Meet John and Terry Wheeler_ January 2003 by wanghonghx


									The day after tomorrow

Meet John and Terry Wheeler, January 2003

For John and Terry Wheeler it was a dream come true. The opportunity had finally arrived. It was
a chance to move out of their small apartment and finally own a home of their own. They had
always dreamed of owning a home, but there was never enough money. Terry’s tips from
waitressing at an upscale steakhouse had enabled the couple to build a small kitty of $5,000, but
that didn’t cut it. Homes were expensive in southern California and it seemed no matter how
much John and Terry brought home, housing prices moved further out of reach. That is until
Terry’s aunt passed away leaving her a small inheritance. The $20,000 bequest wasn’t much, but
with the drop in interest rates their realtor said that with the right financing package, they would
be able to swing the deal.

In March of 2003 their dream became a reality. They purchased a small home in the suburbs for
$515,000. The yard was small and the homes were close together, but they didn’t seem to care.
After living in a 1,000 square foot apartment since they got married, Terry thought their new home
was a palace. Thanks to the realtor’s advice of taking out a variable rate mortgage, they were
able to get a 3% starter loan, which brought the payments on their $490,000 mortgage down to
$2,100 a month. With property taxes and insurance, their combined incomes were able to handle
the $2,500 a month outgo. Besides, John’s job as an electrician paid well and with all of the new
homes being built, John was getting time and half for working overtime. Business began to pick
up at the local steakhouse and on weekends Terry took home more than $500 in tips. By working
three lunches a week in addition to her five nights, Terry’s income was beginning to catch up with

These were good times. With John’s overtime and the extra money Terry made working lunches,
the Wheelers had enough money to buy Terry a new car. They were able to buy a brand new
Ford Explorer for less than $400 a month thanks to zero percent financing. Times were so good
that they even had enough money at the end of the month to put a little extra aside into savings.
Terry wanted to buy furniture for the living and dining rooms with their extra earnings and the tax
refund they received from the President’s tax cuts. John had his eye on a new 52 inch LCD TV for
the family room. With their cash savings they were able to pay cash for the LCD TV. But the
furniture was too expensive. Terry didn’t want to wait. The furniture store offered them an
attractive financing package that made the purchase tempting. John was hesitant, but he found it
hard to say no. After all he had gotten the new TV. How could he say no to Terry’s desire to
furnish an empty living and dining room? The furniture payments wouldn’t start for another two
years. When they kicked in, it would add another $360 to the monthly budget. By then they hoped
                                                             they would have enough cash in the
                                                             till to pay down the loan and reduce
                                                             their payments.

                                                             If the overtime kept up and business
                                                             at the restaurant remained strong,
                                                             they would still be able to handle the
                                                             additional payments when they were
                                                             due. However, the overtime and
                                                             weekend tips were now a necessity.
                                                             Without them there would be very little
                                                             left over in the budget at the end of
                                                             the month. But that was a worry for
another day. Right now times were good and 2003 ended up as a memorable year. A new home,
a new car, new furniture, a new LCD TV – what else could a couple ask for? This was living the
American dream. John felt good enough about his new job. With a major new development going
in, the overtime pay would continue. That Christmas he bought Terry a set of diamond earrings
on credit. Terry wanted to make this Christmas special for John. She had her eye on the home
entertainment system that would be the perfect compliment to the new TV. The system cost more
than $2,500, so she charged it. Terry figured that her tips would enable her to pay off the credit
card within a year. That year's Christmas was one they would never forget. The $4,000 in new
credit card debt would be a monthly reminder.

The Wheelers Feel the "Pinch" in 2004

2003 ended well and the couple was hopeful that 2004 would bring more of the same. John’s
overtime continued and Terry still made $500 or more in tips on weekends. But in March they got
a bit of a shock. Last October their mortgage payment went up by $100 a month after the bank
raised their mortgage interest rate from 3% to 3.5%. They had expected an increase, but were a
bit troubled after the mortgage company raised the rate another half a point. Their adjustable rate
mortgage adjusted every six months, but they were assured by their realtor at the time of
purchase that interest rates would remain low. They were now paying 4%, which was still less
than a fixed rate mortgage, but the rate hikes had increased their monthly payments by more than
$240 a month. Terry was also beginning to complain about the cost of groceries and the price of
gasoline. It now cost more than $56 a week to fill the tank of her new Ford Explorer and the
weekly grocery bill had risen by more than $20. Their property tax bill went up in April and they
also were paying more on monthly utilities. These were all small things, but they were starting to
add up. John and Terry still managed to put aside $150 a month, but it wasn’t as much as they
hoped for.

