When you tuck your kids in tonight, be sure to read them this bedtime story…
A loan that’ll get ugly fast – Los Angeles Times
HERTZBERG bought his house 11 years ago for $129,995, immediately after his second divorce. (He has no children.) Since then, Corona and the Inland Empire have boomed.
Comparable homes in his neighborhood fetch more than $400,000. With fresh paint and a few repairs, Hertzberg could probably sell his place for $275,000 more than he paid.
He would see little of that, however, because he’s already seen so much. Over the years he has taken out $190,000 in cash through refinancings.
Hertzberg’s home equity paid off his credit cards, financed trips around the world that allowed him to indulge his passion for photography, bought a $32,000 Toyota Avalon and enabled some lousy investments. He bought dot-com stocks and lost money. To recoup those losses, he bought commodities — and lost money faster.
“Free money always has the unfortunate effect of making people go overboard,” said Hertzberg, whose living room is strewn with financial publications including American Cash Flow Journal and Donald Trump’s “How to Get Rich.” “You’d be surprised how fast $190,000 can go.”
The money wasn’t really free, of course. It just seemed that way, the result of a radical shift during the last decade in how people view their homes.
“Homeownership has become like auto leasing, where the price of the car doesn’t matter,” said Rick Soukoulis, chief executive of LoanCity, a San Jose lender that funded $7 billion in mortgages in 2005. “All that matters is the size of your monthly payment.”
Lenders say these new loans are all about payment choice, but Hertzberg is far from the only borrower who invariably chooses the smallest payment option. Washington Mutual Inc., which has one of the nation’s largest portfolios of pay option loans, said 47% of its borrowers in this category last December took the minimum option.
Few people intend to become deeper in debt every month. Hertzberg certainly didn’t.
“I assumed my future and my retirement would be taken care of by the company I worked for,” he said. “I trusted corporate America.”
He used to make a six-figure income selling vacation packages to corporations that would use them as customer incentives and employee bonuses. After the 9/11 terrorist attacks, the business soured.
His current sources of income include selling comic books on EBay and freelance photos to golf and travel publications. “Once you’re over 55, what employer wants to hire you?” he asked. “I’m a dinosaur.”
Moral of the story: when you make over $100,000 – don’t extract equity from your house to buy cars and fancy trips. Use it to buy another house because housing always go up!