What Were You Thinking When You Purchased Your Home?
In the Sunday Real Estate section of the Washington Post Michael Rosenwald wrote an article called Was the Mortgage a Mistake. The article discusses Michael’s own decision to purchase a townhouse in Germantown, with an interest-only mortgage, at the peak of the housing market. In essence, just after his purchase the housing market cooled and interest rates began their creep upwards.
So one might wonder, why Michael purchased a home he could not afford. His rationale, an interest-only loan helped us buy a house in an expensive county where we wanted to live and eventually send our children to school. With an interest-only mortgage we could buy a nicer, larger home. Michael admits that he could have lived farther from the District for less money… Could have continued to rent…, but instead he decided he deserved a nice home and reasons he did what we had to do to get one.
He rationalized the purchase saying that he fully intended to sell the home within five years. He assumed that the market would continue to rise and that he would earn a profit just like the previous owners of his home. This thought process makes absolutely no sense. From Michael’s prior statements it is clear that he had no intentions of downgrading to a smaller home at any point in the near future. Let’s assume the housing market continued to rise. Michael would have sold his current home for a profit, but he also would have purchased a larger home that would have cost even more money in the wake of a rising market. It seems to me that Michael would have perpetually dug himself into deeper holes with larger mortgages. Let’s face it, the decline of the housing market has not hurt Michael’s financial situation, Michael has hurt Michael’s financial situation. In fact, I believe the current market decline may have saved him from purchasing an even more expensive home, and getting into even deeper trouble.
What’s even more amazing is that Michael and his wife seem to make a decent living. He mentions that his wife is a physician and that he pays taxes in the highest bracket. Yet Michael hasn’t made any preparations for his loan’s conversion from an interest-only mortgage to a 30-year fixed. In fact, in his own words, he bought a flat-panel television, took a nice vacation, bought a dog, hired a dog-walker, and then we got pregnant. All this while knowing that his interest rate could jump as high as 10.125%.
After talking with a real estate agent and a financial planner Michael now believes he has three options. Save money for the ultimate conversion of his mortgage. Refinance now to a 30-year fixed mortgage, and then refinance again if mortgage rates drop, or sell his home and move to another state where his housing dollars can go a whole lot farther.
Michael’s case is an interesting one. It seems to me that with a little more saving and a little less fruitless spending he could afford his home. While a lot of people are facing foreclosure because they can no longer afford their homes, it seems that there are also quite a few people with high incomes that could afford their homes if they simply stopped spending elsewhere. Either way I think it’s a good lesson for all involved and all those who are watching. No matter how much you love a home, you shouldn’t buy one you cannot afford.