Don’t use your house to pay for your life

by Rocket Finance

My financial story is not particularly unique, however I believe that many people, especially young people in their 20’s who are contemplating marriage or have just graduated from college can benefit from reading it. I put myself and my family into a great deal of financial trouble because of a lack of knowledge and some carelessness. Today and over the next week, rocket finance will be focusing on real estate finance, the true cost of home ownership and real estate debt. My story will serve as the jumping off point for tomorrow’s post: Home Finance: Mortgages and the Real Cost of Home Ownership that will include links to many posts authored by some of the more familiar names in the personal finance blogging world. Please stop back for a look.

Here is my story:

During our first year and a half of marriage, my wife and I made $43,000 per year and had no housing expenses. We were able to save almost $15,000 during this time. Looking back, I can’t believe that we didn’t save more. Our life was not extravagant, but we did not go out of our way to exercise frugality. We did not deny ourselves anything that we really wanted. After that first year with no housing costs, we decided to purchase a small starter home. We were expecting our first child and conventional wisdom dictated that home ownership was the “best investment you can make” and renting “is pouring money down the drain”.

Our first home needed a great deal of work, but I have some ability in that area and we thought we could handle any household upgrades that were necessary. Later on I realized that renovation does not just require time – it also requires cash. Our first home cost $76,900. It does not seem like much, but for us it was a big investment. We put $7,700 as a down payment, paid $2,800 in closing costs and ended up with a loan of $72,000 at 7.25% – not too bad.

Our first born arrived seven months after we moved in and my wife stayed home to care for the child. My job situation also changed and our household income sank to $24,000 a year. However, we were still not on a budget and we did not reduce our spending. Our yearly expenses continued on a pace of about $35K a year. Our debt began to increase – but gradually – we didn’t notice at first and it was disguised by 0% credit cards, tax refunds and a refinance.

Interest rates decreased and we refinanced our mortgage in order to install new windows in our home and pay for a new car. This mortgage was at 6.75% for 30 years on $85,000. We also rolled the closing costs into the loan.

Less than a year later, interest rates continued to plummet and I realized that we could improve our rate even more! So I refinanced again – our third mortgage in three years! We took very little cash out, but once again we rolled our closing costs into the loan. We got a great rate, 4.85% – a three year ARM or adjustable rate mortgage. Our base loan amount was now up to $86,000, but we assumed that we would sell the house well before the ARM was up.

The best laid plans. . .

It is now 2006, and our credit card debt was piling up. We also desperately need a new roof, a hot water heater and a host of other things. . . but the roof was the most urgent need. I figured that our house was worth about $110,000 and we had paid our mortgage down to about $82,000. Our credit card debt was close to $15,000 and the roof was going to cost around $12,000, so I tried to get a home equity loan for $30,000. No problem, the mortgage company wrote the check and we found ourselves with $30K HELOC at 10%, a new roof and no credit card debt. . . at least on the surface.

This is a long post. But if there is someone out there who is starting down this path. . . I hope to offer a warning.

In 2007 our ARM reset to 6.75% and our payment jumped well over $100 a month. At the time, it looked like interest rates would continue to rise, I was desperate to lock in our rate – so I refinanced again. We presently owe $111,000 in two loans. That makes four mortgages and two HELOC’s on the same house in six years. Our broker estimated our house value at $123,000 in order to make the new mortgage and HELOC work. I was a little surprised by the estimated house value, but I wanted the money and didn’t question it. Later on, after I secured the loans, I had an independent market analysis done on our home that put it’s value at $107,000 – and this was before the housing market slow down. (By the way, that mortgage broker is now out of business. . . )

We are slowly working our way out of our debt. Unfortunately we have a much longer and harder road as a result of a careless attitude toward our finances and especially our mortgage debt. If you are in the housing market, I encourage you to get as much advice as you can from people you trust. If you want to run your situation by me – I would be happy to trade emails with you through my contact form on this page. In the meantime, here are a few things that I have learned:

  • Always offer less if you are convinced that the house is overpriced. Don’t be afraid to trust your instincts. Our broker talked us out of offering less than the asking price by saying that someone else might jump in front of us. We allowed ourselves to be pressured into paying more than we thought the house was worth.

  • The broker works for the seller, not the buyer – no matter how nice he or she is.

  • Don’t be in a hurry when purchasing a home, they are making more houses every day.

  • Home maintenance and remodeling can be expensive, even when you do the work yourself.

