The other day I sat in a meeting listening to a young man extol the virtues of owning property. Much of what he said was true. However, two things made me sit up and take note. I couldn’t help but comment.
First, he said the interest on his home loan was tax deductible, so the government secures his house payment. I asked how much the government pays him. He said they didn’t pay him anything. They allowed the interest on his home loan to be deducted from his taxable income.
Assuring him that I didn’t want to be nosy, I asked him what the deduction meant to him. “Twenty-eight percent of the interest paid saves me taxes,” was the reply. “So you keep 28 cents for every dollar of interest you pay?” She enthusiastically replied, “YES.”
He didn’t see the problem with math. I decided to help him. I took some change out of my pocket and put 28 cents on the table. I asked him if he would give me a dollar for the coins. Before she could respond, I sweetened the pot. I put a total of 56 cents on the table. I said, “I’ll double the amount Uncle Sam gives you. I’ll give you 56 cents for every dollar you can scrape together.” He didn’t seem very enthusiastic about my idea. He understood the demonstration. “Pay the mortgate”. I told.
But it wasn’t over. He mentioned, “The property was going up in value.” I asked him how old he was and he said 30. Then I asked him how well he remembered the early 1980s. He didn’t.
I told him that real estate doesn’t go up in a straight line, and sometimes it goes down. I told him that I bought a house in the spring of 1980. Almost immediately, the real estate market stalled. Five years later, if I sold my house, I was sure I would have owed the bank money at closing. We waited 10 years before the market started to go up.
Recently, the market hit another bump in the road. In our area, prices fell by 3% in the last year. With easy money and low down payments, many new buyers find themselves upside down on their mortgages. Many people, who have a home equity loan up to or even higher than the value of the property, are in the same boat.
Did you get the moral? Yes, she did it. Borrow as little as possible, pay back as quickly as you can.
The goal of living debt free is attainable. . . unless you want my 56 cents.
What will you accept for a dollar?
