A Tale of Two Mortgages

Two Houses

This is a personal story of how much mortgage debt I have and how I acquired it. Ordinarily I do not post numbers about my assets or debts, but I’m comfortable making these known. I don’t necessarily intend for there to be a moral to this story; it’s just an objective tale of how I took on the debt that I still have. You, dear reader, probably have your own tale as well, and I’d love to hear it sometime.

This is a long post, so if you’re impatient, skip to the bottom. Otherwise, stay awhile and listen….

Once upon a time….

It all started back in early 2006. I was a fresh-faced lad, straight out of earning my Master’s degree. I had recently torn open the envelope that contained an acceptance letter into the doctoral program of my choice, so my soon-to-be wife and I headed out for a night at our favorite Indian restaurant. She had also been accepted into a graduate program at the same university, so over a delectable and divine dinner of pakoras, masalas, and naan bread, we contemplated our plans for the near future.

Should we rent or buy? That was the big question. We knew we would be there for 3-4 years, and all the conventional wisdom at the time said that rent was throwing away your money. Housing prices only go up. Buy a house, and when you sell it, you can earn a profit! The rent on our apartment was about to get jacked up by another 10% or so… and a monthly mortgage payment never increases… right? Hmmm….

We were both young, in our mid-twenties, and we had no counterpoint to that argument. Even our parents were pressuring us to buy a house. So, we did the only logical thing we could do: we contacted a real estate agent. The guy we met was affable and jovial, as real estate agents tend to be, and we quickly agreed to let him act as our buyers’ agent.

Then it was off to the races! Scheduling visits, riding all over town, perusing other people’s belongings, recoiling in horror at wallpaper choices – all the fun stuff that you get to do when searching for a home. And I admit: it was fun, in a strange and tiring way. It took a couple of months, but we finally found a place.

Before I talk about closing on the house, I simply must – by necessity – discuss the foreign and alien process that was getting pre-approved for a loan.

The Loan Approval – ACORN to the Rescue

In order to put an offer on a house, we first had to get pre-approved by a lender. Now, my soon-to-be wife and I were both graduate students, and both of our jobs were as graduate teaching assistants. The good news was that 100% of our tuition was covered, so we didn’t need any student loans. The bad news was that the monthly stipends that we received were abysmally, absurdly, and insultingly low. If you recall, I was only earning a whopping $8,000 a year at that time. My almost-wife was earning a little more than that. All together, our annual gross income couldn’t have exceeded $20,000. Gross, indeed.

Would anyone approve us for a mortgage? Well, keep in mind that we’re talking about 2006, so this is pre-housing-crash. We had no trouble getting a loan. Granted, we were approved at the first place we approached, so I really don’t know how difficult it could have been. Anyway, on the advice of our buyers’ agent, we got in contact with ACORN, which was offering a special program for poor first-time home buyers like ourselves. Yes, ACORN – the same community organization that was so disparaged by certain media companies in 2010 and had to file Chapter 7 liquidation. But I digress….

Basically, we had to go through a short course that walked us through the home-buying process. ACORN had partnered with Bank of America, so if we completed the course successfully, we would be offered a 30-year fixed BofA mortgage with up to 100% financing. The going rate was 5.75%, which wasn’t bad at the time. I actually learned a lot from the course, mostly because I was so utterly clueless to begin with, but I recall that there were useful sections on budgeting and home inspections, and we did have to submit documentation of income and assets.

In the end, we were approved. There was no way, however, that I was going to stomach the idea of 100% financing. We scraped together some cash for a down payment, essentially emptying whatever emergency fund we had. I believe we were the only ones who put any money down. In hindsight, with our low incomes, we probably never should have been approved for a loan, and I can’t help but wonder what fate befell our classmates. When the housing hammer fell shortly thereafter, how many of them lost their homes? Could we have been the only ones in our class to keep making payments? We may never know.

That said, I have no bad words for ACORN. After all, they helped me get my first home, and I’m grateful for that.

