What the meltdown means to me, a 35-year-old married West Coast homeowner
Filed under: Borrowing, Debt, Simplification
Despite my Ivy League MBA and my role as a founder of a personal finance web site, I haven't done much in the way of planning my financial situation. All of my financial milestones in the past decade or so have been accidental, serendipitous, or just a gut response to a disaster.I was pregnant pretty much the moment after I was engaged, at 28. Through the birth of three boys (all of which came along a little sooner than I expected), I worked in a unusual career that I made up out of whole cloth, starting out in dotcom operations management, finance and product development and ending as a professional blog producer. While it paid fairly well, it did not pay nearly as well as the jobs of my business school peers; and it became very difficult to make extra room in my budget to pay my huge student loan payments. Instead of paying down my student loans, I've only compounded them.
One thing I did brilliantly was to buy a house in an up-and-coming neighborhood immediately upon getting pregnant with my first child, and never refinancing it. Buying it was a gut reaction to the nesting hormones, but it turned out wonderfully. Four years later a Starbucks went in two blocks away, and my home's value doubled. Early on, I took out a home equity loan to (hiding my head in shame) pay for our wedding; I'm thankful I never refinanced the house, keeping my ARM that was garnered at the peak of my credit score. While I was seriously guilty of living outside of my means as a young bride and mama, after I became pregnant with my second son I buttoned down the hatches, canceling all my credit cards and vowing to live on what I made.
That one really good decision -- never to refinance my mortgage -- has paid off with a low-ish monthly payment and a fast-reducing principal balance. And with my new philosophy of "no debt no way never," I know at least I won't be facing a tough credit review at my local bank.
Another great financial decision I made was to stop driving the family car and travel by bike. I spent my Economic Stimulus Package on a fancy cargo bike that can transport my kids and lots of groceries -- and whose maintenance costs consist of an inner tube every six or 12 months (ok, I'll admit it, I buy a new helmet or some other kind of bike accessory every six months too. $120 a year!). Other than the cost of the bikes for me and my six-year-old son, we spend about $250 a year on transportation.
In response to the financial crisis, I've decided to put more of my rather small 401(k) balance into the S&P 500 (seems like a buying opportunity) and finally start college saving accounts for my boys, also invested in index funds. Hopefully we can tell them how prescient their mama was to start when the market was at the Great Low of 2008. Due to rising grocery prices and philosophical and environmental concerns, I've begun to eschew packaged breads, cereals and snacks in favor of baking from scratch, grow more of my own food and get as much of the rest from local farmers and ranchers, also volunteering to pick neighbors' neglected fruit trees and preserving the produce. Those 8 pints of fig pear lavender jam in my pantry were almost free (I just paid for honey to sweeten them) and will taste great on homemade bread this winter. And, if all goes as planned, I'll be saving enough money to start whittling away at that student and home equity loan debt this month.
Lots of my friends about my age are making similar choices, foregoing cars, preserving food, cutting back on needless spending. Others who have just completed significant refinancings to pay for remodels or home expansion are working long hours to keep the wheels turning. Their homes are lovely, but I'm happy I didn't make a similar choice. In my opinion, now is not the time to increase debt for a bigger car or a bigger/lusher home. Now is the time for debt reduction, scaling back activities, and simplification.
And now is definitely not the time to refinance my mortgage.
Reader Comments (Page 1 of 2)
10-07-2008 @ 4:20PM
Joe said...
Just a comment on the pride you maintain in "never refinancing your mortgage". Your philosophy is actually very foolish unless you got close to the very best finance rates available. Refinancing does not mean that you are changing your rate AND taking out extra money. The way you are putting down refinancing makes it sound as if this is what you mean.
I purchased my home in 1995 at a rate of 8% on a 30 year fixed mortgage. A few years later, rates dropped to 7%, so I refinanced my mortgage (30 year fixed) andnever took out extra money. Of the money I saved with the new monthly payment, I sent in to be applied to "additional principal" each month. In other words, I continued making the same payment amount with the new mortgage to speed up the payoff date. Now again, in 2003 rates reached a very low point. I again refinanced without taking out any money, but this time at a 15 year fixed rate of 4.875%.
The bottom line is that by refinancing and not taking out any extra money will have saved me nearly $100K in interest payments and I will own my home 7 years sooner.
Either you didn't explain yourself very clearly or you are not very wise about financing. Either way, you shouldn't be giving advise by example to your readers when it is poor advise indeed.
I am not in the loan or finance business. I just took exception to your column.
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10-08-2008 @ 2:05PM
sarah gilbert said...
Joe and others: refinancing would have been a terrible choice for me not just because of the all-to-often utilized opportunity to take money out, but also because refinancing simply costs money. mortgage brokers are eager to help you refinance because they charge points and closing costs each time, typically adding $5000-$10,000 to the principal. in my situation, I wouldn't have been able to reduce my interest rate enough to justify the points.
10-31-2008 @ 4:04PM
Judy said...
I thought your attitude was waaaay too superior!
She didn't advise anyone! She just told us what SHE did, and did tell of some mistakes along the way. She is human and doing the best she can.
