Another interview! Not for a job, but for someone else’s article. (Someone out there must need a writer who can write about engineering in English.) The folks at Nerdwallet.com wanted to write about 40 year mortgages and were having a tough time finding homeowners who had one and were willing to talk about it. They stumbled across my blog and gave me a call. Evidently, I’m a member of the 1%, not in terms of wealth but because only about 1% of homeowners hold such long mortgages in the US. Yet again, I’m not normal. I’m okay with that for several uncommon reasons.
I didn’t shop for a 40 year mortgage. It was a consequence of my Mortgage Modification a few years ago. Thanks to a government program (HAMP), an understanding official at Fannie Mae (“With a resume like that you just need time to get a good job.), and an odd path through mediation (a long story), my mortgage switched from a >6% 30 year mortgage to a 40 year mortgage at 2% that someday will ramp up to something under 5%. My total monthly payments dropped by about half (for now) and I get to stay in the only house I’ve considered home.
The downside as they state in the article, is another decade of interest payments. That’s more money heading out the door. Most people prefer going the other way, paying off mortgages in 15 or 20 years to decrease the total cost of the mortgage. A 40 year mortgage can come across as one of those deals where it sounds sweet for the homeowner, but the bank’s the one making the money on the deal.
Run the numbers. There’s probably an online calculator to make the comparison for your situation. I didn’t need to. I didn’t have any other option except to sell while the market was low, and then be penniless and homeless. I certainly hope your situation is more flexible.
It is easy to be seduced by the precision of the mathematics. I enjoy math so much that I watch documentaries about it and subscribe to Numberphile on YouTube (where tau versus pi is a passionate debate). Here’s the trick with the numbers. Check the assumptions behind them and the equations that use them.
Inflation bounces up and down, but take an average over a long enough period and see a general rise. That’s the nature of our economy. It relies on about 2%-3% growth, which roughly translates into inflation. Look back 40 years and find inflation has been about 3.5% per year. If the mortgage rate is less than inflation, then my interest payments are becoming a smaller fraction of my monthly expenses every month. My housing expenses may continue to rise with insurance and taxes, but the cost of borrowing the money gets smaller. Something that cost $1 in 1977 would cost $4 now. A 3/4 cut in a mortgage payment can happen by keeping the number of dollars the same while inflation rises four-fold. Even my eventual increased interest rate has a good chance of staying below long term inflation. Wait 40 years and that interest payment may be as small as the price of a nice dinner.
Housing is getting more expensive, especially in the Seattle area. With my 40 year mortgage, I get to live in a home for less than it would cost to rent. The downside is those increased insurance and tax payments. A house is an asset, which means it can also be an investment that I happen to live in. Good investments rise faster than inflation. An increase in my monthly interest payment increases my expenses by a few hundred dollars per month, but my house, my asset, my net worth can easily increase by several hundred or even a few thousand dollars a month. As the real estate market recovers, my house’s value is rising about $3,000 per month. Spend a few hundred to get a few thousand? Sounds like a deal – just be careful with liquid versus illiquid assets.
Housing may be getting more expensive, but for many it is no longer the greatest monthly expense. Health insurance costs are rising. I am aging. Combine the two and compound an expense that becomes prominent. As I’ve written before, health insurance can cost so much that I can’t afford health care. If I spent money on my health rather than on insurance, I’d be able to visit a different doctor every month. Oh, what a luxury. That’s more on my mind as a greater inefficiency than interest payments.
That aging thing happens. Will I be alive in 40 years? Maybe. Maybe not. If I’m alive and still in this house, great! That’s a celebration! If I’m not alive, I’m probably not worrying about my mortgage payments.
Concentrating on the expenses in the last 10 years of a 40 year mortgage only makes sense if I stay in the house more than 30 years. In 40 years I’ve had almost a dozen addresses because of careers, relationships, and opportunities. Half of all homeowners move again in about 10 years. Very few take out one mortgage and pay it off.
The Economy et al
Forty years ago we were in the Cold War, recovering from a political scandal, just out of Vietnam, just coming off the gold standard, and about to hit stagnation and high inflation and interest rates. The personal computer was a toy for geeks, the Internet was largely unknown, cable TV was a luxury, and coal and oil were king and queen. The Space Shuttle was replacing the Apollo Program. Want to guess how things will be in 40 years considering the singularities that may occur in automation, quantum computing, nanotechnology, Bitcoin, augmented reality, electric cars, cheap solar power, medical advances, and the inevitable unknown unknowns (or unk unks as we called them at Boeing)? Throw in climate change, political change, societal change. Toss in some chaos theory. Toss in some good and bad luck. The range extends from utopia to apocalypse.
Personal finance is personal, and even the finance part doesn’t exist purely within the realm of mathematics. Personal finance is about financing a person’s life, and that life exists within a far more complex environment that shouldn’t be ignored. As they quoted me at the close of the article; “I’m happy with the present and willing to accept what’s lined up for the future“. (Nicely done, Marilyn.)