Taxes, Real Estate and Loans

The other day I was listening to a young man extol the virtues of owning real estate.

Much of what he said was true. However, two things made me sit up and take notice and I couldn't help but comment:

First, he said the interest on his home loan was tax deductible, so the government was underwriting his house payment.

I asked how much the government was giving him. He said they were not giving him anything but allowed the interest on his home loan to be deducted from his taxable income.

Assuring him I didn't want to be nosey, I asked what that deduction meant to him. 28% of the interest paid he saved on taxes was the reply. "So, you get to keep 28 cents for every dollar in interest you pay?" Eagerly he responded, "YES."

He didn't see the problem with the math, so I decided to help him out.

I took some change from my pocket and placed 28 cents on the table. I asked him if he would give me a dollar for the coins. Before he could answer I sweetened the pot.

I doubled the amount and put a total of 56 cents on the table right in front of him.

I said, "I'll give you double what the government is giving you. I'll give you 56 cents for every dollar you have or can scrape together."

He didn't seem too excited about my idea as he understood the demonstration. "Pay off the mortgage." I told him.

But he wasn't through. He was looking to redeem himself. He mentioned that at least the property was going up in value.

I asked him his age, he told me 35. I asked him how well he remembered the early 1980's. He didn't.

I told him real estate doesn't go up in a straight line, and on occasion it goes down. I told him I bought a home in the spring of 1980.

Almost immediately the real estate market went flat. Five years later my wife and I were certain if we wanted to sell our house we would OWE money to the bank at closing. It was 10 years before the market started to move up again.

Just recently it hit another bump in the road.

In my area prices have dipped 3% in the past year. With easy money and low down payments, many new buyers are finding themselves upside down in their mortgages.

Many people, who have taken a home equity loan up to or even exceeding the value of the property, find themselves in the same boat.

Did he understand the moral?

Yes, he did!

Borrow as little as possible, pay it off as quickly as you can and take care of it before It takes care of you!

The goal is living debt free ...

Unless you are ready and willing to give me one dollar for my 56 cents!