Summary:
Why would I sell my home, give up my three percent mortgage, and buy a new one with an eight percent mortgage when my payments are five times greater? Low interest rates have trapped most homeowners in their current homes, and they cannot qualify for an eight percent mortgage.
While owning a property, especially an owner-occupied home, is a cherished part of the American dream, it’s crucial to consider the substantial financial implications. The cost of maintaining a home for a family with kids, two dogs, and two cats, along with the desire to keep up with the Joneses, often leads to a conflict between dreams and finances. This underscores the importance of careful financial planning and decision-making, which are deeply ingrained in the American psyche.
Article:
A Family’s Desire For Upward Mobility:
Consider a family with a $700,000 home contemplating a move to a $1,500,000 home. The allure is undeniable, but the financial hurdle and the potential strain on monthly cash flow to meet the bills are significant. This decision, which requires careful consideration and financial planning, empowers the family to make an informed and thoughtful choice.
Consider a family that purchased a $400,000 home and financed 80% of the purchase price with a $320,000 mortgage. After living in the property for five years, their balance has been reduced to $310,000 due to amortized loan payments. They strategically refinanced their current home loan at the optimal time for a 3% loan with a 30-year amortization. This move, made with meticulous financial planning, enabled them to capitalize on the situation as inflation rose to 10% or more. This example underscores the crucial role of economic planning in such decisions, providing a reassuring roadmap for others to follow and a sense of control over their financial future.
The refinanced house payment was $928.89per per month for principal and interest. Over the life of the loan, the total costs were $668,800.60, with genuine interest paid of $358,800.60, excluding tax deductibility.
Their property taxes are based upon Proposition 13 in California, a law that limits property tax increases to 2% per year and calculates the beginning tax at about 1.25% per annum. Their initial property taxes were $ 5,000, but they increased to $ 6,000.Homeowners’ dues were $300 but have since risen to $500 per month.
Their property insurance, with various endorsements, including a $1,000,000 liability rider, originally cost $1,000. However, insurance costs have increased, so the current annual outlay is $2,500.
The monthly costs of homeownership, excluding maintenance and capital improvements, are as follows:
Loan payment of 929.
Property tax 500.
HO dues 500.
Insurance 208.
Total : $2,137.
Additionally, monthly outlays for electricity, natural gas, water, and trash may add approximately $1,000 to living expenses.
For all the apparent reasons, it’s time to move up to a larger home and purchase that beautiful new home for $1,500,000.
The down payment would be 20%, or $300,000, drawn from the equity in their existing house, and some additional cash. They saved extra money because they were not burdened with extremely high house expenses. The new loan will be $1,200,000, payable with an 8% amortizing loan over 30 years.
If they could obtain a 3% mortgage on $1,200,000 for their new home, the payment would be $3,596; however, interest rates have dramatically increased.
Interest rates on jumbo loans are now 8% and are expected to rise further. The new monthly house payment would be $8,067.46. Over 30 years, payments will be $5,808,570.63, with interest payments of $4,608,570.63, excluding tax deductibility.
Loan Payment 8,067.
Property taxes: 1,770.
HO dues 700.
Property insurance 400.
Total: $10,937.
The move would allow the family to more than double the home’s square footage and enjoy a larger lot size in a suburban setting, with a great school district, tree-lined streets, park-like open spaces, less urban clutter, lower crime rates, reduced traffic, and improved shopping opportunities. It would be in a charming, planned unit development with an association to maintain the common areas. More crudely, some may also think that they can escape the cesspool of high-density, stack-and-packed, homeless tent-lined streets and crime-ridden city environments. This potential for a better quality of life is not just a motivator; it’s a beacon of hope for upward mobility and a testament to their hard work and financial planning.
The tradeoffs between improving family well-being and straining the pocketbook are stark. This decision is not to be taken lightly. It requires careful consideration and a thorough understanding of the financial implications.
For families considering upward social mobility, the question of financial feasibility is paramount. Would it be a sound economic decision if my monthly house payments increased from $2,136.89 to $10,937? The family’s monthly house payments would increase fivefold. This responsible and thoughtful consideration of financial feasibility is crucial in decision-making, guiding families to make sound economic decisions.
The above example illustrates the primary reason for stress in real estate sales, mortgage sales, and related real estate support services. You should expect continued follow-up. When the real estate salesperson fails to complete the sale with corresponding commissions, the loan agents do not earn commissions, and escrow and title services do not occur. The local Starbucks, the favorite restaurant, the dry cleaner, new clothes, car payments, and maintenance are all eliminated or at least deferred. The list of affected service providers suffering from a financial downturn is long. This ripple effect in the real estate industry can have significant economic implications for many individuals and businesses, leading to potential job losses and decreased consumer spending, and serving as a stark reminder of the broader impact of individual housing decisions.
The challenge of upward social mobility, which refers to the movement of individuals or families from one social class to another, often involves financial success and improved living conditions:
Families naturally desire to climb the social ladder, with the hypothesis that bigger, better, faster, and higher quality are all part of economic success. Et, breaking through each level requires a steep price.
Maintenance and utility expenses would double from those of their prior home, bringing the cost to approximately $13,000 per month. Assume the family has personal expenses of another $5,000 per month for two average economy cars, food, medical insurance, dental and vision care, dinners out, daycare, pet care, and IRA contributions. The total of $18,000 in monthly expenses, when using a backend ratio of 45%, the percentage of a person’s gross income that goes toward paying debts, would require an annual income after federal and state taxation of $480,000. To pay federal and state taxes, this family must earn approximately $750,000 annually and merely break even.
The American economic system, with its high cost of living and increasing income inequality, has created this untenable situation that systematically excludes most hard workers and keeps those who can afford it on a financial treadmill. Credit card expenses are at a crisis level. That seems like an efficient payment method, but it is an economic exploitation because interest rates could increase to 30% annually. Chase Visa credit card’s interest rate on purchases is 19.49%, cash advances are 29.99%, and a late fee is $39. per month plus interest. Banks require minimum interest-only monthly payments because they keep the loan outstanding for a longer period. This system, combined with the high cost of living, makes it increasingly difficult for families to achieve upward social mobility.
The current consumer credit card debt in the U.S. is $ 1.03 trillion, with 93% of consumers having an average of $8,000 outstanding. Debt is a system of enslavement by design. Bankers take in deposits and lend them out at rates ranging from 8% to 30% per annum. The central banking system has allowed the creation of new money deposits out of thin air, lending them out at interest rates ranging from 8% to 30%.
The Crisis in Move-up Housing:
The above examples illustrate the crisis in housing for young homeowners. It is economically infeasible for the average young family to move upward. This family is stuck with a low-interest-rate loan. Less than 10% of home purchasers can qualify for home loans at higher interest rates.
The new and resale home markets are systemically frozen, not because of a lack of demand, but because potential buyers cannot afford to move. Real estate sales are expected to experience a significant downturn by the second quarter of 2024.
However, many investor purchasers expect to turn the homes into rental properties, which has caused reasonable price stabilization, while renters are being locked out of the opportunity for homeownership.
There are three subsets of home purchasers who will still buy homes:
- Large corporations, such as BlackRock, purchase single-family homes as a long-term rental strategy. They pay cash for these homes.
- Super-rich with accountants to direct them to the correct decision because of interest tax deductibility, ty, or because it is an income investment rental strategy. Many can pay cash.
- The government has plans to subsidize home purchases with taxpayer tax dollars. The result of subsidizing is the redistribution of resources from the productive members of society to the less productive or nonproductive members. If the government had its way, every welfare recipient and indigent family would own a home; they contributed nothing to acquire it, and will contribute nothing to own and maintain it. Apply or show up at the border and get your dream home for free. Tax dollars will be redistributed to pay for this insane strategy.
Additional Comments:
- Inherited homes by beneficiaries of deceased parents are a source of home transfers that the children may occupy, but they do not provide an additional supply of homes for sale. These transfers are typically not considered demand- or supply-driven sales.
- Some families who qualify are resigned to paying the extra interest payments and purchasing owner-occupied homes even at 7 to 8% fixed interest or an adjustable rate with a low-interest teaser rate. Even with the higher interest rate, purchasing is sometimes better than renting, especially when rents increase faster than the consumer price index.
Alternative Financing Sources are Doing Well:
- Non-qualified mortgages (non-QM) enable borrowers to qualify based on alternative underwriting methods, rather than traditional income verification and debt-to-income ratios.
- Debt-service coverage ratio loans (DSCRs). The debt-service coverage ratio measures the cash flow available to pay debt obligations.
- Equity lines of credit (HELOCs) or second trust deed,s consolidation of existing debts.
- Mortgage agents should pursue private money loans for borrowers who are unable to obtain bank financing.n There are dozens of reasons that borrowers need a privately funded loan. The escrow periods are very short, resulting in a quick payday for the loan agent.