11.5: Home Ownership

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For those who can in our current economic conditions, buying a home is the one major investment for most U.S. families. Even when interest rates are low, the cost of a home is extremely expensive. If you purchased a $100,000 home at eight percent interest for 30 years, your payment would be $733.76, and you would pay $100,000 for the home and another $164,154 in mortgage interest. That totals $264,154 for a $100,000 home. If the home does not appreciate in value, this is a terrible investment.

There are strategies that can be used to minimize the overall cost of purchasing a home. You can save money and put a large down payment on the home. This will lower the initial cost of the amount financed. You can make an extra 1/12th of a house payment toward the principle of the loan every month. By the end of the year, you would have made a 13th payment to lower the overall balance of the loan (principle). Another strategy is to have a 15 year loan instead of a 30 year loan. In the loan above, that would mean making a monthly payment of $955.65 instead of $733.76. How might that benefit you? First, you’d pay off the loan in 15 not 30 years and second, you’d save $91,626 in mortgage interest. One of the major U.S. financial problems has been the financing of established worth of the home into a second mortgage or home equity loan. Home equity is the value in thehome that is higher than the amount still owed on the home loan. Debt can be detrimental to a family economy.

The average credit card balance for a family with at least one credit card is $\$ 16,007$. This is important because the U.S. has become a nation with liberal debt and debt incurring policies. ${ }^{13}$ Woolsey and Schulz also reported that there were over $\frac{1}{2}$ billion credit cards in circulation in the U.S. contributing to a total consumer debt of $\$ 2.46$ trillion. Eight percent of U.S. college students are reported to have credit with an average amount owed of $\$ 2,200$. They are also estimated to have accrued $\$ 20,000$ in student loan debt.

To illustrate, think about tearing a $\$ 100$ bill into small pieces. This would bother most people because the money is wasted and can't be reused.

Why do we spend \$100 on a purchase for something we don't need and might never use and not even flinch, yet get bent out of shape over a $\$ 100$ dollar bill being torn? The dollar bill is tangible and touchable. The credit card purchases are blips on electronic screens or numbers on paper receipts. It's funny money to many of us. We are heavily marketed to go into debt. Think of all the credit card offers your family receives in the mail. The debt is there for the taking without one caution to the consumer. Very few of the companies that loan money ever warn consumers about the problems of getting into too much debt. Why would they if you can have what you want immediately and pay it back over the next $5-10$ years with massive interest payments? Their ideal customer would run up a large balance of debt and make a minimum payment each month, thereby bringing in the most profits to the company, but the wise consumer uses debt to his or her advantage.

Credit cards are not necessarily a bad thing. They facilitate travel and small transactions for the family; however, credit card balances or unpaid debt can be very burdensome to a budget. The rules of three guides good credit use. The first rule is to save three months' worth of income and keep it in the bank. That means save enough to meet all your fixed debts (rent, mortgage, car, medical, insurance, etc.) so that you can keep your family afloat if you suffer a job loss or crisis.

The second rule is to have only one credit card with no bonus or rewards program. Keep a zero balance on it. Set your credit limit to what it might cost to pay three weeks worth of bills (including your rent, mortgage, and car payments). If you have a lower limit on it you can more readily control your spending. Don't ever use your credit card for long-term debt. It should be a tool for short-term financial matters.

The third rule is whenever there is a consumer item you really want (TV, Cell Phone, Handheld, etc.) wait three full days before you buy it. If it's on sale and you think you will miss a good buy if you wait, remember that it will go on sale again. If you haven't planned for it, saved for it, and budgeted for it, then a three day cooling off period may help you prevent unwanted and unneeded debt. Keep in mind that if we are marketed to with an approach of "hurry, sale ends soon," then most likely the marketing has triggered the use of our emotional decision-making processes (limbic part of brain) and we might rush out and buy feeling like we are actually being responsible purchasing agents; even if we never really needed or wanted what the sale is selling.

Most couples don't have a monthly budget. It makes it very difficult to manage a family's finances without one. There are numerous free budgets online and if you are familiar with Microsoft Excel, it works very nicely for a budget. The two main things about a monthly budget are to be able to know how much money you currently have and where you are spending it.

Footnotes

13. see for example, Xiao, J. S. (2007). Academic Success and Well-Being of College Students: Behaviors Matter. Take Charge of America Institute Report, November , 1-23

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