SLUTH award

I'm starting an award on this blog for general stupidity, called the SLap Upside The Head (Sluth) award.

My first ever award is to each of the borrowers that hold Adjustable Rate Mortgages (ARMs) which are due to be adjusted this year. Approximately $3 TRILLION dollars of these types of mortgages will adjust year, looking to make this year the record year for home foreclosures in this country.

What in the hell were people thinking when they set up adjustable rate mortgages 3-5 years ago... at a time when mortgage rates were at an all time low?

The fact of the matter is tooooo many families bought homes they couldn't afford and ARMs were the only way to squeeze these folks into those homes.

But Gordon, if I buy a $200,000 home, the appreciation in that home is going to much higher than if I buy a $150,000 home.

Let's do the numbers...... Let's assume you buy a $200,000 home (100% financing) and you're able to get an 8% annual return on investment (generous for a home), at the end of 5 years your home is now worth 293,000 (a gain of $93,000). Now compare that to the home I bought for $150,000, assuming the same 8%, after 5 years, my home is worth roughly $220,000, a gain of about $70,000.

Ah ha!! I got you Gordon, I earned $23,000 more than you.

Except that you forgot to factor the extra $386/month I got to put in a mutual fund because I had a lower monthly mortgage payment. After 5 years, 8%, I have an extra $27,000 in actual liquid assets in the fund bringing my total increase in net worth to $97,000.

But let's assume that the increase in net worth is a push. How much more do you have to pay in real estate taxes, insurance, PMI insurance, plumbing repairs, homeowner association dues, maintenance, furnishings, roofs, water heaters etc, etc.. No one ever factors these costs in the return on their real estate and the fact is, the more expensive your home, the more these things cost.

In addition, by saving the money instead of having it locked into a mortgage payment, I have the ability to weather financial storms and the freedom to vacation, etc.

Yeah, but Gordon, what about the write offs related to owning a home? As I tell clients all the time, I'd rather have tax on income rather than the deduction for losses. If you ever want a write off to lower your tax liability, I'll give you a tax preparation bill equal to your income, that will wipe out any tax liability you might have and I'll have to pay the taxes. Yet, I'm still waiting for the first person to take me up on my offer.

My advise on homes.... buy it like you would an apartment, find the location, budget, schools, etc. Don't over buy. You wouldn't rent a four bedroom apartment for two people would you? Don't do the same for your house. You'll find that being able to sleep at night is a lot easier when you don't have bill collectors calling your home.