House #1 – The Numbers

And this brings us back to closing on our first house. The search took a couple of months, including getting outbid on a different offer (hey, it was 2006), but we finally had an offer accepted on a place we liked. The house was big enough for us (just over 1400 square feet), but it was a little older than we would have preferred (built in 1965). On the other hand, it had a pretty big backyard and was on a lovely tree-lined street. A grocery store was also only a stone’s throw away. How could we refuse? My now-wife and I moved in.

Our 30-year fixed mortgage was exactly $100,000. Our down-payment covered the rest. At 5.75% and with escrow for taxes and insurance, we were looking at just under $800 total monthly payment. Fine. Our apartment rent was going to surpass that.

We spent the next three years in that house, and despite our laughably low incomes, we never missed a payment. Of course, if I had a crystal ball that could have warned me about 2008, I never would have bought that house, as it’s lost about 15% of its appraised value since we purchased it. In the bigger scheme of things, we loved that house and loved living there. Heck, I started this blog from there less than a year after closing, and included some thoughts on financial freedom and poverty while living there.

So if buying the house was a financial mistake, at least we were happy. We also made one very smart decision: the entire time we lived there, we rented an upstairs bedroom and bathroom to a roommate. At our incomes, we had to do it. I don’t know that we could have made the payments without doing so.

2009 – The Plot Thickens

Thus we lived for three years – financially slender years, no doubt, but good years. I mean, did you see our Christmas tree from 2008?  In 2009, I completed my doctorate and landed a job in the great state of Texas. This was excellent news, indeed, and we welcomed it with open arms! But it left one significant question for us: Should we sell our house, or try to rent it? We wouldn’t really need it anymore, but how much equity had we lost in The Great Recession? And do we even have the patience and temperament to be long-distance landlords? Then again, if we’re going to have a rental property, converting a former primary residence is the easiest way to acquire one. Hmmm….

We squiggled and squirmed, tossed and turned, and finally decided to try renting it – it would be our backup plan in case Texas decided to secede from the Union.  Thanks to Craigslist, it only took about three days before someone agreed to rent our place. And thus we became so-called accidental landlords. From a financial standpoint, we were more-or-less breaking even: someone else was essentially paying our mortgage plus escrow, plus a few extra dollars profit per month. For the record, by the time we moved in summer 2009, our mortgage balance was down around $91,000.

And so we packed our belongings and moved to the land of lone stars, low taxes, crazy weather, and crazier politicians – otherwise known as Texas. We ended up renting an apartment in our city, and I admit that we had a tough time going from a 1,400+ square-foot house with a backyard and garage to an 800 square-foot apartment without even a balcony. Still, it was home.

Truth-be-told, I’m glad we rented an apartment, because I hated my job, and I knew that I didn’t want to stay there more than a couple of years. I was earning $40,000 gross as a new professor, teaching my a$$ off and having to put up with an utterly incompetent (and overpaid) administration. Compared to my $8,000 annual income as a GTA, my professorship salary was milk and honey, but c’mon, a 40k salary after 10+ years of higher education and a doctoral degree? I could have been a truck driver. What was that about lazy public-school teachers bankrupting the nation?  For the record, I never received a raise or a bonus of any type during my time there. I did receive a Christmas card once from the university president. Once. That was nice.

My wife was completing her dissertation during this time, though she was able to find some part-time work as an adjunct professor. On the whole, we were a one-income household, but we made do, trying to live frugally like the students we used to be. I remember fondly, at the tender age of 30, the feeling of receiving my first real paycheck. We did splurge on a two-week trip to Europe in 2010 (mostly for my wife’s research), but frugal as I like to be, I don’t mind spending money on travel and good, healthy food.

2011 – A Second House

After two (long) years, we decided to say adios to my job, our town, and possibly to Texas. I went back on the job market, and luckily landed a teaching gig at a private university, which by coincidence also happened to be in Texas (at least we didn’t have to get new drivers’ licenses). I detailed more about that in my 2011 Life Update. To make a rather-long story shorter, we decided to build a brand new house in drought-stricken south TX. Interest rates had fallen significantly since we bought our first house in 2006, and the prices of new homes from a builder compared favorably with existing home prices, so we just decided to get a place with the options we wanted.

