Thanks for sharing this with us. Great example.

Steve

When I used your example for my Dave Ramsey Twitter friend to see the dangers of the 15 year mortgage. Here was his response.

“hanks, but why always the horror stories? This is anecdotal evidence and an appeal to emotion…”

“If I believed every story about bad things that could happen to me, I would never leave the house.”

I guess all we can do is offer an opinion and let people decide their fate for themselves.

Steve

Well there is something we might agree in. I’m not a fan of locking oneself into a 15 year mortgage and getting trapped. I’d much rather see people go for the 30 and pay it off like a 15. That way if life happens they can drop back a bit.

You know, I’m not an all or nothing guy. Even when people are getting out of debt I like to see some amount of saving and investing. It might be just putting some money into an emergency fund and participating in the employer sponsored 401(k) program but it is something.

The point I was trying to get to is in every financial investment there is an emotional component that needs to be considered. And while that emotional component has a financial impact I would suggest that it also has a financial value as well.

Not everybody is made the same. For some, the emotional satisfaction of having less of a secured obligation like a mortgage, that gives that person more freedom in life than worry about the monthly nut. It may have significant value in less work, less stress, greater happiness, more satisfaction with life.

Actually a mortgage is a loan against future labor. The more you obligate yourself for the loan the more future labor you are pledging to repay. That is of course assuming that your income comes from working at a job. There is an excellent book on the subject that you may have read. It’s called Your Money or Your Life: 9 Steps to Transforming Your Relationship with Money and Achieving Financial Independence: Revised and Updated for the 21st Century.

I agree the guy in your example found himself in a bad spot. He somewhat took the Dave Ramsey approach of all debt is bad and boxed himself into a corner. Funny, I was having a lively discussion on Twitter just yesterday with a Dave Ramsey fan about the very same issue.

At the end of the day Ed, I think we agree more than we disagree on this and the good news is that we were able to help Carolyn find an answer to her situation that work for her with a balance of financial wisdom and emotional insight.

If you get a chance, register in the forum section of the site and offer up your advice. People can benefit from what you have to say.

Steve

The comment section was closed so here is the answer to your question of someone getting into trouble handling their money emotionally.

This is a real life example/person. This is not hypothetical. It is important to note I have helped and continue to manage mortgages for over 2500 clients. So we see real life events shape their lives and follow them year by year to make sure their plan it is working for them over the long haul. We just do not give advice and move on. Success is a journey!

So, I have a client that was referred to me by a current client of mine. They are co-workers. This new client bought a home and put 40% down to get a small mortgage and took on a 15 year fixed to get rid of the mortgage as fast as possible. As he admits he was emotionally attached to the concept of getting rid of the mortgage as fast as he could. “How great he would feel the day he paid off his mortgage in full.”

But on his way to paying off the mortgage, life happened. He experienced the downturn in the economy and his hours where cut in half and therefore his pay was cut in half. He works in the automobile industry for a car dealership. So now the payment that was high to eliminate the mortgage fast was suffocating him. He could not afford it anymore. And because he put so much money down when he bought his home and was sinking all his discretionary money into the 15 year mortgage payments all his money was tied up into his home. So he was refereed to us by his co-worker to refinance to a 30 year fixed to get his payments down and maybe even get some money out. Makes sense right?

HERE IS THE MOST IMPORTANT POINT I SEE MOST CONSUMERS FORGET: A MORTGAGE IS NOT A LOAN AGAINST YOUR HOME, IT IS A LOAN AGAINST YOUR INCOME. And that is where it was really bad for his situation. With the 50% drop in his income he did not qualify for a mortgage now, not even a lower payment/lower rate 30 mortgage. It was a sad sight to see his face when I told him that. So what is his only option to avoid foreclosure and losing all the money he has and worked so hard for. To sell his home. But here is the other problem, the market to sell is terrible as you well know. In fact, in his subdivision there are so many homes on the market that are not selling that is not an option either. So either he takes a huge lose on the home to sell it and bring money to closing or misses 3 mortgage payments and will lose the home and all his money in it to foreclosure as well. Either way he is or will lose all the money he worked so hard for.

This all would have been avoided if he were to have just put 20% down and done a 30 year fixed mortgage. Focusing more on financial contingency plans and having rainy day funds vs. just focusing on emotionally being debt free.

I hope this shows my very deep concern for homeowners just focused on emotionally eliminating there mortgage at all cost. Even Carolyn sees the value of liquid cash for emergencies. See that is a financial decision she made there, not an emotional one. “Proper financial planning plans for the worst and hopes for the best” not the other way around. That only creates major problems like the example above.

Happy Holiday!
Thanks, Ed

Are you suggesting that important life decisions should not involve any emotional component or consideration?

Can you give me an example of how someone got into trouble as you mentioned.

Steve

I currently have 2 mortgages; one on my primary home and one for a small investment property. I am going to concentrate on paying off the investment property mortgage first. It has a smaller balance and a higher interest rate. If anyone sees this as a bad approach, please feel free to let me know why.

Steve, thanks for offering this free service! It helps me to keep the faith that there are good people in this world who truly do want to help others without expecting anything in return.

Gratefully,
Carolyn

But she said one thing that makes me really nervous for her: she has no liquid savings. And I am assuming she still has a mortgage when she says she is refinancing. So if Carolyn loses her job tomorrow, how does she get by with no liquid money? Probably liquidate her 401k she mentions and that would be disastrous after penalties and taxes she could lose up to 50% of the value that’s in her 401k.

Not having a mortgage is not a bad thing. The danger point for consumers is when they are on their way to getting rid of that mortgage and having a life event happen before the mortgage is completely paid off. Not having money to get through that life event and therefore losing it all. It is a Catch 22. Once you are there, no mortgage, it is great. It is the risks of not having liquid money to back you up on your pursuit to getting there that I am worried about for most consumers.
Ed
.-= Ed Conarchy´s last blog ..Vital Info about Mortgage Escrow Accounts =-.

True, without a mortgage there are still obligations. But I’ve had no mortgage and I have to tell you it feels GREAT! I would much rather be on the hook for $2,000 a year in property taxes than $3,000 a month in a mortgage payment.

Tapping equity at a time when times are rough just isn’t a long term solution for many. It only prolongs the underlying issue, not solve them.

I think if you go back and look at Carolyn’s situation you might agree that tapping the equity to invest, as she wanted, was not the right course of action.

Steve