Fine that you are so much smarter, tell us of your wins and don't sound like you are a genius - cause in the scheme of things, you don't have a clue as to how to reach people without turning them off!
10-07-2008 @ 6:22PM
Brad said...
Joe you are right on. I caught the same rate on a 15 year mortgage here in CA. As a home owner you just need to remember to not "Eat Your Shingles" as those in Real Estate call it. I truly feel sorry for all who did.
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10-07-2008 @ 7:57PM
Audrey said...
Joe,
You are right about the concept of refinancing. The author could have been a little bit more clear on her decision not to refinance and why she didn't do it. I think a lot of homeowners put a bad name on the refinancing, it is often associated with taking money out of the house. I don't own a house but my parents bought theirs in 1999 at a 7.25% interest, 30 yrs fixed. When the rate a bottom at 2004 they decided to refinance the rate down to 4.25% and to a 15 years mortgage. It was the best decision they've ever made, they are paying only about $200 more a month than their original payment but they will own the house in half the time of the original mortgage. Most importantly they refused to take any money out, even though the bank tempted them with a 350K equity line of credit. They said "hell no" to that and I am sure they so happy now that they weren't tempted then.
It is just another example of how people are capable of making great decisions when tempted by money and greed. I am appalled by the people who took out money of their houses during those times then cry foul now because things are not going great for them. When will this society recognize that the lack of self responsibility are causes of this financial crisis.
10-08-2008 @ 1:37PM
mike said...
I am in the process of starting my own business after 22 years working for someone else, however I am not a minority or immigrant so am told I cannot get a business loan from our own government, I have saved for years on my own to start this, now my dreams have been shattered by this situation, my home will not support a loan as backup, My bank was sold, My stocks fell apart and now the contracts I have ended due to them declaring bankrupsy. The entire world fell apart in 5 days. Can life get any more messed up?...no forget that..afraid of the answer!
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10-08-2008 @ 10:01AM
beachpaul said...
We own our house. Liquidated almost everything into cash last winter and spring. Drive late model cars till they rot or breakdown completely. Small equity line based on Fed prime( the bank won't issue anymore, current rate 4.75% and heading further south). Have degrees in liberal arts, where we were given comprehension skills they don't teach in business programs. I have never felt more confident and secure in our economy and our position in it, than I do now. We are prepared for what will come. Finally, the financial nonsense of MBA's will be wrung out of our system for, hopefully, what's left of the rest of our lives. It is sad that it had to come to this. Because one is blind, doesn't mean the rest of us can't see.
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10-08-2008 @ 10:13AM
Herkminer said...
Three years ago a wise friend told me"Get rid of all debt"and put
yourself in position where you can flip burgers if you have to to
weather what is coming. I did just that .I own my home, no credit card debt. Own a parcel of land also free and clear. Heat with wood and solar.He could see it coming.. Borrow borrow borrow
to keep up with an image and down it all will come like a house of cards and it has.. its not over
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10-08-2008 @ 10:19AM
will said...
We are a family of four and my wife and I have worked very hard to provide for our children. We live in Beverly Hills and our kids go to expensive private schools. We life a fairly affluent lifestyle. I am a composer and she works in rock and roll. We are free spirited people who have worked hard for our success. We both came from modest families. We are both in our early 50's.
We have always paid off our bills every month, and have a 30 year fixed on our house a 5 1/4%. We have never missed payments on anything nor lived beyond our means.
We have lost about one third of of savings, including both kids' college funds.
It is very sad for us to have worked our selves to the bone and watch it all go into the pockets of the criminals and special interest groups and lobbyists that run the country.
I am hurt and ashamed. And now I have to pay for everyone else's greed. I already pay fifty cents of every dollar I make in taxes. I guess that isn't enough. Where will my taxes go? Probably to get escorts for congressmen.
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10-08-2008 @ 2:05PM
JAN said...
Yes...I feel the same way...single for 25 years...own home..
run cars into ground...saved...saved...saved....65 years
old and a realtor...not good situation. Very mad at the greedy
folks and lenders who used their homes for ATM machines.
Does not seem fair, does it.
10-08-2008 @ 10:53AM
Gaillery said...
I applaud some of the changes you have made. This year is the first year in more than 10 that I convinced my hubby and sons to dig and help maintain vegetable beds. I was able to home can about 24 quarts of tomatoes, 16 pints of red salsa and am still working on green tomato salsa (what else does one do with green tomatoes)? I also bought two bushels of green beans from my local italian market at .25 a pound and with the help of my family, froze 44 quart size bags of green beans.
I haven't quite gotten to the bike yet. I wish that someone had informed me when I was much younger that debt stinks. And that you can save even though our family has had some challenging medical issues including cancer.
We live in the Chicagoland area, so now that I am reading and learning from others, no one can tell me that just because you live in the burbs that you can't be cautious and frugal.
Thanks for sharing.
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10-08-2008 @ 10:58AM
Donna said...
