Illumination

Have you ever considered that the American Dream is a dream all right, but it is not your dream or my dream, it is the dream of the mortgage holder and the owner of the business where you work. This blog is about the foibles of the American dream. The American Dream, in theory, is to own your own home and have a good job and raise your family. Let me clue you in a little. When you have a mortgage, then you own your home by definition, but the mortgage holder is in the driver's seat. I will talk about the details of the closing and how the bank and mortgage insurance and the appraiser and the sales people are all wanting their part of your future earnings at another time, but for now, let's look at the numbers. Let's just say that you are buying a house for $200,000. The bank requires that you put down 20%. Why do they do that? Because, in a normal market, if you get stuck they figure they will get at least 80%, if you skip out or lose your ability to pay your mortgage. So, let's say you somehow come up with $40,000 that you are willing to part with for your house. Now you have a 30 year loan with the mortgage company. Why is 30 years picked? It just so happens that there is a point at which the payment is the smallest possible. A shorter term and it is a higher payment, and a longer term it is a higher payment. This is also where the interest payments are maximized, which is what the people loaning you money want. So, you pay $160,000 for your house, and you tell the government about it of course because they will let you deduct the interest expense. Sounds great doesn't it? Now, the payment (not counting property taxes, another future blog) is $1199.10 per month at 6%. If you pay every month for 30 years, you paid $431,676 for your $160,000 loan. Now, let's say that you decide to sell your house after ten years. You still owe $133,897.34, after paying $143,892 in payments. Now, let's say you need to sell your home, so after an agonizing wait of three months (pretty fast) and a few thousand dollars in fix-up, you sell it for $240,000. You make a tidy profit of $40,000, right? Well, actually, no. First, you had $40K tied up. If you made 5% after taxes each year, then you would have $65,000, with little risk. So there is $25,000 that gets counted, leaving a $15,000 profit. But wait, you paid $143,892. It is true that part of this amount was toward the house, and the interest was deductible, but the bottom line is that profit is hardly a profit. The bank got over $100K of your money and you got $15,000 of your $144,000 back. And you had most of the risk, especially when you consider what could happen if you lost the house due to a job loss. You would lose your house and down payment. Then whatever the bank could sell it for, if it was less than what you owed, they would come after you for it later. So, the American dream of owning a home is really a great place for banks and others who make their money work. BTW the typical mortgage duration in Canada is five years.



Now let's look at the income side. You get a good job. Well, that means you are in business and you have one customer. You are trading your life for maybe just enough money to live. The company is economically motivated to pay you the least it can to get the most out of you. Raises are slow to come, and really will not let you get ahead. Then there are credit card offers in the mail just when you need to take care of a cavity or braces or any unexpected expense that you might have covered except your $40,000 is in the house.


There is a lot more to say. The bottom line is, even though the American Dream can be had, I am not so sure this is the way to spend your life. There is no involuntary servitude in the US, but this is close. There is an answer though, and I will have more to say on that...

I want to talk about house closings, mortgages, business, marketing, owning your own business, buying cars, buying computers, buying houses, renting, the awfulness of compound interest, inflation, doing something, getting out of debt, staying out of debt, jobs, kinds of businesses, banks, mortgage insurance, appraisals, refinancing and more. Check back about once a week. Your comments are welcome.