being thrown out. And don’t expect a bank to have much sympathy for you – they’re in the money business, not the compassion business so out you go!

Here’s something else to consider: Mortgages – as you may suspect – are always structured to make money for the bank. In most cases a lot of money. That means you end up paying a lot more for a home by taking out a mortgage than you would have if you bought it outright.

“But the tax benefits offset that,” I can hear the financial experts crying out. Tell that to the guy that lost his job, burned through his savings and is facing the prospect of being thrown out of his house. You can take your “tax benefits” and, well, use your imagination.

Getting back to how mortgages are structured, here’s a simple example that illustrates just how badly consumers are screwed over when they take out a mortgage: Say you buy a home for $150,000 and take out a mortgage for that amount. By the time the mortgage is fully paid off, you may have paid the bank a total of $300,000! That number will of course vary, depending on interest rates and other factors, but suffice to say that mortgages were invented so bankers could make money.

I don’t want to give the impression that mortgages are bad and should never be considered. If you want to own your own home some day, it’s often the only route people have to get there. If you can make payments for 15, 20 or 30 years (depending on the term of the particular mortgage) and come out the other end with a home that you own that’s great, and millions of people have done it.

I’ve had my share of mortgages through the years and still have one today. We’ve had some rough periods where we found ourselves wondering if we would be facing foreclosure not all that long ago but we were lucky and were able to get things turned around in time and everything is back to normal. At least for now. If the economy decides to throw us another curve ball, I suppose anything can happen.

Having a mortgage seems like the thing to do. After all, my parents did it and probably their parents before them. It’s the gateway to the American Dream. Everyone does is it, right? I think that’s the way many of us have been conditioned to think. When you are pondering foreclosure, your perspective changes. For me it changed a lot!

Like I said, a mortgage is the only option for a lot of folks who want to become homeowners and I certainly understand that desire. If you’re one of the lucky few who has enough cash to buy a home outright, I’d strongly suggest you go with that option. At least you’ll never have to worry about the bank kicking you out on the street. You’ll likely be responsible for paying property taxes, but that should be a much more manageable amount compared to a mortgage. Especially if you don’t live an a ridiculously over-taxed region like the northeast or California.

Believe me, I love being a “homeowner.” The problem is that I am not really a homeowner at all. I’m basically being allowed to live here as long as I’m a good boy and I make my mortgage payment every month. At this point I can only dream of what it feels like to actually own your home, but it is something I have set my sights on and intend to achieve some day.