The Wisdom of Mortgages

I am absolutely sold on the idea of debt-free living.  While I have been slowly turning my personal financial Titantic around, I realize more and more every week how most of us here in America have so insulated ourselves from the reality of money for “self gratification” that is based on entitlement thinking.  I guess another possible explanation is that we have been duped and bought into rotten ideas about money that keep us a slave to our finances.  While completing my tax returns recently, I had a revelation about this stuff.  I believe it is one of the biggest areas where we’ve been both duped and held captive by our huge spending appetites.  Its called a mortgage!  Let me explain.

Most of us have mortgages.  Our parents had mortgages and some of our grandparents did, but beyond that, generations prior were not as prone to have mortgages.  But our generation, the infamous Baby Boomers, grew up with the idea of a mortgage as a given line item in the budget…that is, if they have a budget.  The point is, most of us Baby Boomers have just accepted the idea of a mortgage and we’ve passed that notion on to our children.

Now, I want to challenge the wisdom of mortgages.  First of all, let us consider that 50 years ago most mortgage companies required at least 10% down in order to qualify for the loan.  This was not only for the protection of the lender, but also the borrower.  The 10% cushion served to absorb some of the loss should the market dip or completely tank.  The recent real estate market crash saw about a 20% to 30% decline in property values.  So, if you had a house that you bought for $200,000 in 2006 say, then when the market bottomed your property was worth $160,000.  If you did not have that 10% cushion then you lost $40,000 of value and are now in a “negative equity” situation, i.e., you owe a lot more on your house than it can now be sold for.  This is exactly what has happened in the last 4 years only most did not have the 10% cushion as they borrowed at 100%.  There was no 10% cushion and the response of many was to walk away from their homes and simply allow the property to go into foreclosure. This is a decision that has numerous long range implications for the homeowner and disastrous implications for the country’s economy.

What is amazing about this whole mortgage thing is how we have justified having one.  The most common comment you hear about mortgages concerns so-called tax benefits.  This is supposed to make the borrower feel good about being $200K in debt and paying about the same in interest across the life of the loan.  But here’s my revelation:  Let’s say you are in the 5^th year of a 30 year mortgage.  Roughly 75% of your monthly payment is interest.  So on that $200,000 loan, you’re paying about $1200 a month, of which $900 is interest.  Over the course of a year, that means you are paying about $10,000 of interest or a total of $14,400 in house payments. 

Now here’s those tax benefits:  You get to subtract that $10,000 of interest from your income.  So say you make $60,000 per year.  With the $10K deduction, you will now be taxed on $50K vs. the $60K this year.  Now, according to my CPA a general rule of thumb is that for every $1,000 of deductions, you will pay about $100 less in taxes.  So that means that you will pay about $1,000 less in tax this year.  Nice little tax break until you consider that you paid $14,000 on a mortgage!  What if you didn’t have a mortgage?  Well then you paid Uncle Sam and the IRS the $1,000.  Which would you rather pay…$14,000 or $1,000?!

This is kind of a no brainer, right?!  It doesn’t make any sense does it?  So if you have a choice do you want the mortgage or no?  And yet we’ve bought into the idea that a mortgage is such a tremendous tax break!  No it is not!  Yes, if we have a mortgage it is one of the few advantages, but let’s face it, compared to not having a mortgage it’s a pretty puny break!

So what would it take for us to get rid of our mortgages?  I think 3 things:

