Money mistakes - we all make them, don’t we? Some are bigger than others. This one's a doozy.
In late 2004, Mr. Financier and I got swept up in the housing bubble. We were in the Washington, D.C. area and struggling to afford this expensive city. So, we did what every young couple should do - buy a home. (Please read that with the full sarcasm with which it was intended.)
Colleagues, friends, and the media concurred; while D.C. housing was expensive, real estate prices never, ever dropped. So, if we didn’t buy now, we’d never get on the property ladder. We started looking and were promptly floored by the prices. We’re Midwesterners and grew up in areas where $250,000 could buy you more house than you could ever need. In D.C., we blew right past our $300,000 maximum after a weekend of looking for properties. Shortly, we found a beautiful, obscenely sized home perfect for a couple barely out of college. (Again, sarcasm.)
Along the way, my gut told me it was all too good to be true. Yet, I was reassured at every turn. The real estate agent pointed to the rising prices, reinforcing that housing was the safest financial bet one could make. A family member encouraged me to stop investing in my 401k, because my house could become my retirement account. The lender’s very first question was, “How much do you want to borrow?” Colleagues talked excitedly about the massive tax deduction that a house provides. “Everyone in D.C. has a massive mortgage,” they assured us.
Our first mortgage had terms that make me cringe. Our combined gross pay in 2004 was $105,000; Mr. Financier has an engineering degree and I have a business degree. We were lucky to secure excellent jobs after graduation. But, our total housing debt was $607,430. We didn’t put a penny down. The mortgage was creatively assembled, as so many were in the heydays of the boom leading up to the 2008 financial crisis.
The primary mortgage was a 5/1 LIBOR interest-only loan for $472,500 at 4.75%. Interest-only meant we were only required to pay the interest during the initial five years of the loan. Regular payments we made wouldn’t decrease our outstanding balance. After five years, our loan would amortize for the remaining term and the rate would adjust. (In layman’s terms - the payment would go WAY up.) LIBOR loans are tied to the London Interbank Offered Rate, which serves as a benchmark for interest rates that banks use to loan themselves money.
The remaining debt was a home equity line of credit provided by National City. (Subsequently, National City was hit hard by the financial crisis and was acquired by PNC.) The $134,930 line of credit started with an APR of 5% but fluctuated, as lines of credit do. The rate steadily rose during the time we had this mortgage; our initial payment of $562.65 grew to $668.37 in less than a year; an increase of 18.8%.
Initially, we were swept up in home buying excitement and assured by the encouraging chorus around us (real estate agents, lenders, media buzz, family, and friends). It wasn’t until we were in the home for a few months that we appreciated how incredibly stupid our mortgage was. We stressed as we saw the line of credit payment increase, rising steadily as the interest rate changed.
In 2005, we scrambled to find a loan officer that could refinance this ticking time bomb of a mortgage. Mr. Financier and I worked our tails off at work, trying to increase our income to both make us more attractive to lenders and reduce the balance on our interest-only mortgage.
We got very, very lucky - in October 2005, we refinanced into a more stable mortgage. Our new loans were a $520,000 first mortgage (30-year fixed at 5.75%) and a $90,000 second mortgage (20-year fixed at 7.13%). We were lucky because we refinanced before the economy imploded. Also, our rising income made it possible to secure the new mortgage - by that time, our gross income had grown to $135,900. I also give a tremendous amount of credit to my family - my parents realized what a bind we were in and offered to lend us some money to help with the payments on our new, more expensive, mortgage until we could afford it on our own. (This resulted in another money mistake; stay tuned.)
For those of you keeping track of the numbers, you noticed that our second set of mortgages was higher than the first. No, we didn’t take any cash out; the increased mortgage covered the fees associated with refinancing. We bought for $607,430 and our second set of mortgages was for $610,000 (a difference of $2,570). In the eleven months that we had our wild first mortgages, we did pay off some principal.
The first painful part of this money mistake is the $25,730.48 we paid to our lenders during the time we had the 5/1 ARM and line of credit. Much of that was interest, of course, and is money that we never got back. As I write this, well over a decade later, I still feel sick at how much stress our original mortgage added to our lives. And I feel ill thinking about what would have happened if we hadn’t been able to move to a “better” mortgage before the housing bubble popped.
The second part of this money mistake is the fact that we bought a house we couldn’t afford at a very early point in our lives. We dedicated our twenties to furiously growing our incomes in order to pay our mortgage and build our savings. Because the housing market collapsed shortly after we refinanced, we didn’t attempt to sell the house. D.C. housting was also negatively impacted by the crash and we were underwater on our home for years, which meant we were stuck.
You might be interested in what’s happening today. We are still in the same home and completed what I hope is our last refinance in 2012. We currently have a 15-year fixed rate mortgage at 3.375%, and I recommend everyone consider a 15-year mortgage when purchasing a home. Mr. Financier and I aim to eliminate our mortgage in the next five years and regularly make extra payments.
Whew, that was a painful money mistake to relive! But, we learn from the mistakes of others. I share this story as an example of why you should listen to your gut and resist getting caught up in the frenzy created by others, particularly when making big financial decisions. We’re so, so lucky we didn’t lose our home (or jobs) and got through the financial crisis ok. However, luck is not a sound financial strategy.
Have you ever had a loan with wild terms or one that you regretted? What other money mistakes have you made?
xoxo, Ms. Financier