And so we did. We used the real estate agent that my new boss recommended (a good political move, I couldn’t say no) and looked at dozens of places, but ended up building a new two-story 1,800+ square-foot house, and we’re happy with it. We got the options that we wanted, and I admit that part of the appeal of a new house was not having to deal with maintenance or renovation while starting a new job. My wife is happy with her new bathroom and kitchen in particular, so happy wife, happy life.

Oh, and accepting the job at the private university entailed a roughly 30% increase in salary. My rank is the same, but I teach fewer classes compared to my prior job at a public institution. Based on my experience, at least, I find zero evidence for this nonsense about how coddled and overpaid public-sector workers are versus their private counterparts. Zero.

House #2 – The Numbers

For a brand new 1,800+ square-foot house with 3 bedrooms, 2.5 baths, and a two-car garage, and the upgrades that we specified, the total price was just in the vicinity of $150,000. I qualified for the mortgage in my name only, which we decided was preferable: If for some reason I couldn’t make payments on the house or had to declare bankruptcy, only I would take the credit hit; my wife would be spared.

I put a larger chunk of change down on the second house. When all was said and done, I had a mortgage through Pentagon Federal Credit Union at a 15-year fixed rate of 3.625% with a total beginning balance of $92,000.

So, in mid-2011, here were the mortgage balances:

  • House #1 – $80,500 (in both of our names) at 5.75%
  • House #2 – $92,000 (my name only) at 3.625%
My total mortgage debt, as of mid-2011: $172,500. My wife was only on the hook for House #1.

House #1 – The Refinance

Within three months of buying the second house, we started looking into refinancing House #1, our rental property. The house had been rented consistently since we moved in 2009, which was excellent, but considering how much interest rates had fallen, we would be foolish not to consider refinancing. I was also consumed by the idea of refinancing House #1 in my name only, thereby making my wife debt free. Since I was still the primary breadwinner and could quality for the refinance by myself, I was attracted to the idea of taking on all the debt in my name only, freeing her from financial calamity if it came to that. I saw no reason to burden her with debt unnecessarily, especially since I could include her on the deed to both houses.

So we refinanced. The best quote I got was from Amerisave, which was 3.25% for a 15-year fixed mortgage. All told, the process went pretty smoothly, though underwriting moved slower than molasses on a polar bear’s backside. I had to provide them with pretty much every piece of documentation on my life’s history that I could scrounge up as well – they were ridiculously thorough.

Once the refinance slogged its way through the underwriting process, it was smooth sailing. Amerisave even sent someone to my house in TX for the closing, which was convenient. Thus, we closed on House #1’s refinance in November 2011. The balance owed was $79,500. The number of years remaining on the mortgage dropped from 25 to 15, and the monthly payment, including escrow, even dipped slightly.

Total Debt

And there we have it. As of July 2012, my total mortgage debt is:

  • House #1 – $76,569 (currently a rental property, earning a small amount per month)
  • House #2 – $87,226 (primary residence)

Total Balance: $163,795

House #1 has a little over 14 years remaining in a fixed mortgage at 3.25%, and House #2 has exactly 14 years remaining in a fixed mortgage at 3.625%. Both mortgages are in my name only, so my wife is officially debt free. I hope to join her one day.

These interest rates are at historic lows, so I suppose I should be in no hurry to pay them off. Debt of any type bugs me, though. I hate paying interest on anything. The thought of freeing myself from the shackles of monthly payments is more appealing to me than trying to earn more in the market. I’m currently making extra payments toward House #2 (primary residence) since its interest rate is a little higher, but I’m not paying any extra principal on House #1. Honestly, I’d love to pay off both of these mortgages within the next 8-10 years. I’m optimistic, at least. Stay tuned, and I’ll be sure to post occasional debt updates.

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