I had the most interesting conversation with a lawyer last night. He was telling me and my husband some ways to improve our credit scores and how to prepare for home ownership, and he said something that made both my eyebrows go up. He said that we shouldn’t be in too big of a hurry to pay off a house once we get it.
Pretend there are two families, and they each buy a home for $200,000. Family A makes the regular monthly payment, and Family B puts every penny into paying it down faster. Some time goes by, and Family A owes $150,000, while Family B owes $50,000. You’d think that Family B would be in the best position. After all, their home is three-quarters paid off – what could be better than that?
But then imagine that both families hit hard times, and they need to refinance. Which family will the bank be more willing to work with? I thought for sure it would be Family B. After all, they’ve shown themselves to be diligent about paying their debt. Who wouldn’t want to work with them?
I was wrong. The bank will be more willing to work with Family A, and they are more likely to foreclose on Family B.
You see, Family B has more equity, and that’s what the bank wants. When they come in and take that house, they’re getting exactly what they want in return. They’ll refinance for Family A because that equity hasn’t been built up to where the bank wants it yet.
This makes the bank sound cold and heartless, but the fact is, banking is a business just like any other. It is not a non-profit undertaking. George Q. Banker has a house payment of his own. He’s got kids to feed. He needs a paycheck to meet his own creditors, and if he sees a way to make himself more profitable to his employer, well, that’s what he’ll do.
My lawyer friend suggested that when we get a home, we make the monthly payment as required, and then if we have any money left over, to create a financial cushion for ourselves in case of emergency. Once that cushion is created, to the amount of about $5000, then we should start paying off all our other debts first, and worry about the house later. It’s just the wisest course of action all the way around.
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