The other day I sat in a meeting listening to a young man extol the virtues of owning real estate. Much of what he said was true. However two things made me sit up and take notice. I couldn't help but comment.
First, he said the interest on your home loan was tax deductible, so the government underwrites your house payment. I asked the amount the government pays him. He said they didnt pay him anything. They allowed the interest on his home loan to be deducted from his taxable income.
Assuring him I didn't want to be nosey, I asked what the deduction meant to him. "Twenty-eight percent of the interest paid, I save on taxes," was the reply. "So, you get to keep 28 cents for every dollar in interest you pay?" Eagerly he responded, "YES."
He didn't see the problem with the math. I decided to help him out. I took some change from my pocket and placed 28 cents on the table. I asked if he would give me a dollar for the coins. Before he could answer, I sweetened the pot. I put a total of 56 cents on the table. I said, "I'll double the amount Uncle Sam gives you. I'll give you 56 cents for every dollar you can scrape together." He didn't seem too excited about my idea. He understood the demonstration. "Pay off the mortgage." I told him.
But he wasn't through. He mentioned, "The property was going up in value." I asked his age, and he told me 30. I then asked, how well he remembered the early 1980's. He didn't.
I told him real estate doesn't go up in a straight line, and on occasion it goes down. I told him I bought a home in the spring of 1980. Almost immediately the real estate market went flat. Five years later if I sold my home I felt certain I would have owed money to the bank at closing. We waited 10 years before the market started to move up.
Just recently the market hit another bump in the road. In our area prices dipped 3% in the past year. With easy money and low down payments, many new buyers find themselves upside down in their mortgages. Many people, who have a home equity loan up to or even exceeding the value of the property, find themselves in the same boat.
Did he understand the moral? Yes, he did. Borrow as little as possible, pay it off as quickly as you can.
The goal of living debt free is attainable . . . unless you want my 56 cents.
David Wilding has for ten years, worked one-on-one and with groups to change attitudes toward personal debt. Visit his website http://www.debtattack.com for other ideas about debt.
