Do You Own Your Home?

Do you have a copy of the original questionaire you filled out for each of the credit cards available for easy review?

(If not, shame on you!!! Get one! Now! In the meantime, check out one of the online offers or a recent snail mail spam you received.)

Do you see where it says, Do you Rent or Own your home?

Here’s one of the tricks that got us, collectively, in trouble during the housing boom and bust.

If you have a mortgage, you do not own your home. The bank does.

The amount of equity you have built up in your home is a percentage of ownership. Until that mortgage is paid off, in full, you only own a percentage of your home. The bank holds the deed and title to the property until then.

See, by asking you an either-or question, the lender (in this case, a credit card company) is tricking you into thinking, “Hey, I’ve got a mortgage, that means I own my home!” It’s a crock.

It is very simple: If you have a mortgage, you do NOT own your home. Any offer of credit based on you owning your home is therefore a trap… UNTIL you really do own your home.

(Yes, I know that revolving debt – like credit cards – can’t normally cost you your home if you default. However, home ownership makes you a good risk, in the credit card company’s eyes, for consumer credit. Regular, on-time, mortgage payments also make you a good risk – though not as good as home ownership – for consumer credit. It seems that the credit card companies forgot this difference, along with a significant portion of U.S. citizens.)

Now, consider the recent credit, mortgage, financial crisis. Credit was given to many people (including me) on the basis that having a mortgage = owning a home. If you own your home, you have an asset of real value. If you have a mortgage, you have a debt.

Here is one instance where Pookah was definitely smarter than I am.

Pookah thought she had a home once. Pookah lost her home. Pookah survived, but fully understands that Pookah depends on her human for comfy-nest and Pookahfood. A small tasty bird would also be nice. Pookah will now purr and entertain human with cat antics.

This is my train of thought (again, overly simplified):

1. Treat a mortgage as home ownership.

2. Offer people credit based on false home ownership.

3. Encourage people to use the credit, which they do.

4. People now have a moderate credit card bill every month IN ADDITION to a moderate mortgage bill. At this point, everything’s okay until…

5. A mistake happens – late on a payment – or life intervenes with an expensive medical or car problem; OR the continuous encouragement to buy on credit turns that moderate credit card bill into a High credit card bill.

6. People default on their payments.

7. The effect cascades as soon as enough defaults start racking up.

8. When enough people have defaulted, the credit card company’s gross income shrinks to the point where they can’t generate enough profit to pay *their* bills.

9. The credit card company can’t get any loans because the same thing is happening to other financial institutions.

10. The credit card company defaults on its loans.

11. All heck breaks loose.

Here is a case where an ounce or two of prevention are worth several metric tonnes of cure.

  • Any credit card offer that doesn’t ask about your mortgage is a trap. Don’t step in any more traps.
  • If you are already in debt, think twice – no, three times – before getting a new credit card. Borrowing more money will NOT get you out of debt.
  • If you are in debt, the only sort of credit card you should even consider is a 0% balance transfer card with a maximum 3% transfer fee. If the offer does not meet these minimums, shred it.
  • If you have any authorized users on your credit cards, cut them off. Seriously. You’ll have enough problems dealing with your own mistakes without having someone else’s mistakes bite your tail. If your kids are authorized users, it’s time to cut the financial umbilical cord. If your S.O., best friend, or business partner are authorized users, it’s time for them to be responsible for themselves. This does NOT mean that you cut your S.O. off. It does mean that you MUST contain the damage before it gets worse.

One Response to “Do You Own Your Home?”

  1. Deni says:

    I thought we were debtaing the value of IO loans. Can we keep that separate from the other debtaing points?Whether buying real estate (right now or ever) is a good idea (for living in or renting out) is a completely separate issue.Clarity of thought is key when making financial decisions.Confusing these issues, and lumping them all into the same basket:Whether RE is a good investment.Whether your RE purchase, if your own home, should be considered an investment at all.Fixed vs variable.Whether borrowing against “equity” is ever a good idea.Established communities vs new developments.Rent vs buy (and what are the metrics that go into that decision).isn’t particularly smart.I think we can ALL agree that the RE market is seriously overpriced in many markets, and also that there has been some egregious behavior by agents, brokers, and financial institutions which has enabled and encouraged the greedy and the ignorant to produce a truly horrifying situation.Nonetheless, people have, historically, bought and sold RE. Even you “bitter renters” have to rent your homes from somebody. Right now, you’re getting a very good deal. At other times, less so.Keith’s done a very good job on this site in showing just how speculative the market had become. He did it (mostly) by pointing this out with statistics.Please don’t turn Renting vs Buying into a religion. It’s really just a financial choice, and it should be an informed one.

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