  • Closing costs are expensive, don’t ignore their effect when considering the cost of a new loan. Five to seven thousand dollars of our current debt is due to closing costs alone.

  • Be very careful in getting cash out when refinancing. The cost of that money will set you back farther than you want to be.

  • Your house might not be worth what your broker says it is. Just because they are willing to give you money does not mean that it is a good idea.

  • Avoid a home equity line of credit unless you are sure that it will greatly enhance the value of your home.

Be sure to check back tomorrow for Home Finance: Mortgages and the Real Cost of Home Ownership.

  1. 28 Responses to “Don’t use your house to pay for your life”

  2. By Aaron Stroud on Jan 31, 2008 | Reply

    Thanks for sharing your story. Houses truly can become money pits, especially in this age of instant credit! It’s frustrating to look back, knowing we could have saved more or taken a different path. But that’s true for most of life.

    My wife and I recently finished buying our first (and last!) house. We developed some family land in a fairly rural area, so we had to deal with power easements, a well, etc.

    Sometimes I wonder what it would have been like to begin with a starter home similar to the one you described. But then I remind myself that we never have to go through the process of buying a home again. Plus, our quality of life is far superior to city life (18 acres, a pond, and much of it wooded with grandparents retiring next door vs a cramped city lot in an older home, needing a lot of expensive repairs.)

  3. By rocketc on Jan 31, 2008 | Reply

    Can we move in?

    If we had kept a lid on our spending. . . we might be selling a house for $90 or $100K on which we only owe $65,000.

    Instead of trying to sell a house for $107K on which we owe $110,000 or so. . . discourging.

  4. By Aaron Stroud on Jan 31, 2008 | Reply

    Rocketc, we felt the same way when we were blind sided with news that our road easement did not include utility access!

    Unfortunately, sometimes walking away isn’t an option.

    Why are you and your wife planning to sell the house? A $110k mortgage is a lot easier to chip away at than a mortgage twice that size. Plus, when you live a little off the beaten path like we do, it’s awfully hard to pick up a few extra bucks to attack debt. We have to burn a gallon of gas just to get into town which seriously negates the benefits of any part-time work.

  5. By rocketc on Jan 31, 2008 | Reply

    We haven’t made a final decision on selling it – two things may force us out:

    three kids on one room (my wife and I are contemplating a move to the living room)

    a possible job change to another state

  6. By Aaron Stroud on Jan 31, 2008 | Reply

    A couple of thoughts.

    An overcrowded house does not force people to sell. That’s a decision we make in response to the lack of space. We spent two years in a 350sq ft rv with two kids as we developed our property. Unfortunately, due to gov’t regs we really only had the 350sq ft because we were not allowed to place the rv on “our” land!

    If it looks like you may be moving to another state, you may need to put the house on the market now. I’d recommend keeping every spare penny in a separate savings account to make up for any shortfall between the mortgage and sale price. If you don’t tap the money for the mortgage, you’ll certainly need it at some point during the move.

  7. By plonkee on Jan 31, 2008 | Reply

    Rocketc, don’t forget that American houses are bigger than European ones – I’m sure you can be creative.

  8. By rocketc on Jan 31, 2008 | Reply

    Yes, I will forward your comment to my wife. 🙂 Our house is almost as old as European houses – 167 years old.

    We have some ideas in mind for dealing with the space issues. The biggest problem is a lack of storage – we have no garage and our basement is barely usable. I think we could handle the sleeping arrangements for quite some time, but finding a place to put lawn equipment, kid’s toys, etc is a challenge.

  9. By Aaron Stroud on Jan 31, 2008 | Reply

    Actually, I’m pretty sure they’re generally bigger than any country’s homes. And it’s not necessarily a good thing. It’s great that we can afford to have bigger houses, but bigger isn’t always better. I’ve seen some houses where every child has their own bathroom!

  10. By thebaglady on Jan 31, 2008 | Reply

    Glad to see that you are on your way out of this and you are able to reduce debt! I am 24 and my husband is 25. We went against our parents’ wishes and didn’t buy a house when we got married last year, and I think it is for the better. Thank you for sharing your story. A lot of people are still delusional and believe they can live off their home by refinancing even more.

  11. By rocketc on Jan 31, 2008 | Reply

    baglady, thanks for stopping by! There are definite advantages to having your own home. It is just important not to enter into the commitment of a mortgage without knowing all the facts.

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