Nana just finished feeding Clara her carrots.
15 April 2008

I learned something new on the subject of personal finance recently.  I read this very good article on mortgage products.  (Say that again with me: mortgage products; the word alone should send up a red flag.)  I highly recommend reading it.  What I learned:  people no longer own their homes.  Instead people continuously take out home equity loans.  A quote from the article:

In the case of Bob and Jane and those like them, Scurlock uses a language long forgotten.  “They’re sharecroppers,” he says.  “They don’t own their home.  They’re just renting their home and refinancing every few years.”

It is so easy to think, “I’m not renting my home from the bank; I’m buying my home.”  But with all of the interest front-loaded onto the loan and very little of your mortgage payment actually going towards the principal, we are most definitely renting our homes, especially if you refinance every few years and start the cycle all over again.

We have credit card debt, as I have mentioned before.  And I was completely on-board with taking out a home equity loan to pay off the credit card debt at a lower interest rate.  It seemed like a no-brainer.  But that is because I was reading the literature propaganda from the bank.  A quote from Mortgage Loans: Costly Mortgage Mistakes:

Use Your Equity Wisely

You should never exceed 80% of your home’s value when it comes to your primary mortgage and any home equity loans you carry.  By maintaining that 20% equity “cushion” you are protecting yourself from economic downturns.  If the value of your home drops in a declining market you could end up owing more than your home is worth.

Many homeowners use equity for repairs or to consolidate other high interest debt.  The equity you have is your ownership of your home; use equity wisely, if you are considering a vacation or a new car you might want to think twice.

This is all new information to me.

Another very good quote from the article:

“I think the biggest change,” says Scurlock, “has been the way debt is marketed.  It’s very much sold as a product now.  I think we’re being taught to think of it no differently than a pair of shoes, or a cup of coffee, or anything else that’s marketed … The fact that it’s a liability has really been obscured and lost.” [The emphasis is mine.]

And from all this new knowledge, I have also made a deduction:  do not get your financial advice from the bank.