From the Seattle Times over the weekend:
Almost every dollar Todd Asher earns is spoken for. He has one daughter in college, another in high school and a toddler in diapers.
“We made a decision to have my wife stay at home with our 18-month-old son, so we’re living off my income, paying for tuition, diapers and everything else,” said Asher, of Sammamish. “We’re all about making money go as far as possible.” Asher, 39, has found a way to save a little each month through an interest-only mortgage loan. He diligently puts the savings into his 401(k), an individual retirement account and mutual funds.
“My goal when we purchased our current home was to buy the most house for the least amount of money and then save, save, save,” Asher said.
Does this logic sound a bit off to anyone? What happened to the idea of living below your means?
Some mortgage specialists and financial planners believe unconventional home loans could be good tools to help consumers put away money for their future — if they’re disciplined enough to invest the mortgage savings.
If homebuyers invest the extra $160 to $200 they save each month on an interest-only mortgage, then it “absolutely makes sense,” said Jeff Tisdale, a broker at Skye Mortgage in Bellevue.
But Paul Merriman, founder and president of Seattle-based Merriman Capital Management, said every dollar a young homeowner invests now from mortgage savings will make a surprising difference when he or she retires.
Consider this scenario: A 30-year-old homebuyer invests $200 a month in a Roth IRA for five years. With a 10 percent compound rate of return (based on the S&P 500), he will have $15,312 in five years. Then, because he faces a higher mortgage payment of principal and interest, he stops contributing to the IRA. Even if he adds nothing more to the investment, the money continues to multiply.
“They will have $267,185 at age 65 and they will be able to take tax-free distributions of $16,031 (6 percent) the first year,” Merriman said. “If they continue to earn 10 percent while taking out 6 percent, they will take out over $500,000 and have $585,435 left at age 85.”
Consider this scenario: Based on the last 35 years of inflation, $267,185 will only be approximately $53,034 in 2042 dollars, which probably won’t even buy you a Hyundai (assuming there are any fossil fuels left in which to operate it)
I think it’s also safe to consider that whatever McMansion they purchased will be worth much, much less than their purchase price in years to come. Money isn’t free and without exception debt -always- must be repaid. How will this paycheck-to-paycheck family ever get out from under this house?
“Most people want everything now, and they come back every two years looking for more money,” he said.
He also has families who “come back a little richer” each time with more money in the bank.
“I can’t keep track of what people do once they walk out my door,” Tisdale said. “I can tell you that the ones who are committed to investing their savings are rare.”
The home ATM has all but dried up. The American public is now in their 19th consecutive month of negative savings. This family and many like it are are literally living on borrowed time. What’s the point of an interest only loan when you can rent a suitable home, closer to work, for much less than “buying”. Why put yourself under such pressure, especially when you aren’t building any equity?
A house has become more of a consumer product than an investment, especially based on current false valuations and the way they are physically built today.
This family is only one job loss, sickness, or interest rate hike away from a CH13 bankruptcy. The American Dream is looking more and more like a nightmare. The suburbs with their large McMansions will be the slums of the future.
(Linda Thomas, Seattle Times, 12.16.2006)