“Don’t tell me where your priorities are. Show me where you spend your money and I’ll tell you what they are.” —James W. Frick
It seems like only in America can a family go from debt-free to being $1 million dollars in debt in a decade.
And yes, you read that right. A couple got into $1 million of debt in 10 years!
As unbelievable as that sounds, it is very possible. If you don’t believe me then see my post called Meet an orthodontist with $1 million in student loan debt.
Orthodontist Mike Meru has it all: family, home, career, and a $1 million student-loan debt that keeps growing. https://t.co/9huLq5QSWW via @WSJ
— Miriam Joy (@mjp2520) June 17, 2018
Although, student loans are a different financial beast, mortgage debt can be just as damaging to a family’s finances because, like student loans, bankruptcy does not absolve you from the debt. You still owe the money.
I read this article in the Washington Post several years ago entitled, “Swamped by an underwater home.” The Boatengs had no debt in 1997 and by 2006 owed over $951,000. By 2013, their debt had gone up to $1,011,176.
In Fairwood, dreams of black wealth foundered amid the mortgage meltdown https://t.co/r4w5chO2Ng When buying a home goes wrong.
— Miriam Joy (@mjp2520) July 7, 2017
When this article was published in 2015, the Boatengs had not made a mortgage payment in 6 years. It took them 10 years to go from $0 in debt to $1 million in debt. This is crippling debt. Most families in the United States will not come anywhere near this amount of debt in a lifetime, but this couple did in less than a decade. Here is their story.
HOW TO GO FROM DEBT FREE TO OWING $1M IN 10 YEARS
Comfort and Kofi Boateng won a visa lottery to come to America from Ghana in 1997. Their odyssey would not take them to where they truly wanted to be like Homer’s, but just the opposite. Instead of the American Dream they would be ensnared in an American Nightmare.
In the Ghandian culture, people pay cash for their assets including their homes. In Ghana, Comfort graduated with a degree in computer science at the University of Science and Technology in Kumasi and his wife, Kofi, received an associate’s degree.
The couple married in 1989, he was 30 and she was 26.
Wanting more opportunities, they applied online for a lottery administered by the State Department to receive a U.S. permanent resident card. If this was football, this would be considered a Hail Mary.
The reason for this is that the odds of getting chosen were slim. Per federal data, less than 5 percent of the 1 million immigrants granted permanent residency enter the United States through the lottery. But, this family beat those odds.
In July 1997, Comfort was on his way to American in a plane headed for Maryland.
On May 5, 2000, they bought their first home, a three-bedroom townhouse for $128,900 in Germantown, MD. This was after renting for several years and taking 2 of those 3 years to save for a down payment.
Even though his wife admitted she didn’t know anything about loans and houses, she was now a homeowner.
For me, this is a red flag. If you do not know about loans or homes, then why buy a home with a loan? This is a double whammy. At this point, I would urge anyone to learn about these things before doing anything else.
FROM $128,900 IN MORTGAGE DEBT TO $223,900 IN FOUR YEARS
In 2003, the Boatengs become American citizens. Comfort’s mother gets a green card to come live with them and this eliminates $300 in weekly child-care costs as they now have three children.
The Boatengs refinance their Germantown home several times to pay for home improvements and consolidate other debt. They cash out $95,000. They now owe $223,900 in mortgage debt.
Ultimately, with 6 people now living in the home, they decide they need a bigger house.
The townhouse, thanks to the booming housing market before the 2008-2009 stock market crash, their home is now worth $355,000 within only 3 years.
FROM $223,900 IN MORTGAGE DEBT TO $838,583 IN 1 YEAR
The Boatengs decided to move to from Germantown to Bowie, which is in Prince George’s county Maryland.
A home is found in a subdivision with manicured lawns, European cars, and intercom systems in a place called: Fairwood.
The neighborhood has a lot that Comfort likes because it reminds him of his dormitory back in Ghana.
At this point, he is already emotionally attached, which is a major no-no when it comes to money.
The family decides to build a house for over $600,000!
They think it will be a good investment. Their thinking was it is likely to go up in value like their Germantown home and could use the equity (more cash outs) to pay for the kid’s college educations.
I now have to call a time out! Flag on the play. I am shocked that this couple did not see the RED FLAGS here! How are you going to afford this? His wife is working as a secretary making $30,000 and he as an IT specialist making $80,000-$100,000.
They do not have the money to pay for this. This is the part in game where they are supposed to forfeit.
Alas, they continue to roll the dice with their finances. Little do they know the house is about to win.
Their real estate agent assures them it is affordable, if the refinance (yet again) the mortgage on the Germantown house — which they were going to keep (this just makes no sense, now they are going to be landlords!!!) — and cashing out the $60,000 in equity. That money will be the down payment for the Fairwood house.
Bad, bad, bad idea. They are now taking advice from a realtor.
Let me tell you something. This person is not their financial advisor, CPA, attorney, business manager, or anything. He owes this family nothing. They have signed no documents to act as a fiduciary. They are not working is this family’s best interest.
Think of it like this. A baker likes to bake. If you ask the baker, if you should buy a cake, the answer is going to be yes. A barber likes to cut. Same rules apply, if you ask a barber, if you need a haircut.
However, I digress. Let’s get back to the story.
The Boatengs receive a loan from Lehman Brothers.
I’ll offer you a little background on the Lehman Brothers. It was founded in 1850. This bank was the fourth-largest in America and was not only one of the biggest subprime mortgage lenders (that helped cause the 2008-2009 housing crash), but also became the biggest bankruptcy in American history with $600 billion in debt. It had been in business for 158 years.
