Last month (December)
Years left: 0.25
P =$1,198.91, I =$15.49, Escrow =$812.79
This month (January)
Years left: 0.166666667
P =$1,214.40, I =$10.74, Escrow =$812.79
For the past few months our mortgage statement has come with a sheet not about the usual refinancing or home equity line of credit options, but about getting a new mortgage on a new home. We must have clicked into the “almost done with the mortgage” advertising.
This thought of being ready for a new loan once you’ve finished the old mortgage must be appealing. With increased incomes over time folks can afford a larger monthly housing payment. Why go from a small payment to no payment when you could just pay a little more and get a bigger house to go with it? Many of my colleagues bought much larger homes when they got tenured or promoted, effectively doubling the cost of their housing.
That same thought process can go along with car loans. Buy a new car after 5 years when your loan is done. You’re used to the payment, why not get something nicer for about the same cost or only a little more?
We’re a bit odd– most tenured faculty in my department started out with houses under 3K sq feet and now have houses more than 4K sq feet… we have 3K sq ft exactly. No starter home, no McMansion, just a big house. While we occasionally think about down-sizing because it means paying less for all the services and upkeep that come with a house, we never think about up-sizing. Given that we have no need/desire for a larger house than the one we’ve got, it really doesn’t make sense to get a new mortgage. Maybe there was a benefit to not getting a starter home, even if we ended up paying more for utilities and property tax and so on, because it means we didn’t go crazy with custom-building something even bigger.
We’ve also never gotten used to having a car loan. Our first car that we owned jointly and paid the insurance on was a graduation/wedding gift/hand-me-down. We paid for our next car with cash. We’ve only had a short car loan for the third car that was paid off in well under a year. So the thought of starting another required monthly payment for a car seems odd. Going from not paying anything to a regular monthly payment seems painful to us. But if we’d had a long-term loan, maybe it would seem like business as usual. Why not get a nicer car for a monthly payment we can afford?
I wonder how much of this buying bigger and better is partly habitual. You get into the habit of monthly payments, so you don’t think about what you were paying before as a loss, even if you wouldn’t have to pay it anymore if you didn’t buy the shiny new thing. You compare the additional monthly payment to the niceness of having something new, rather than comparing the full cost of all payments to the increase in niceness over what you already have.
In other words, it feels like the original payment is a sunk cost even if it isn’t because you’re already used to paying it. We fell prey to this miscalculation ourselves when we bought our house– part of why we didn’t get a starter home was because the mortgage payment for our big house was about the same size as what we had been used to paying in rent for our grad school apartment!
One problem with not having the habit of regular payments is that we’re also in the situation where if we want to buy a new car, we have to come up with 20-30K in a relatively short time-frame to keep up with our usual not having a car payment. That’s a bit of a spending shock. Still, it’s one that can be put to rest with a large enough emergency fund and/or a willingness to take on a short temporary loan if it takes time to move around/accumulate assets. Even if the larger emergency fund isn’t the best use of money, it’s still more efficient in terms of savings than buying a new car every few years would be.
Fortunately one generally doesn’t have to replace a house like one replaces a car (and we’re keeping our home insurance in case of a catastrophic event). We won’t be buying a new house any time soon. Even if Wells Fargo wants us to.
How do you think about revolving debt and new purchases? When do you/have you decide(d) to buy a new house or car?