Flipping the 30-Year Mortgage the Bird
Speaking of birds, check out this dude who was strutting his stuff outside yesterday.
Anyway, about the 30-year mortgage. When we bought our first home, we walked willingly, even giddily, into the 30-year mortgage trap. We assumed that was what we were supposed to do. Why? Because it’s what every Responsible Adult around us was doing.
We had committed to having a wedding where we would wake up the next day without any debt, which we managed to do.
But practically the moment we did wake up, we started planning for the next stage of Responsible Adulthood. We began looking at homes to get a sense of what we could buy with our incomes. At that time in 2002, banks were throwing loans at people with decent incomes and great credit scores, even without a dime in the bank.
To our surprise, we qualified for a zero-down loan. We had planned to wait until we had money saved for a down payment, including waiting for a big bonus I had coming, but our realtors told us that house prices in the SF Bay Area were outpacing the amount we hoped to have saved in a year. At the end of 2002, this happened to be true.
So we bought the home and congratulated ourselves for being Responsible Adults.
When we sold our home in 2007 to upgrade to a bigger home for our growing family, we made about $210k on the sale, enough for a down payment on our next home. Awesome investment. Zero down, $210k return in five years. We congratulated ourselves again.
But did we really make an awesome investment? Let’s look at the numbers. We had been renting a one-bedroom for $1700. If we had stayed in that apartment, we would have saved ourselves about $3200 per month that went to our mortgage, insurance and property tax. The average rate of return of the S&P 500 for those five years was 11.1%. So if we had invested those $3200 monthly in an index fund for those same five years, using a simple compounding interest savings calculator, I see we would have had a return of $260,696. That’s a gain of over $50,000 more than our home investment, probably about what we saved in tax deductions. And that’s not factoring the expensive new roof we put on.
I don’t even want to do the numbers on our sweet, bigger home. While we made some money in the sale, I’m sure it doesn’t even come close to covering what we sank into it in improvements and realtor’s fees. Basically, we recouped the original $200k we made with the first home. Enough to buy our 9-acre property in the sticks.
With a little research compliments of the worldwide web, my suspicions were confirmed. The 30-year mortgage is a relatively new invention. In fact, it’s only been around for 80 years, created in 1934 following the Great Depression as part of the New Deal. Before that, most people were either renters, bought their homes with cash (shocking!), or built it them themselves (SHOCKING!).
So odd that, for today’s US family, none of these three options seems to be desirable or even considered possible.
If you rent and have kids, somehow it feels like that should be a temporary solution with the ultimate goal of owning your own home.
If you bought your home outright, you’re a rarity, indeed. I only know one person who did this.
If you built your own home with your own hands and without a land loan or construction loan, then you are a nouveau pioneer. I personally don’t know you, do I? Out yourself. This is what we’re attempting to do, and I want role models!
A little etymology research tells us that “mortgage” comes from mort = “dead” and gage = “pledge.” The intent of the meaning is that either the contract is dead once it’s paid or the deal is dead, and your property can be confiscated if you don’t pay.
But what it has come to mean in this country is that you pay it until you’re dead. So many people refinance when mortgage interest rates go lower, which resets the 30-year clock back to the start. And the average homebuyer will only stay in their home for 13 years, according to one study, so every move restarts that 30-year clock, too. Then add in the home equity loans and lines of credit, and well, you can see that for many people, that 30-year mortgage may end up stretching out until death.
Are we ever really homeowners when we have a mortgage? In fact, we are small shareholders, with the bank having majority ownership. In our case, we owned only about 21% of our home when we decided to ditch it, meaning that we had been paying mostly interest and that after our down payment, we managed to pay it down an additional 1%. That means the real owner of our home was the bank. As attested to by the slate of home foreclosures in recent years.
