I have a FB friend who owns a credit repair company. His posts and the people who comment on his posts intrigue me because it’s a glimpse into the other side of the credit spectrum. It makes me grateful for taking that personal finance class in college and thankful for the social-economic position I’m in. Anyway, he posted a question last week, “Is living in a home with a mortgage an asset or a liability?” I’m sure the majority of you who are homeowners would say it’s an asset. He and I got into a discussion, and he mentioned that most homeowners refinance every 5-6 years and they are continuously paying interest since that’s how mortgages work.
Let’s talk about mortgages first. THIS WILL NOT BE A RENT VS BUY DEBATE. It seems like my friend’s argument is that mortgages are evil because you are paying mostly interest in the first 5 years, and since the average homeowner refinances every 5-6 years, then they are continuously paying interest. I think it’s clear here that the issue isn’t the mortgage itself, but it’s what caused the homeowner to refinance every 5 years. If you do a zero-cost refinance and shaving a point off your mortgage, you should take that all day, every day. If you are refinancing because you want to take out some equity to buy a fancy car, that may not be the best reason to refinance. A mortgage in and of itself is a great tool for someone who wants to leverage their money and get a huge loan with the lowest rates. If we didn’t have mortgages, then we’d have far fewer homeowners since no one has that much cash sitting around. Anyway, let’s move on since I’m pretty sure I’m preaching to the choir here.
Debt acceleration program
Eventually, he linked me to this video – https://www.youtube.com/watch?v=2BSscPzl47k. The video is 6 minutes long, but you’ll roll your eyes so far back that you’ll black out by the 3 minute mark (assuming you even last that long.) If you don’t want to watch it, let me give you the Cliff notes version – the video wants to help low credit people (who most likely have credit card debt) budget their money better to have some $500 extra a month, and to put that $500 towards their mortgage so they’ll pay off their house in say 20 years instead of 30 years. Can you already figure out what the issue is here? Heck, even my wife, who doesn’t know anything about finance, who overheard the video said, “Yeah but what about the opportunity cost?” EXACTLY! If people with bad credit saved an extra $500 a month, why would they want to put that money towards paying down a 5% mortgage vs a 20%+ credit card debt?!?
When 0% makes sense
In fact, 2/3 of Americans would have issues coming up with $1,000 to pay for an emergency. That’s very disturbing and eye-opening. So if this person could somehow save $500 a month, wouldn’t it be in their best interest to sock that money away (even at 0% interest) to save up for a rainy day vs having no liquidity for emergencies? Look, I’m not try to bash my friend or credit repair agencies. If they can help people restore people’s credit and improve their scores 100 points, GREAT! But that’s the first step. The second step is to help people actually save money by not buying the latest iPhones or showy cars. If they are still overspending and racking up credit card debt, they’ll never get out of that vicious cycle. For instance, I just had to bite my tongue and not say anything when I saw my friend post this: