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Opinion Pieces
November 21, 2004
Putting Your Money Where Your House Is
By Joe Klock, Sr.
     A little over a half-century ago, when a loaf of bread went for less than a dime, directory assistance was free and soap operas were about as salacious as morning prayers, Firstwife and I took a plunge on our first home.
     The price was a daunting $8,562, almost all of which we perceived as a 25-year noose around our young necks in the form of a mortgage, with payments second only in priority to food and body coverings for our expanding herd of human livestock.
     Although the numbers involved are, by today's standards, nearly as unreal as pre-marital chastity, they vastly increased the number of sheep we counted before finding our nightly solace of slumber.
     As things turned out, it was a financial scheme no less shrewd in concept than Peter Minuit's acquisition of Manhattan Island, and a strategy that we subsequently parlayed into lifestyles just short of being rich and famous.
     That strategy, a matter of simple arithmetic, is equally workable today, although the numbers now involved then appeared almost solely in Monopoly games and F. Scott Fitzgerald novels.
     The extra zeroes of today, however have little impact on the net result.
     What we did then, although it didn't occur to us at the time, was borrowed dollars of full value (purchasing power, that is), which we promised to pay back with similar-looking dollars of steadily decreasing worth.
     The name of the game was (and is) long-term inflation, the players were (and are) borrowers and lenders.
     The patsies were, and still are, those who lend - or, more accurately, those who deposit with the lenders - and those bedecked with the financial nooses were/are the winners.
     For example, let's talk about a newlywed (or significantly-othered) couple that buys a home today for, say, $100,000. I hasten to concede that, while this figure makes for easy arithmetic, it is in the fantasyland of current house hunting, but the principles hold in any price range.
     Let's go on to say that they plunk down $10,000 and take on a 30-year mortgage for the balance at 5%, with the principal and interest payment coming to $483.13 per month.
     Well-meaning friends and mean-spirited gurus are quick to point out that thirty years of such payments would mean paying back a thumping $173,927, nearly double the amount originally borrowed.
     That frightening threat, however, is based on the unlikely possibility that the loan runs to maturity before it is prepaid or the owners move.
     Regardless of that, assuming a modest inflation rate of 3%, the borrowers will owe only $66,369 in "real money" (that purchasing power again) five years later, further reduced (albeit slightly) by the relatively modest monthly payments to principal.
     That shrinkage in "real debt," more than 25%, would be eclipsed by another simple-but-powerful dynamic, combining inflation with leverage.
     If, in the example we're using, the purchased home goes up in value by 4% during the first year - a conservative estimate, based on recent history - that $4,000 increase represents a 40% return on the down-paid investment of $10,000. (Like, WOW?)
     That level of financial feedback would be hard to beat on "the street" without an ulcer-generating level of risk.
     Understand, the figures used are hypothetical and subject to both geographical variations and economic uncertainties, but not palpably more or less so than other forms of investment.
     You can, with pencil, paper and/or a calculator, backed up with some rudimentary math, massage the above example to fit your budget as well as your residential aspirations. 
     Home equity also offers a convenient "parking place" for nest-egging funds earmarked for contingencies, as well as almost-certain happenstances, such as retirement and diseases (including the "maltuition" that seems to grow like mushrooms with a thyroid condition).
     Given the anemic yield of savings accounts and other fixed investment media, all of which are vulnerable to inflation and most of which are further eroded by taxation, paying down one's mortgage represents an alternative stash that is always drainable by refinancing or equity loans. (Your boob tube abounds in suggestions as to how and where this can be done).
     Another consideration, not to be overlooked, are the less tangible amenities that come with home ownership, tending to more than compensate for the burdens of maintenance and meeting the monthly tab.
     Renting is a sensible alternative for those unsure of their staying power at a given location, but those who think it's a less expensive lifestyle have landlords confused with philanthropists.
Joe Klock, Sr. is a freelance writer in Key Largo, FL. For more "Klockwork," visit www.joeklock.com.

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