And the worst part about it is that if you calculate how much interest you pay on a 30-year loan, you practically crap your pants. Now, if you really want to soil yourself good, consider how much you would have saved if you were to actually take the difference between rent and a mortgage payment and invest it in an index fund. In our first home, with a difference of $3200, even with an extremely conservative return of 3%, we would have saved up over $1 million in just 20 years–just eight years from now, and 10 years before the 30-year mortgage would have been paid.
So here’s what I’m thinking. What if we had a new normal for shelter that threw off the indentured servitude of the 30-year mortgage? What if we got really creative about what “home” meant? Here are just a few alternatives I’ve come up with, thanks to some creative people around me as examples.
1. Buy your house with cash. Conversely, don’t buy one until you have the money. I have some friends who did this. They came into a windfall, and in spite of a forecast for home prices to continue dropping, they took a long-term view and realized that owning their home would put them in a much more secure situation over investing it in other ways and taking out a mortgage. Even cooler is that now they use their home in creative ways by hosting couchsurfers, renting it out short-term to fund their international travel, and doing home exchanges instead of paying for hotels. As a result, their cool home hosts a steady stream of interesting, creative individuals.
2. Share a home. Mauricio and I did this when his parents needed to move out of their rental. They paid some rent, so it helped us with some income. We also gave our kids the gift of a close relationship with their grandparents and daily immersion in Spanish. Of course, that meant we had all three kids in one bedroom, but it never felt tight. I have some other friends who did another version of this when they wanted to rent a home with a yard. They couldn’t swing the rent by themselves, so they created a co-op situation with another family and shared a big rental home with a yard. Not sure I would do this, but I love that they were so open-minded about their living situation.
3. Live in an RV. I’m inspired by this guy, from Early Retirement Extreme, who used the RV idea as a way to live cheaply in the Bay Area and was able to retire before age 30 with a grad student level income by saving 80% and more of his income. The added bonus of an RV is that you can travel around and not have to pay for hotels. That’s what we’re living in now, in case you hadn’t heard. Yes, a family of five in an RV.
4. Build a Tiny Home. Mauricio and I went to a tiny homes workshop before we moved to the sticks. We were going to try to adapt the idea of a tiny home on wheels for a family of five. We still might try to build one at some point, maybe even with the kids as they get older, so they have their own place to live and come back to, as well as the skills and confidence to build their own shelter without a mortgage.
5. Rent forever. It’s time to stop thinking that renting is a temporary solution. In fact, it just may be the smartest choice you could make, if you do the numbers. Besides, you’re not responsible for maintenance and you can drop everything at any time and travel the world. Sock away the difference for early retirement.
6. Build your own home. Now this is the sandbox we’re playing in. A hundred years ago, most people had the skills to build their own home. I just found out recently that my Italian immigrant uncle actually made his own house out of a railroad car that he just built additions onto. He still lives in it! Now we feel like the work of homebuilding has to be done by “professionals.”
I say everyone should have the skills build their own home. We’ve outsourced one of our most basic needs and, as a result, have given up control over our own destinies.
When I was in the Peace Corps in the Marshall Islands, my first project was helping my host family build my thatch hut. This thing was a work of art. The cement floor, cool thatch and cross breeze created by the floor-level windows kept it really cool, even in the tropics. We bought 2x4s and cement, but other than that, it was made from pandanus leaves woven together with the spines of palm leaves, which were free and ubiquitous. It is by far, the best home I’ve ever lived in. Check out the fishing spear propped against the wall. I was such a badass then. Too bad I made such a long detour into Responsible Adulthood.
7. Squat? Camp permanently in a tent? Live on a modified school bus? Rent out the backyard of someone with property? Put up a teepee? A tent cabin? Yurt? Shipping container? The options are only limited by our own imaginations. I’m not saying these are solutions for most people. What I am saying is that we need to open up the conversation beyond the Responsible Adult default belief that the 30-year mortgage is the only option.
C’mon. I know I’ve only barely scratched the surface here. Let’s brainstorm some more ideas.