My former husband and I refinanced our home two times after mortgaging and buying our house. The first refinancing helped to reduce our payments, which we needed because we were raising two young kids and they had reached the age of having outside activities that could be costly at times. The second refinancing came later when interest rates were down and we had grown older and were able to afford the payment on a 15 year mortgage. Interest rates were down, so it really wasn't a huge increase in payment. Unfortunately, my first husband passed away 2 years later after refinancing. With his passing I weighed the value of paying off the mortgage. I chose not to at that time, but after 2 years I realized that I was paying more than I actually could afford because it was more than what I was making on the money I had been left to pay the mortgage off. My point is that everyones income level and lifestyle is different, so what is right you may not be right for someone else. You have to look at the big picture. I am thankful now that I did pay it off because of the stock market dropping down. At least I have a home to live in and do not have to worry about making the payment. My 2nd husband and I live modestly and do not run up our credit cards. After marrying him I found out he had a lot of credit card debt, so I arranged to get him balance transfers with low interest rates and he's been paying them reasonble payments each month. He was one of those people that paid the minimum which would have kept him in debt forever. It still will take time to them off, but at least it's under control and he's actually putting a dent in the principal each month. I do not believe in running up credit cards. In the early years of my first marriage, we would do that and then pay it off every six months when he received bonuses. They didn't seem much like bonuses when we had to use it to pay off credit cards. My belief is that, if you can't pay for it, don't buy it. Don't let someone talk you into buying when you are not sure you can swing the payments. The responsibility lies in ourselves. We can't hold others responsible for our own mistakes. Learn how to save and budget you money. Too many are not willing to wait and save the money to buy something we want. Not when it can be put on the credit card. Keeping up with the Jones's may seem important at the time, but it does not bring the right kind of happiness to our lives. It's a temporary fix. Keeping up with others is a lifetime task and for many, they don't have the disposable income to do that for life.
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10-08-2008 @ 1:15PM
mIKE said...
Did your children arrive Federal Express? It seems to me we need to educate people on the price of pregnancy. They did not arrive, you made them. Why can't people get this in their head? Quit complaining about not making enough money to support your family. You made this family, and you will suffer the cosequences right or wrong.
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10-08-2008 @ 1:18PM
Mike said...
No, everyone is paying for the family you created through taxes.
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10-09-2008 @ 6:43AM
Kay said...
Will, I so agree with all you have said.
Our situation us similar. I am so angry that I have spent the last 10 years working myself to exhaustion, only now to lose it all in the market. Maybe this is lesson for us all to stop chasing the almighty dollar. I am now trying to regroup and accept that the security I thought I had earned is gone. I really don't think I will go back to the same pattern. Suddenly, I believe money is a myth. What do I really NEED? I need my health. The stress of the loss of investments has totaled me out. I am going to try to regroup mentally this next week and then begin living my life with a different attitude. I will look back at this as a valuable life lesson......
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10-09-2008 @ 10:07AM
Grace D. said...
I often say that I am glad to be the child of parents going through the depression. There was no welfare, unemployment,SS, medicare, etc. my father lost his Pharmacy store and never regained. There were no credit cards, only cash. So, throughout my life I bought what i needed and not what i wanted...it is a philosophy that one has to perhaps experience. Times were difficult, my dad got day work, i remember my mother taking food off her plate and slipping it to mine. I am glad to have these memories because i learned to budget and live within my means the rest of my life. The lessons of today will only be forgotten if the government bails all of you out. We did not have that option. WW2 took us out of the depression.
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10-09-2008 @ 10:39AM
Lynne said...
Who chose these articles? I mean really - everyone of them says they have no debt and are in great shape! This is not a reality for the majority of people! Give us stories that we can actually relate to rather than tell us how great you are doing and how frugal you have been. I am finding this whole take of "What the Financial Meltdown Means to Me" to be a little self righteous!
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10-09-2008 @ 4:57PM
Jen Clark said...
Joe, Your story is practically identical to mine! Yes, refinancing is the BEST thing we ever did. We bought in 2000 at 8%, refinanced in 2003 at 6.5%, and refinanced again in 2005 at 5% on a 15-year arm.
We just kept paying the original payment, adding the extra to the principal (and a little more now that our income has gone up since then). Our house will be paid off in 2015 and we'll have saved $150k in interest!
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10-10-2008 @ 1:12PM
Chris said...
And never forget that while you scrimp, save, and live hand to mouth, the executives of your student loan companies are making out like literal bandits, getting multi million dollar bonuses. Think about that when you pay that bill every month into the bottomless maw of Sallie Mae or whatever vendor(s) sold you that bill of goods years ago.
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10-10-2008 @ 1:38PM
Amy Roth said...
Sarah, thanks for clarifying your reasons for not refinancing. My husband and I bought our home in 1998 at probably 8% interest or thereabouts, 30year loan, then a few years later, we were able to get a 15 year loan at about half the interest rate. Somehow, our payments didn't change much. So now we're about five years into the loan, paying a small extra amount each month towards principal. The house should be paid off about when our first child goes to college. I work at a college, so I hope he takes advantage of my free tuition perk! Next October our car will be paid off and I'll drive it till I can't anymore. Other than that just two credit card bills is all we have. I did a Christmas club this year so I don't charge any gifts, and will cut back on what I buy. Bottom line, doing everything I can to not spend more than I have to.
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