Dear Responsible Home Buyer: You Wasted Your Money
by Brian Sullivan
Here's the scenario -
Five years ago you bought a home for $300,000. You put down $50,000 and took out a fixed rate loan for the $250,000 mortgage. Over the past five years you've been paying principal. You didn't refinance, instead living with an older kitchen or bathrooms and a used car. You now owe $225,000, having paid $75,000 in real payments to a bank over the years.
At the same time, another couple bought a similar home on your street for the same price. But unlike you, they put down just $5,000 and took out an interest only loan for $295,000. Three years ago they refinanced their house in a hot market and borrowed $50,000 in 'equity' to install a fancy new kitchen, complete with all the latest and greatest amenities. That 6 burner Viking stove looks great, but now they owe $345,000 and are paying no principal.
Then housing took its fall.
A third neighbor defaults and the home sells for $225,000. Appraisals tumble. You now realize your home is worth less than you paid, but at least you aren't completely underwater.
Not so for the neighbor with the new kitchen. He realizes he's more than $100,000 upside-down on his mortgage and paying no principal. Though employed and can afford his monthly payments, the house suddenly looks like a burden, not a benefit. He considers walking away and mailing in the key.
Now comes the President's new housing plan.
Under it, banks are under pressure to cut not just his payments but also his principal balance. All on the back of the already cash-strapped FHA.
So let's assume that unlike the other housing plan (HAMP), this one works and Mr. 6 Burner Stove gets his lender to slice $100,000 off his balance and dump the difference onto the FHA (and thus the taxpayer).
He now owes $245,000 to your $225,000. But you spent $75,000 real dollars not including interest on your loan. He spent $5,000 and has a fancy new kitchen.
Basically you just blew $75,000 bucks.
And oh yeah, your taxes will probably go up once the FHA needs a bailout.
That, in essence, is the 'new' housing plan from the White House. Does it sound like the "new era of personal responsiblity" the President spoke of in his inauguration?