1. Firm commitment and belief that it is doable.  We cannot waffle on this issue.  We must be firmly persuaded that living life without a mortgage not only is a goal worthy of consideration, but that it becomes a priority to eliminate as a line item in the budget.  We cannot accept the flimsy reasons for which we go into debt, particularly on a house.  Most of us have a mortgage and when we think of getting rid of it the task seems impossible.  What’s funny is that when I look back I see plenty of missed opportunities to pay off my mortgage, only to engage in momentary life amenities instead.  “Where there’s a will there’s a way” the saying goes.  If we believe that we can eliminate our mortgage and commit ourselves to being debt free without it, life will have a way of bringing the opportunities to do so.
2. Fixate on being debt free.  Don’t accept anything but debt free in your thinking.  Pillar 2 (12 Pillars and a Prayer) says that as God’s people we will “borrow from no one and lend to many nations”.  What if we began to incorporate that into our thinking?  It is revolutionary and will absolutely change the way we live and make decisions.
3. A plan!  Sit down and list out all of your bills.  I agree with those who suggest to focus on paying off the smaller bills first.  It does 2 things: psychologically, it gives you energy and momentum to begin working on some of the other bills and its one less guy who is calling you at supper time!  The plan should include how much you will pay on each bill each month and when you expect to pay off each bill.  These are just quick suggestions and you may have a better idea.  But the point is, make a plan in writing and work it diligently!

How then should we think about money, wealth, success and prosperity?

12 Pillars and a Prayer is about money.  Its also about whether not its ok to be wealthy.  Yet again, 12 Pillars is a way to think about all the aspects of wealth and God's blessings (including material) on our life.  I have often found that the church tends to polarize itself around this issue.  On one hand, there are the prosperity teachers whose major tenet is to "name it and claim it".  While this philosophy initially glitters and hops, it often becomes the seed of considerable discouragement and even resentment.  After all, if you name and claim it and it doesn't happen you don't have a lot of wiggle room to explain it.  You've either got to say the philosophy is wrong and dismiss all notions that God may want us to enjoy wealth, success and/or money, or be mad at God for not giving you what you wanted.

One the other hand, we've got those locked into poverty thinking.  If I had to guess, I would say this thinking is much more pervasive in the church and is much more destructive.  Poverty thinking says that to have money somehow obstructs our ability to know and have a healthy relationship with God.  Poverty thinking denies a man or woman his/her dreams and screams at us to "Stay in the box!  Its not safe anywhere else!"  Those locked into poverty thinking may allow themselves "reasonable" dreams, but never believe that those big dreams, those ones you think about when you think about "what would I do with the money if I won the lottery", could come true or are even permitted.  And when the possibilities of something greater present, those stuck in poverty thinking quickly retreat to their structured, safe schedules never allowing themselves to tap into that creative side of God that He has placed in each one of us.  Thousands of untold inventions, companies, medical breakthroughs and technological magic have never happened because of poverty thinking.  

Unfortunately, poverty thinking is also deeply embedded and supported by religiosity or a religious spirit that squelches any attempt to break out of the status quo and pursue Godly vision and use God-given talents.   Poverty thinking says the good is ok, but great is too much and moves you away from God.  Poverty thinking is supported by such scriptures as "its harder for a rich man to get into heaven than to pass through the eye of a needle".  But what's the context of these words?  How does this jive with centuries of Jewish thought based on Torah law that says part of the covenant God established with Abraham and was echoed through Moses, includes financial and material blessing (see Pillar 2, Deuteronomy 28).  These promises and covenant was played out in the lives of many biblical heroes (think Solomon, David, Abraham, Isaac, Jacob, and on the list goes)?  In my opinion, a poverty mindset is much harder to deal with because of its subtleties and its shiny religious coat.  But make no mistake about it.  Poverty thinking chokes the life out everyone it touches and prevents an individual from reaching their God-given potential.

So while the church polarizes itself around these 2 extreme positions, how then shall we think about money and wealth and prosperity? Six years ago I found what I believe to be a biblical philosophy or way to think about money.  It was the 12 Pillars and a Prayer.  It literally was a divine download and has changed my life completely.  I have been living this now for 6 years and have seen new measures of peace, progress bringing my finances under control and a richness to my relationships that I did not previously experience.  While most people know how to add and subtract, balance a checkbook and understand the basics of money (i.e, its wise to spend less money than you make), most of us run into problems with our thinking about money.  Most of us lost out when we spent money we did't have to try to achieve something we really didn't need.  Most of us have gotten ourselves in trouble when we mismanage money for emotional reasons that somehow made us feel better at the time but ended up tying a noose around our necks!  So the question is not "Does God really want us to prosper financially?" but rather, "How then do we think about money, wealth, success and prosperity?"

