I spent the latter part of last week in bed with a nasty virus. Because I was so wiped out, the only thing I felt like doing was lounging and watching old movies. In between Godfather DVDs I caught an episode of My First Place on HGTV. I’m fairly confident I have seen this show before, but as I was reaching for the remote control, a comment from the young couple being featured caught my attention.
“Our budget is $475,000 to $490,000.”
Huh? These young people barely looked old enough to buy an adult beverage, and they were considering a half-million dollar home? They had my attention.
For the next thirty minutes or so I watched these young people roam from house to house with their real estate agent. I was extremely impressed with their thoughtful considerations of each house. You know, like which one had enough room in the backyard so their two dogs could play without feeling “claustrophobic,” and which house would be best for “entertaining.” After all, these are important considerations when just starting out. End sarcasm.
It was at this point that I began to regain my strength. I think it was adrenaline actually, as I had the overwhelming urge to reach through the television and smack some sense into these people.
Admittedly, I know very little about this couple, other than one is an “account executive” and the other is in medical sales. However, I think it is safe to assume that unless they inherited a couple hundred thousand dollars, they planned to borrow most of their first purchase.
$3,000 a Month for Thirty Years
Let’s run some numbers working with our assumptions. I think the couple settled on a house listed for $490,000 and paid about $475,000 (I don’t remember the exactly sale amount). I’d like to think they saved up at least 10% to put down, which is a fairly large amount of money for this size house. Perhaps they did have $50,000 to put down, and financed the remaining $425,000 on a 30-year mortgage.
Their monthly payments would be around $2,281 before taxes and insurance, which could easily add another $800-$1,000 a month, bringing their total monthly mortgage payment to over $3,000. Let that sink in for a moment.
This 27 year-old couple was about to sign a binding contract promising to make 360 payments at $3,000 a month for the next 30 years. They would be 57 years-old by the time they paid off the mortgage.
During those thirty years they would likely have children, and have to continue working like maniacs to make that $3,000 a month payment. They would need to save for retirement, pay for the annual vacation (or two), buy, maintain and replace seven or eight cars between them, deal with a medical emergency, deal with a medical emergency with their parents, deal with a job loss, etc. They would have to deal with all of life’s curve balls with a $3,000 a month obligation hanging over them.
“But We Can Afford the Payments”
When I watch people engage in this type of transaction, I can’t help but be a little sad for them. And my feelings aren’t limited to those taking out a huge mortgage – even though these are usually the longest of financial commitments. Many people borrow money for expensive cars and such which obligate them to costly monthly payments for a number of years because they can “afford the payments.”
Hearing the statement, “we can afford the payment” is a sure-fire sign someone can’t afford the payments. Marketers have won the battle of convincing us that we can afford things we can’t if we only have to pay for it every thirty days, rather than all at once. But what happens when you hit a bump in the road? What happens when life happens? Because trust me, it will.
Someone will get sick. Someone will get hurt. Someone will lose a job. Someone will get stuck in a soul-sucking job and dread Monday mornings like a trip to the dentist. Life is not always rosy. Things happen. I’m not being a pessimist, I’m being a realist.
It’s hard to tell that to a couple 27 year-olds with their whole life ahead of them and without a care in the world. Sometimes people have to find out the hard way. I just wish people would listen to others who have been down the same road (if you are a parent, you can relate to this).
My First Place: An Alternate Ending
Imagine if this same young couple decided to put their $50,000 down payment on a $200,000 home, and finance only $150,000. Their monthly payment drops to about $800 before taxes and insurance, they avoid having to pay private mortgage insurance (PMI), and they can seriously consider a 15-year mortgage, or paying off a thirty-year mortgage in the same amount of time. They could easily be debt free before 40, house and all.
Yes, they would be giving up a little space for entertaining, and the dogs would have to get used to a smaller backyard, but imagine the freedoms they would enjoy. Imagine them as a 40 year-old couple with a $225,000 house, a modest pile of savings, and zero debt.
Imagine a young mom having the option to stay home with the kids. Imagine those kids going to college and graduating without debt because their parents can afford to help. Imagine those kids getting married and making a similar first-home purchase decision because they admired their parents’ frugality. In one single decision, that couple could complete change their family tree, and one day leave behind a legacy of debt freedom for generations to come.
This post appeared in the Canadian Finance Carnival