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Down Payment On A House, Retirement Savings Or Vegas Money?
Before we get to another housing crisis concern, here’s a quick rundown of what we’ve done so far in our October Housing is Haunted series. In this series, we’re doing what we do best here at The Juice. Covering the biggest stories from the angles that matter: economic, personal finance and investing.
Then, of course, yesterday we interrupted our regularly scheduled programming on housing to bring you breaking news about increasingly worrisome consumer debt.
We’re crushing the game from all angles. And we’d love for you to gently encourage a friend to subscribe to The Juice. Just forward them this email so they can see what we’ve been up to.
So, yeah, housing is absolutely haunted. Call it a case of not quite deja vu. Because, as we’ve explained, this 2023, soon-to-be 2024 housing crisis is nothing like we experienced in 2008:
Which leads us to the first big difference between 2008 and 2023: The number of underwater (owing more on your mortgage than your property is worth) homeowners dwarfs the number we saw during the 2008 housing crisis.
But, as we said roughly 18 months ago in relation to debt: Just wait.
It’s pretty funny. Not ha ha funny, but scary and peculiar funny.
The more cost-prohibitive home ownership becomes, the more invested parties try to tempt you to become a homeowner. Like there are actually “experts” suggesting to buy now when it’s admittedly bad before it gets worse!
Then there are enticements like this …
Rocket Mortgage continues to heavily promote a scheme where some buyers can put as little as 1% down on the purchase of a new home and Rocket will come in and add an additional 2% down in the form of a grant. Here’s how Rocket says you qualify straight from its advertisement:
This is available to those qualifying with less than 80% of the area median income level who have qualifying credit scores of 620 or better.
So, you need to be below the median income in your area, which raises our eyebrows. We’re not saying this can’t be a good deal for some people, however we are saying it helps contribute to a climate where we encourage people who have no business being homeowners to become homeowners.
Think about it for a second.
You earn less than the median income where you live.
Presumably, given that you’re seeking down payment assistance, you don’t have much, if any money to speak of in the bank.
So, you ultimately finance the entire purchase price of the home, less 3%.
And, now, here you are, a homeowner carrying a 30-year mortgage and owning property with little to no cushion in the bank to go to if something goes wrong. Like unplanned maintenance. Job loss. Gambling debt. (That last one is a joke — we hope!).
Specifics and critiques of this offer aside, here again, it promotes, even encourages, people to enter home ownership without being in a position of financial strength. This loosely reminds us of 2008. When lenders used every trick in the book (remember interest-only mortgages!?) to “help” people become homeowners.
There’s a problem with dangling home ownership in front of people as an ideal. As a rite of passage. Because it consciously encourages people who aren’t financially ready to become homeowners and makes them feel as if they’re making a prudent, even smart financial decision to scrimp, save and stretch every last dollar.
Newsflash: If you can’t comfortably make a 10% down payment — at least — you have no business being a homeowner. To suggest otherwise is simply financially irresponsible.
Wanna talk about being financially prudent?
You have worked your butt off for the last five years, socking away like 30% of your income each month. Now you’re sitting on $150,000.
You’re like 30 years old.
If you pull back on your savings and put away just 15% of your income every month for the next 20 years, you’ll have close to $1,000,000 by the time you’re 50, assuming you only earn a 5% rate of return.
That’s the dream, right? To have a million bucks in the bank by, if not before 50 years old.
If you took out a $400,000 mortgage loan at age 30, you will have paid more than $463,000 in mortgage interest by the end of the loan. That’s more than the principal. And that’s using a 6% interest rate, not today’s present number of 8%.
Chew on that math for a second.
The Bottom Line: That was a quick second.
All of this isn’t to say we’re anti-home ownership here at The Juice. We’re not. It has worked and continues to work for millions of people. However, it’s becoming a more difficult proposition for an increasing number of people as our Housing is Haunted series has made clear so far this month.
The thing is you rarely — actually you never — see the numbers and rationale around them presented this way.
It’s almost always, pat on the back, you saved the down payment, you have a good job, now buy the house. No mention of the incredible amount of interest you pay over the life of a 30-year loan, regardless of what the interest rate is. No mention of how that down payment could grow if, instead of putting towards a house, you put it towards your retirement or whatever you see for yourself in the future.
However you slice it, our nation requires a mindset shift on home ownership. It has always been a lot to take on. It has always been something you should only enter from a position of financial strength. And that’s all doubly true today.
If you’re a saver — and you’re not going to blow your nest egg in Vegas — it might be a better roll of the dice to not turn around and hand your hard-earned cash over to a mortgage lender before it even has time to breathe (and grow!) in your bank or investment account.
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