I tackle these questions in my latest book, 12 Pillars and a Prayer and I look forward to discussing these issues on our 12 Pillars and a Prayer blog site each Friday throughout the year.  As always, we invite your thoughts, comments and feedback.  See you next week!

Pillars built on fault lines aren’t very stable!

I am excited to begin writing this blog about money.  Perhaps there is no hotter issue that we face in this country and in our lives that cause more stress and strain than money.  This country's debt problems are mind boggling and to the average American citizen, the numbers are so astronomical that we tend to just dismiss the entire crisis is if it does not matter or effect us.

But make no mistake about it.  It does effect us!  Our country's debt problems and economic woes are only a reflection of what most of us are experiencing in our personal finances.  Several years ago this country issued bailouts to some of the biggest industries in the world:  the auto makers and mortgages lenders.  But where did the money come from for the bailouts?  Some of it came from you and I, John Q tax payer, while the rest was borrowed money!  Get that, borrow money to pay off bad debt on other borrowed money!  But before we get too judgmental, how many of us have done the same thing?  For example, a credit card gets maxed out and another offers to transfer the balance at a reduced rate or call up a friend or family member to borrow money to pay a credit card.  Borrow money to pay on borrowed money (see the excerpt below from my book 12 Pillars and a Prayer).  The result is Fool's Gold designed to make us feel better for a season but makes no real progress on the real problem:  our thinking about money is messed up and our money management is out of control.

This blog, named for my recently released book by the same name (12 Pillars and a Prayer) is dedicated to getting our thinking right about money.  It is designed to be practical, real and founded on Biblical teaching about money, wealth, success and prosperity.  I've been living these 12 Pillars for almost 7 years now.  They have permeated my entire life and guide my thinking about money.  They are powerful passages from the Bible that when applied to all areas of my finances, have led the way for me to become completely debt free.  No, I'm not there quite yet, but I'm on the right path to obtain debt free living in the very near future.  The entire process didn't start with getting a better paying job or eating peanut butter every meal for a year.  It came by changing the way I thought about money.  Now that I am no longer swimming in a pool of debt, it is my desire to see others overcome their economic bondage and live debt free.  To do so changes our world.  I begin this journey of sharing the 12 Pillars with others by asking a simple question:  How would your life be different if you had no debt?  What would change in your relationships?  Would life suddenly become more rich and full, as you no longer were slave to the creditors?  Would you be in a better position to help others?  And what about your own desires to spend?  What if you had a better handle on why you spend money you don't have and in the process remain a slave to debt?

All of these questions will be discussed in this blog.  Each week I will post to the blog either stories that from my own life or from the lives of others (names will be changed to protect their identities).  We will begin this blogging journey with a story from 12 Pillars and a Prayer.  This is a true story that illustrates just how far our thinking becomes when the financial pressure begins to mount.  I hope you enjoy and encourage each of you to comment or contact us and share your story!  You contact us at askdrt@simplesolutions4.com or leave your comments directly on the blog site.

Pillars built on fault lines aren’t very stable!

…owe no man nothing but to love him..!

Romans 13:8

I

t was 15 years ago when I traveled to a conference with a friend and coworker.  Let’s call him Ron.  I listened carefully as he began to lament his financial woes.  I was completely caught off guard by what he told me. 

Ron was a sharp looking young man, bright and came from a nice family.  He had just finished his medical school training at a prestigious private university and was waiting to hear from residency programs.  He had published some of his work in a peer reviewed medical journal.  Ron seemed to have it all going for him.  I assumed him to be of reasonably sound mind and emotionally stable.

