Sunday, June 28, 2009

Apparently, $335,000 today equals $59,000 in 1987.

This is what passes for austerity these days. God help us.

My husband says I’m stuck in the 80’s. Back then we were a younger couple buying our first home. We acted very conservatively when we purchased our home, and bought an older twin home that served our needs nicely for several years, until our family grew from two to five in sixteen months. Even then, we stayed in our first (small) home for another year and a half, and moved in to our present home seventeen years ago.

That first mortgage was a lesson in control and conspicuous consumption. We paid $59,000 for our home. Twenty-three years ago, we were approved for another $75,000 on our mortgage (maybe even more). Despite the temptation that goes along with spending more money, we stayed on the low end of the buying scale and as a result, made extremely comfortable mortgage payments.

When we traded up to a larger home, we did the same thing. The sale of our first home netted us a $30,000 profit, and with the additional money we’d saved, we were able to put a down payment of almost $50,000 on our second home.

Once again, our principle, interest, and escrow payments were comfortable. Too comfortable? I guess that’s debatable. Yes, if we had stretched ourselves all those years ago and counted on the fact that our incomes would rise, we’d probably find ourselves in a more valuable home today. But that was our problem: counting on a growing income. We bought our second home with three young children in tow, and the only thing we counted on was that our expenses would go up as they grew up. And since one of the incomes we generated was the result of a freelance career, which resulted in reliable but not “paycheck reliable” income, erring on the side of caution seemed prudent.

The latest advice on mortgage as a percentage of income says that spending 40% of your income on a mortgage is expected. So let’s make this simple: if you make $100,000 a year you take home $65,000. And 40% of $65,000 a year is $26,000 a year or $2,166 a month on your mortgage. Let’s see what kind of home $2,166 buys. My figures won’t include taxes or escrow payments for home insurance but let’s leave them out of this for now. Although you can’t leave them out in the real world.

Well, this is promising. You can buy a home with a price tag of $481,500 and pay a monthly principle and interest payment of $2,166. That’s based on obtaining a 5%, thirty year rate on your loan. In many places outside of Beverly Hills, a home worth almost half a million dollars is quite lovely. Good for you!

Oh, wait a minute. This calculation works only if you put down 20% on the home. That’s $77,940 in cash before you take on the mortgage. Where a young person or young couple gets almost $78,000 in cash on a $100,000 a year income is beyond me.

Which brings me back to austerity. Seems to me, there’s something to be said for deciding to spend only 30% of your income on your home, or 25%, or 20%. It’s called planning for a rainy day, or the times when income disappears, or grows unexpectedly unstable or even smaller. [Example: during our mortgage, I had a career-building opportunity come along that would mean a temporary reduction in my income. I was able to take it because we have some room to breathe with our monthly expenses. Our mortgage didn’t hold us hostage. ]

But the free market needs incentives in order to work, right? Maybe everyone who takes on a mortgage for less than their “qualified” for gets a bonus. Maybe for every 10% they “undermortage” themselves, they save a point on closing costs. Maybe they get automatic refinancing that’s funded by the mortgage company should rates drop by half a percent or more. There has to be a way to convince people that underspending is admirable, too.

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