From Yahoo Finance:
How the Monthly Mentality Messes Up Your Wealth
by Laura Rowley
Housing prices are coming down in my New Jersey town, with properties virtually flooding the market, compared to summers past. This tempts me to surf the local realtor Web sites, trolling for deals.
But I can’t bring myself to trade up. The main problem, as I explained to my realtor pal Elizabeth is the taxes. New Jersey’s property taxes are, in a word, ridiculous — especially to someone who grew up in the Midwest.
For example, it’s not uncommon to find a five bedroom, two-and-a-half bath residence in my area with $20,000 in annual property taxes. This is three to five times what my siblings in the Midwest pay. The thought of spending $200,000 over 10 years to get a bigger kitchen and an extra bed and bath makes me gag.
“Most people don’t look at it the way you do,” Elizabeth told me. “They just look at whether they can afford the monthly payment.”
And therein lies the modern personal finance conundrum. From housing to autos to material goods, Americans are bombarded with the notion that if you can afford the monthly payment, you can afford the thing you’re buying. What’s never discussed is the princely opportunity cost of living on borrowed money — and how devastating the monthly mentality can be to long-term wealth. But as a variety of recent reports demonstrate, it has become a way of life for millions of Americans.
The monthly mentality is also evident in the auto market. Some 29 percent of U.S. vehicle buyers were “upside-down” in their loans in May — meaning they owe more than the trade-in value of their cars. That’s the second-highest level in four years, according to Jesse Toprak, executive director of industry analysis for Edmunds.com. The average amount of negative equity was $3,789.
The reason? Borrowers who otherwise can’t afford the cars they want are opting for mega-term loans: In January, 2002, the average loan term was 57.3 months. Now it’s 63.6 months. Toprak says 72 months is becoming the norm.
“Unfortunately, we still often see people going to the dealer and saying, ‘I want to pay $400 a month,’ despite the fact that it’s a really bad way to buy a car,” Toprak explains. “Extended terms become the only way to get the car they want. They don’t see the consequences two years down the road.”
Toprak says he’s seen a new trend in leasing among upside-down borrowers because it allows them to finance up to 115% of the vehicle’s sticker price, whereas a traditional purchase only provides 100% financing. Thus, borrowers can trade in their vehicle and add their negative equity to the lease. It results in higher monthly payments, but at the end of the lease the negative equity is gone. Of course, they don’t own anything at the end of the lease, either.