“I don’t know how we’re going to pay our bills,” Ron told me as he gazed out of the passenger side window at the vibrantly colored western North Carolina Mountains.  It was late fall and the iridescent mountains captured the majesty and radiance of God’s creative nature.  Ron, on the other hand, was anything but radiant as he proceeded to tell me about his financial woes.

“We owe over $40,000 in credit card debt alone!” he confessed at one point.  “We are months behind on our car payment and the bank is threatening to repossess any day.

 “Sally is about to divorce me and will hardly speak to me.  Our sex life is non-existent, and I haven’t had a good’s night’s sleep in months.” Ron’s countenance sank to despairing lows as he continued to share the gory details of his shipwrecked finances. 

The more Ron talked the worse it got.  It became obvious that he was totally demoralized.  In spite of the successes he was enjoying in his career, Ron saw himself as a complete failure and inept leader in his home.  His self-esteem was completely shot.  Attempts to regroup himself were met with poignant reminders of his failures either from a hostile bill collector or his wife, who was obviously crushed by his clandestine spending habits.  And to top it all off, Ron lamented that if his medical school found out they would not graduate him because of an ethical standard agreement he signed when he enrolled in school.  While I had never heard of such a thing, apparently the contract required students to remain financially solvent throughout their education.  Ron’s anxiety was over-the-top.  His peace was thrown out the fiduciary window.  And he saw no way out other than bankruptcy which would most certainly end his promising medical career. 

            As Ron and I discussed his situation, I learned more about how he came to be in such dire straits.  Initially, he had received an offer to receive a credit card.  It had a low spending limit that he quickly maxed out with a purchase or two.  He made a few payments and the next thing he knows the company upped his credit limit.  The process repeated itself several times until his spending limit was up to $10,000! 

Next, while barely making his minimum payments, Ron was offered another credit card with a balance transfer option that offered lower interest rates.  “That makes sense.  I’ll get a lower interest rate and pay this mess off much quicker,” he thought to himself.  So off he went, with a plan.  He transferred the balance but somehow derailed from the plan and failed to shut down the first account.  He then used the first account again and the next thing he knows, he’s maxed out two cards!  Then the process repeats itself a couple more times until he now has six credit cards, all maxed out!  At this point no one is offering him credit and the nightmare begins.  Exit freedom and joy; enter bondage and anxiety.

Let’s just stop for a second and think about Ron’s logic for a minute.  Ron is trying to use borrowed money to pay off debt!  Sounds crazy, right?  But wait a minute.  This logic is immensely popular in today’s world.  The logic strikes a current day chord.   Many of the country’s stimulus package plans and bailouts are based on the same logic!  It goes like this: let’s borrow money to pay on bad debts that people can’t afford pay in the first place!  Huh!!!?

I have to admit that as I heard Ron’s story I wondered exactly how someone could wake up one day with over $40,000 of credit card debt. At that point of my life, I’d not had so much as a single late on my credit report.  I found myself struggling to be non-judgmental and not become condescending in tone.  But, as I would later learn, Ron’s story is not all that uncommon.  “What goes around comes around” as the saying goes. Perhaps my numbers weren’t as high but they didn’t have to be and neither does yours.  If you can’t pay your bills you can’t pay your bills.  You have become a slave to your finances.  The tail is wagging the dog and your life is reduced to chasing the almighty dollar.  Your true wealth is threatened and your life is now an uncomfortable, paralyzed existence.  It’s not what you wanted; certainly it’s not what God wanted for you, but here you are now firmly entrenched in the world of S&B …slavery and bondage!  Slave to your lender; bound to your debt.  Your credit rating is slipping and your world is changing as you insidiously lose your freedoms.  You no longer get the best interest rates and your cell phone company wants a large deposit before they’ll open an account.  Good sleep is hard to come by and it’s hard to look into the mirror, much less the eyes of your spouse, and muster up a good feeling about yourself! 

                                                                    excerpt  from 12 Pillars and a Prayer by M.Russell Thomas, PhD