WhiteSites Blog

mortgage lies

Posted on Aug 14, 2007 by Paul White

Back in 2001 after 9/11, our country went into a recession.  A majority of people stopped going out, they stopped traveling, and they stopped buying luxury items.  Many people went into 'rainy day' mode.  Since the demand for goods and services went down, so did the prices for commodities.  The Fed acted by lowering interest rates to stimulate the economy.  Many would say it worked.  With new lower interest rates available, people rushed to buy a home to lock in these new low rates. Also, a large number of people refinanced their home to get their payments down at a lower rate.  Loan officers were making well over 6 figures, the prices for homes skyrocketed, and builders did everything they could to keep up with home demands.  Many people thought they were getting the American Dream. 
With the Advent of  Reality TV Shows. Came a new wave of shows.  I remember back when HGTV used to have shows with bob villa, and alot of gardening shows.  But now its packed with tons of pimp your house shows. Where home owners fix up their house to sell, or they are shopping for a new one.  It shows all the best case senereos where home owners flip homes to make alot of money.  With plenty of breaks in the shows to push all the products available at Home Depot and Lowes.  These shows have practically brain washed americans into thinking they can do things that aren't realistic.

Even though I am a home owner and I recommend it to others.  Way too many people don't educate themself before buying their home.  Keep in mind that your realestate agent is paid on a percentage of how much you spend.  So its in their best interest to get you spending as much as possible. The same goes for the loan officer.  To get people qualified for high priced homes, people get put on an ARM loan.  These are loans that adjust to the Fed set interest rate after they have reached their term.  This can get your payments down in the beginning, but once your term is up, it adjusts.  If the Fed has raised interest rates, you house payments could jump 100's.  With the high number of people who are living beyound their means, this can often bankrupt them, causing them to loose their house. 

Building equity is another reason people buy homes.  The problem is amortized loans don't help you build equity.  In the beginning each payment you make is almost all interest.  So after 1 year you are lucky to have $50 in equity.  The only other way you can build equity is by the appreciation of your home's value.  Keep in mind that just because your home appraises for more, and some websites say you could sell it for more,  this still does not give you a buyer.  Right now ( Sept 2007 ) there is more than 9 months of inventory on the housing market. This means it will take you on average 9 months to sell your home for the market value.  Most newly purchased homes have actually depreciated in value.

But here is another evil aspect of mortgages:  One of the biggest factors that convinces people to buy a home is so they can deduct the mortgage interest from their taxes.  First let me clear this up.  Lets say you have a mortgage payment of  $800 / month ( typical for a $140,000 house ) and you just started your loan.  Almost all of that $800 is interest in the beginning of your loan.  So after 12 months you have spent almost $9600 in interest.  But you don't get this $9600 back just for using it as a deduction.  Lets say you make $50k / before taxes.  Without the house or any other deductions you would be taxed on $50,000.  With the house you would be taxed on $40,400.  If you are single you are in the 25% tax bracket for 2007, without the house you would have paid 25% of $50,000 or $12,500 in taxes.  With the house you will have paid $10,100 in taxes.   So because of the house you will get $2400 back in your tax refund.  Now this is assuming that you are a single person.  If you are married file your taxes jointly and have a house hold income $50K this puts you in the 15% tax bracket.  So now you are only paying $7500 in taxes without the house, and $6060 with the house.  This scenario only gets you $1440 back in your refund for your house.  This shows how writting off the interest is worth less for those who are in lower income brackets.  Also keep in mind that even though you get the tax write off, its still for money that could have been spent on something else, saved, or better yet invested if you owned the house. 

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