VOL. 128 | NO. 217 | Wednesday, November 6, 2013
For Financial Strength, Question Old Rules
By Robert Feol
One of the great things about loving what you do is that it doesn’t seem like work. On Saturdays when I go to “work” at the radio station, I have the amazing experience of not only being a radio show host, but also being somewhat of financial doctor.
I am charged with examining people’s financial pictures and analyzing mistakes they have made and diagnosing what is wrong. Then I suggest a strategic fix, and a course of actionable steps they can take to improve their financial statements.
It’s a demanding task, and one I must complete within the three minutes each caller is allotted. It’s a challenge that plays itself out over and over again as many callers have the same symptoms and ask, in one form or another, the same simple question: “I get up, go to work every day, pay my bills and mortgage promptly, but I seem to be getting nowhere financially. I’m living paycheck-to-paycheck. What am I doing wrong?”
While specific circumstances vary, the answer I have come up with may surprise you.
The problem: You have a 30-year mortgage.
Let’s assume that if you have a mortgage, it is your biggest expense. Your mortgage is likely the one that eats most of your take-home pay. While most people blindly pay their mortgages each month and don’t consider what is actually taking place, they assuage themselves with the idea that they are “building equity” as a homeowner.
But are they? Are they truly gaining traction through a reduction in their home’s principal mortgage balance each month, or are they just financial running blindly like a hamster on a wheel? A quick trip to MortgageCalculator.org gives us the data we need.
Let’s say someone goes to the bank today to borrow money for a $100,000 home, and obtains a 30-year mortgage for the purchase price, which carries a fixed interest rate of 5 percent. How much principal reduction is actually taking place, and how much equity is being built each year of the mortgage?
After five years of timely payments, having paid $32,000 toward a home loan, barely $8,000 of the total funds have been applied toward principal – 75 percent of the payments have gone to interest alone.
Here is my question to you: What family can gain financial traction when their biggest payment each month applies 75 percent to interest?
Sadly, only one conclusion can be drawn: this type of debt instrument, while lauded as the only “affordable” mortgage option, is not an empowerment to the borrower as much as it is a tool of indentured servitude.
Robert Feol is the host and founder of “Pieces of the Puzzle: Journeys in Creative Real Estate Investing,” talk radio show on FM 98.9 WKIM and owner of Discount Property Warehouse.