Due to their income, they could only qualify for an interest-only, adjustable rate mortgage. This is the worst type of loan there is. Do not ever take out an interest-only loan.
He has a great credit score of 748, which is how they got they loan. However, credit scores only mean you are great at managing debt. Nothing more. It does not necessarily mean you have any wealth.
For the first five years, they only make interest payments, then afterwards they would be required to pay more. How much more? Nobody knows. That is why these loans are so dangerous.
The Boatengs borrow $493,600 from Lehman Brothers, at an initial loan rate of 6.1 percent. In five years, it would reset to at least 8.3 percent. Their payments go from $3,662 up to $4,336. Thinking they would be able to refinance in the future to get a better rate. This day would not come.
He would then lose his job while the home was being built.
This is the part of the story where I am like. It’s all over. The house of cards has come crashing down. The jig is up. No more easy credit access. The bill has come due. There is no free lunch. It’s over.
And what happens next?
They admit to being emotionally attached, do not tell the lender of his job loss, decide not to walk away from the $20,000 deposit and not back out of the deal.
The Boatengs get a second loan to complete the financing through their broker’s company, a 30-year fixed-rate mortgage of $61,700 at 8.5 percent. The couple paid $29,000 in closing costs and put down a total of $73,000 in cash at the closing. They move in on November 25, 2005.
They now owe $838,583. Comfort has no job or any income and the couple are drowning in debt.
FROM $838,583 IN MORTGAGE DEBT TO $951,176 OF DEBT IN LESS THAN 1 YEAR
The couple is tapped out. They have no money to furnish the home. The first payment is due on January 1, 2006.
The payment on both homes (they still own the one in Germantown) is $5,550 a month!
Shut the front door! No, I mean literally. Shut the door to that place and give the keys back to the bank. Sell it and walk away. From both properties, in my opinion. You owe the bank everything you have.
The tenant in Germantown couldn’t pay. The housing market crashed, now being underwater, they couldn’t sell.
What did they decide to do? Take out more debt. Kofi started selling Mary Kay and took out $15,000 in personal loans with Bank of America. Then another $20,00 for her Mary Kay business with a 15 percent interest rate over 10 years. She didn’t see the risk because she thought she could earn $7,000 a month with Mary Kay.
Hold the phone. What happened to being cash heavy when starting businesses? Or starting them with your savings. Businesses need capital. Why not start small and see if a business works out? Then expand. She is putting the carriage before the horse here. There is no guarantee of making $7,000!
The Boatengs now owe $951,176.
FROM $951,176 TO $1,011,176 OF DEBT IN 6 YEARS
They decide to consolidate again. Howvever, consolidation only works when you pay off what you owe.
The couple took out a $620,000 refinancing loan from Countrywide Home Loans. It was again an interest-only subprime loan, carrying a 6.29 percent interest rate and adjusting in two years (even sooner this time) instead of five. Their payment on the Fairwood house would rise to about $5,230 by November 2008. That is $62,760 a year, after tax income!
They were unable to pay the $5,000 monthly payment and tried to modify their mortgage, but were able to get relief. They owed to much to qualify for HAMP. Ain’t that a kick in the head.
The Boatengs made their last Fairwood mortgage payment on Sept. 18, 2008. They are now in default and can be foreclosed on at any time. This means not only losing their home, but any money they put into it.
By November 2011, their payments were set to go up to $6,000. The bank valued the house at $378,216. That is $238,839 less than what they paid.
During this time, his wife went back to school in 2003 and graduated in 2009. She owed $90,000 in student loan debt. She lost her job and unemployment ran out after eight months.
Comfort was mostly unemployed or not working full-time from 2005-2010.
In 2014, the family was notified by Nationstar Mortgage, their new lender, that late payments dating back from 2008 were due now: $318,611.97.
Comfort’s mother passed away in 2014 and he was still looking for full-time work.
He became so frustrated he thought: Why stay in America? Why not just go back to his country and find a job there?
Like me, their housing counselor noticed that their downfall began with the idea of buying a second home for more than $600,000!
The couple owed $$ 1,011,176.
That was 2014.
FROM $1,011,176 TO $1,371, 813 OF DEBT
By 2015, they owed $257,776 on the Germantown house, $969,037 owed on the Fairwood house, $55,000 in personal loans and still have the student loan debt (which is not dischargeable in bankruptcy). The couple who had never owned a credit card before moving to the United States now owe more than $1.3 million.
They currently earn about $100,000 a year.
It does not take a rocket scientist to know that they do not make enough to pay off these debts. They owe more than 10 times their gross income (what they make). And more than 19 times their net income (what they take home).
The interest on that type of debt is mind numbing. We are talking more than $50,000 a year in interest alone. That debt is likely to balloon to $2 million in another a decade. This will be during their golden years. They are building no wealth.
The reasoning for taking on so much debt was that the couple stated they saw that was how everything was done in America. You had to borrow to get ahead. Everything involved debt.
I want anyone out here reading this to take this away from this cautionary tale: Stay away from debt.
Don’t borrow more than you could ever afford to repay.
Do not borrow one million dollars, if you do not have $10 million in the bank.
You should have 10 times more in the bank than you owe, not owe 10 times more than you make.
That way if the bill comes due, you can pay it off in full.
At this point, borrowing money is strategic and not the only option.
Matter of fact, just pay of all your debt ASAP and owe no one a penny. NOT ONE RED CENT!