What is Cool?
What is cool and what’s the cost? This is a question that’s been asked for generations. From the greasers of the 1950s to the goths of the 1990s, every generation has had its own definition of what it means to be cool. But the cost of cool is a moving target, depending on where you are in life. What might have been cool for you at age 10 is definitely not the same as what’s cool for you at age 13. And as you get older, the cost of cool becomes more tangible, especially when it comes to money.
Several years ago, there was a TV commercial featuring a macho-looking dude in a helicopter flying over the Sahara Desert. As the camera panned over the breathtaking scenery, a voiceover described what you were seeing. And then, just when you thought the ad was over, the voiceover added something about his $8,000 watch. The commercial then shifted gears, with a different voice and tone explaining that the $8,000 would cost him $72,569 later in life. The ad was for some financial firm, and it really got people thinking.
So, where is the cool part of all of this? Sure, wearing an $8,000 watch might get you some attention, but what happens later in life when all those choices you made start adding up? Cool has a price, and so does uncool. And where we draw the line says a lot about us, even if we get sound advice and pick and choose what we want to follow. You could be eating Ramon noodles at 70, not by choice, but hey, you’ll know what time it is.
Enter WAYD and Mortgage Number. This is a page on the Mortgage Number website that really drills into these ideas. It’s for people who have had a mortgage for some time, say a minimum of 5 years. What is the cost of a refinance? Not just the expense of the action, but starting the term over. Yes, a lower rate will lower your payment, but what else is happening? It’s okay to save money, sure. But the next phase is when you pull cash out to pay off debts. And this is where the problem lies.
Pulling cash out of your home can be a valid financial decision where the benefit outweighs the long-term effect. These are choices we make, and the danger can arise when the house becomes an ATM machine, subsidizing lifestyle wants and needs. (Did you really need that?). This model was designed to illustrate what you have been doing with your mortgage balance. Are you maintaining, reducing, or growing your balance? An interest-only loan or a refinance starting the amortization over can cause this, along with cash-out. Check out WAYD.
And this is where the gas analogy comes in. Are you ready? It’s like putting expensive gas in your car so the engine lasts longer. The problem with this logic is that you will never own the car long enough to benefit from the engine lasting longer or for it to show up (some cars require it so those people are disqualified from this).
So, you spent $2,100 more on gas in the 60,000 miles you owned the car (for those of you keeping track, that’s 35 cents more per gallon for that higher octane). Why? Because you didn’t keep the car long enough to see the benefits of your investment because you sold it! Gas companies love you! (Don’t get me started on electric cars, the frequency will change and turnover will slow down, people will keep their electric cars longer than ICE cars, but that’s a future conversation).
The point is that kicking the can down the road cost more than picking it up. Here is a twist on this.
Refinancing your mortgage to subsidize your lifestyle is like borrowing from your future self. You may have more cash in hand now, but you’ll pay the price down the road.
Mortgaging your home to fund your current lifestyle is like robbing Peter to pay Paul. You may feel relieved now, but the consequences will catch up with you eventually.
Taking out money from your home to finance your current expenses is like digging a deeper hole for yourself. Sure, you may get some short-term relief, but you’re setting yourself up for bigger problems in the future.
Refinancing your mortgage to support your lifestyle is like living beyond your means. It may seem like a good idea at the time, but sooner or later, the bills will come due.
Though, this is probably why the reverse mortgage was born, out of necessity where and when there was none. It’s like you have so much shit in your garage that you need a storage locker.
…I can’t help myself.
Let’s go back to the gas thing.
Do you give to charity?
Yes – GREAT!
No – That’s fine too.
But if it’s a No and you’re putting more expensive gas in your car, then you are giving to charity, food for thought…
So, what is cool? Come full circle and ask a 10-year-old. Click here for more information.