My husband and I recently bought our first home.
The home buying process was eye opening for several reasons, but what I found most surprising was how many homeowners owed more on their mortgage than the original mortgage was worth.
Revealing The Numbers
There were two homes that we were deciding between. Each had only been owned by one owner.
Home A was originally bought for $116,000 in 1997. Today, it had a value of $189,000. The realtor was able to tell us that the owners still owed $149,000 on the mortgage.
Home B was originally bought for $116,000 in 2003. Today, it had a value of $170,000. This homeowner still owed $160,000 on the loan.
I was shocked by these numbers. Are you?
After realtor costs, the owner of Home B will likely walk away with no additional money when the house sells. She may even owe the realtor a few thousand dollars for the pleasure of selling her house.
Home A's owners sold the house for $184,000 and will pay $4,500 in closing costs for the buyers. They will likely walk away with a profit of about $15,000. That's after 17 years in the house!
Where Did All The Money Go?
Each of the owners, after 17 years and 11 years in their homes, respectively, should owe well under $100,000, even if they took out a loan for the full price of their home when they closed. Yet, both of them owe more than $33,000 more than the original price of their home.
Of course, there's no way to tell why their loan balances are so high. Maybe they refinanced and took money out of their home's equity. Maybe they had a line of credit.
What did they do with the money? Perhaps they used it to pay for a child's college education. Maybe they bought a car or remodeled their home. Maybe they used the equity to pay off credit card debt.
There's really no way to tell.
But after being in a home for 10+ years, most people would expect to walk away with a profit. Clearly, that's not happening very often.
Losing Sight Of The Total Price Of The House
When you buy a house, you pay tens of thousands, if not hundreds of thousands of dollars, in interest if you dutifully pay your home loan on time at the required payment amount.
If you choose to take equity from the house and increase your mortgage, you are paying even more in interest. I cringe to think how much these two homeowners have paid in interest in the 17 and 11 years they have respectively owned their homes.
Investopedia warns, “A HELOC costs little to nothing to establish, and the annual fee to have the funds available is usually no more than $100. Furthermore, interest payments are tax deductible, just like the mortgage interest, and accessing the money is as simple as writing a check or using a debit card. When you have tens of thousands of dollars readily available and spending it feels just like making any other purchase, but with tax benefits, it can be easy to rely on a HELOC to pay for purchases that your monthly income can't cover.”
I'm both excited and terrified at the prospect of owning a home. However, because we bought our home later in life, I don't plan to draw from the equity in our home. Hopefully, paying off the mortgage on time or a bit early without drawing on equity will make our home the investment we hope it to be.
What has your experience been? Have you drawn from your home's equity or did you want to pay it off as early as possible?