How We Got Into Debt

About a month ago, a commenter asked me how we managed to accumulate all this debt. It's not a surprising question, and I've been meaning to discuss it for a while now. I've been procrastinating for a few reasons, the biggest of which is that it's pretty embarrassing. I am ashamed of how we managed to go $38,000 in the red. There was no medical crisis, or house fire or tragedy that we borrowed money to cover. We just made a series of poor decisions. A series of very poor decisions.

We bought our first house in April of 2005. This in itself was not a mistake; however, we made too many assumptions when we purchased the house. We primarily considered the cost of the mortgage and not all the other costs associated with home ownership. Even with that, we would have been just fine.

In May 2005 we got engaged and began planning our wedding. We made a budget for the wedding based on how much money we could put towards it every month until the following summer, when we were to be wed. In June 2005, we bought a new car. Not new-to-us, brand spankin' new. With the car payment, we were still ahead and making more than we spent.

So what pushed us over the edge? In July 2005, I quit my job to work for a small business as their sales and marketing director. It was a commission based position. If I didn't make any sales, I didn't get paid. Unfortunately, I didn't have any sales experience, so I didn't make a lot of money. My income dropped by about 75%. All of a sudden, we didn't make enough money to pay our bills.

That alone wouldn't have been devastating - if we had made adjustments to allow for the lower income. But we continued living our old lifestyle, going out to eat, vacationing, buying needless things. We went away twice in less than a year - both trips piggybacked on business trips, but there were, of course, plenty of expenses incurred. We only sent the minimums to the credit cards and incurred a variety of late fees and over limit charges. The interest rates skyrocketed t 29.99%.

In October 2005, we attempted to minimize the damage by transferring some of the debt to a zero percent card. Within 2 months we were back up to the limit, as well as using the zero percent card. We had bills being automatically paid by the credit cards: cable, internet, gym fees, tolls. Every month was a decision of which bill would be paid late, as we never had enough to pay them all on time.

On top of our every day expenses was the wedding. While we stayed within our original budget, we by no means had any savings to draw upon. We didn't go all out, but there were plenty of places where we could have spent less money. We even took out an additional loan of $10,000 just for the wedding - which later blew up in our face.

When we returned from getting married, I found a new job almost instantly (I had been looking for a few months) and we turned a new leaf. Our rock bottom debt was in October 2006: $38,440. Since then we have paid off $26,000 and wiped out 8 separate debts (and added one). I cannot wait to erase the remaining 3 credit cards from our life!

Looks Like Our Home Value Has Decreased

I received a letter in the mail the other day from the lender of our second mortgage. The second mortgage is technically an interest only HELOC. Arguably not the best method of buying a house, but that's an entirely different post.

Although I call it a house, where we live is technically a townhouse. That is, the building our house is in also holds two other townhouses. Fortunately, we have an end unit, so we only share one wall and have direct access to the garage, which adds to the value of our home. Unfortunately, townhouses and condos are usually the first to drop when the housing market takes a hit.

When we bought our house in 2005, we paid $280,000 (Remember, this is Massachusetts). It was appraised 2 weeks after we closed for $305,000. Sweet! Very exciting. Instant equity. Of course, what something is worth only counts if you're selling it.

The letter from our second mortgage stated that we couldn't further draw on our HELOC because our house's value had dropped so much. I don't know exactly how they calculate the houses' value or how much of the value they will lend up to, so it's difficult to say if our house's value has dropped so much that we are now upside down on our mortgage. It's possible, if it dropped enough. We didn't have any plans to draw further on the HELOC, or take any equity our of house at all, so that part doesn't affect us directly. What I am worried about is when we do want to sell our house.

I checked Zillow.com, and they list our house at $253,000 currently. Their estimates aren't perfectly accurate, but the letter from our mortgage company lends a bit of credibility as well. I want to close my eyes and shut it out, but it appears we now owe more on our house than it is worth. Or at least it's close.

When we bought our house, we intended to live here for 3-5 years. This summer will be 3 years, and we moving isn't even on the horizon right now, for a variety of reasons. We'll be staying put for the foreseeable future, and we may end up staying past what we had originally planned. There is still plenty of room here, even for when we eventually start adding people. I just liked having the option to move if we wanted to, and right now it would be pretty foolish to do so. Even more reason to pay down the debt - eventually we'll get to paying off the mortgage!