The monthly credit card payments were now over $120 a month and over the last year they found
themselves buying more things on credit. They bought a portable barbeque and new patio
furniture in the spring. Terry really wanted a spa for the backyard. The backyard was too small for
a swimming pool, but the pool company could build a nice spa and waterfall in the corner of the
yard for $15,000. Their credit card balance was now over $8,000, so charging it was out of the

John called their realtor who suggested a home equity loan. Houses in their neighborhood had
been appreciating by more than 2% a month. The realtor told John their home had appreciated by
more than $100,000 over the last 15 months. John took the realtor’s advice. Their home's
appreciation made John and Terry feel richer. They now had more than $125,000 in equity, which
was hard for them to believe. Terry wanted to put in the spa by summer. Besides the new spa,
Terry also had her eye on a new bedroom set. The furniture store had been running sales every
weekend. A new bedroom set would cost more than $12,000 and John wanted another TV to fit in
the armoire. John called the mortgage company, figuring they would need about $35,000 to pay
for the spa, bedroom set, new plasma TV and pay off their credit cards. John found it absolutely
amazing how easy it was to get credit now that they had become homeowners. Getting credit had
never been this easy. Buying their new home had been the best financial decision they ever

During that summer John and Terry took their first vacation since their honeymoon. Carnival
Cruise line was offering a package tour of the Mexican Riviera for only $2,500. It was bit
expensive, but with their credit card debt paid off and their home continuing to appreciate, John
felt they could afford to charge it. They came back from their vacation refreshed. Terry was
pleased with some of the purchases they had made in Mexico. There were new pots for the back
yard, nic nacs for the family room and beautiful silver jewelry for Terry. The purchases had set
them back another $1,000, which they also put on their credit cards.

It all seemed affordable especially now since their home kept appreciating. Their combined
mortgages was $525,000. That was more than the original purchase of their home. But the way
John figured things, they were still ahead. A call to his realtor had reassured John that things
were okay financially. Their home was now worth more than $625,000. Even though their debt
balances were larger, they were still ahead by almost $100,000!

They were living the good life. John’s overtime continued and Terry still made good money at the
steakhouse. The couple were thrilled with their new home. Terry loved all of her new furnishings
and John was considering adding a covered patio off their family room. It would provide the
shade they needed to cool the house down from the summer heat. A call to their mortgage
company provided the needed cash. John got the $7,000 he needed to put in the new patio cover
and Terry wanted to replace the family room Venetian blinds with wooden shutters. John asked
his mortgage broker for a $22,000 loan. That would give him enough money to build the new
patio cover, put in the family room shutters and pay off their credit cards.

At summer's end, their credit card balance was back over $5,000. There was always something
that came up each month and there never seemed to be the extra cash around to pay for things.
It became easier to charge things. John and Terry had not realized it, but charging things each
month had now become a way of life. Terry complained about their grocery bills. Costs seemed to
be going up everywhere and their grocery bill had gone up by more than 40% over the last three
years. Her last office visit to her gynecologist cost her $80. A trip to the dentist to get her teeth
cleaned cost $58. Prices were going up everywhere and it was beginning to pinch their budget. In
October of 2004 the mortgage company raised their mortgage rate by another half a point to
4.5%. John complained to his mortgage company, but the broker told him that his variable rate
mortgage was still cheaper than a fixed rate loan.

John was getting worried. Their mortgage payment was now over $2,500 a month. Property taxes
on their new home were going up along with their mortgage payment. Taxes and insurance now
added up to $600 a month. In addition to their regular mortgage, they now had a $47,000 home
equity loan. This cost them an additional $200 a month. Add in the $75 minimum payment for
their credit cards and it all was starting to take its toll. Making matters worse was the fact that
their home equity payment went up almost every month. Not by much, but enough to irritate John.
The bank told him it was because the Fed was raising interest rates. The home equity loan was
tied to the prime rate. When the prime rate went up, so did John’s monthly payment. John didn’t
understand economics, but he began to understand that every time he saw Alan Greenspan on
TV, it meant his mortgage payments were going up.

Although John and Terry were still happy, they found themselves arguing more over money. The
end of each month left them in a tight spot. They stopped going out to movies every Sunday. Out
of necessity they both decided it was best to stay away from the shopping malls. Terry tried to
save money on groceries by using coupons and buying more household cleaning supplies at
Wal-Mart. These were small changes, but they helped to balance their budget. John’s union had
negotiated a pay raise and his boss still needed John to put in the overtime. They were thankful
for their new home and good fortune, but by year-end they both agreed to pull in their horns at
Christmas. They managed to get through the Christmas season by adding only $1,500 a new
credit card debt. There wasn’t enough in checking at the end of the month to pay for discretionary
luxuries. The difference was made up with credit cards. The cutbacks that John and Terry had
initiated made the budget balance each month, but there was very little left for unexpected
expenses – a trip to the dentist, new tires for John’s truck or simple repairs around the house or
birthday, anniversary or Christmas presents.

When John and Terry added up assets and liabilities at the end of 2004 they were still on the plus
side. One of their neighbors had sold their home for $650,000. It was the same model as John
and Terry’s. Their realtor told them that their home might be worth a little more with the patio and
spa addition. Although their mortgage and credit card balances had increased in 2004, they were
able to upgrade their home with new shutters, a spa and patio. Terry was happy with the way the
house looked, so John anticipated no new expenditures for 2005. If the house continued to
appreciate like it had the last two years, it would more than make up for the difference in
mounting credit card bills. They looked forward to the new year with all of their major
expenditures now behind them. The new home construction market was still strong in San Diego.
John’s only worry was Alan Greenspan’s frequent appearance on the evening news. That meant
higher interest rates and John worried what would happen in March when it was time for another
mortgage adjustment.

By James J. Puplava
February 22, 2005

To top