Wednesday, August 09, 2006

DON'T BANK ON IT

For the first time ever, Americans owe more money than they make.

According to new figures released this week, household debt has surpassed household income by more than 8% - this according to the Center for American Progress. And it's getting worse. Prices keep going up, but income levels are not rising to meet them. Add to that recent rises in interest rates and you've got a lot of people owing a lot more money to financial institutions every month.

ARMS (Adjustable Rate Mortgages) have been called the biggest scams in the history of lending because borrowers are sold on low rates that are all but guaranteed to explode at the end of the adjustable term. They look attractive because the monthly payments start out nice and low - but as the price of money climbs, so do the payments. I know from personal experience how this can affect disposable income, as my rate is on the way to doubling what it was when I "locked" it in 3 years ago - for the short term, that is. I couldn't afford the place I wanted with fixed rates what they were, so I gambled on an ARM and lost. Now I'm paying a shitload more every month. Money I used to spend on and save for other things - like ME.

Most credit cards and home equity lines operate in the same way - the rates are variable, not fixed - meaning when the Fed hikes Prime, the banks pass along that courtesy to you...hiking YOUR rate Consequently, the minimum payment on your second mortgage rises, as does the amount that's tacked onto your credit card balance every month. Carry a balance, do you? It's costing you a lot more these days than it was a couple years ago.

The result? We now owe more than we earn. There's a word for that: beholden. We are essentially slaves, and our master is the Bank. Take a look around when you drive home tonight. Bank branches are popping up everywhere. Washington Mutual. Bank of America. Chase. Every strip mall and street corner has a fresh brick and mortar location. Major financial institutions are cleaning house...and here's the best part (for them). When we're struggling to make ends meet because our mortgage payments (first and second) keep rising, and we can't get to work because the price of gas is so fucking out of control, we start CHARGING shit on our credit cards, which are issued by all the same banks holding our mortgages.

They own us.

Legend has it home ownership is the way to go because of something called "equity." But that equity isn't yours - it belongs to the bank because the bank owns the property. You don't see that until you manage to sell your property, which is only worth what someone is willing to give you for it. And that, my friends, isn't a whole lot these days because interest rates are high, consumer prices are high, debt keeps getting higher, and salaries remain stagnant. We are but serfs, working the lord's manor - sending off a majority of our income to the bank every month - mortgage payments, credit card payments, student loan payments, car payments, etc.

Our standard of living is an addiction enabled by the banks. And now that they have us hooked on owning our own homes and enjoying our fancy consumer electronics and driving our nice new cars, we'll do ANYTHING to maintain this lifestyle. We'll keep buying and spending and borrowing from them, getting deeper and deeper into debt. It's not looking good. I recommend stashing extra cash under the mattress, because we're one significant terrorist strike or natural disaster away from a massive financial meltdown.

The good news? Rates didn't go up yesterday after 17 consecutive hikes. But before you jump for joy, gas prices are up again. I'm feeling squeezed to the point I can't breathe. Or is that just my asthma acting up?

2 comments:

Gint said...

ARMs aren't necessarily bad, as long as you refinance, pay down your mortgage, or sell before the fixed period expires. While this may be unlikely to happen for a 3 year ARM, lenders also offer 5 and 7 year ARMs these days. ARMs also sometimes have clauses that have a cap on how much the rate can increase in a year, which can shield you from having to move to market rates as soon as the fixed period of the ARM expires.

AYNtK said...

These are all very valid points that I neglected to mention - probably out of frustration - but also because the people who take advantage of 3 year ARMs typically do so because the rates are lower than the longer term ARMs and enable greater purchasing power. I actually do have a cap on mine, which will help as the bank will essentially be phasing in any increase in payments over the next few years, but I am fortunate my mortgage broker knew what he was doing when setting up my loan. A lot of people just don't know any better - especially first-time buyers.

Unless you're savvy to the game and how these things work, you can really get hosed...and a LOT of people are getting hosed right now. ARMs seem like a reasonable option at the time because of the possibility that rates won't go up. The hope is that you'll be able to refinance in a few years and get a comparable rate - people wouldn't opt for the ARM if they KNEW they'd ultimately be buried by mortgage payments. It's essentially gambling, and it's not a good or a safe bet.

So now a lot of people with ARMs, like me, will be forced to sell...and selling in a market that has cooled due to high interest rates means the equity will take a hit, too.

But life is about learning - and the lesson I learned was that if you can't afford the property with a fixed rate loan, don't get it!

Thanks for clarifying those other details, though...

I SEE YOU!