Archive for the ‘mortgages’ Category

Are Mortgages Forced Savings?

Tuesday, March 18th, 2008

Fathersez (who has given ME encouragement on parenting) left a question in a comment over the weekend on my post about search phrases that bring people to this blog.  He wrote:

If someone tells me that getting a good debt (say, a mortgage, that still leaves me with a lot of equity) is a way of forced savings, what should I tell him/her?

I am low on ideas and coffee this morning, so I’ll tackle this one since I did say that was a post all unto itself.  I’ll also interpret the question as narrowly as possible so I don’t fly off on too wide a tangent.

Good Debt.”  That phrase gets bandied about in the PF blogosphere quite a bit, but you might have noticed I don’t use it.  I just don’t subscribe to the good debt vs bad debt idea.  Debt is debt, and it all means you owe money.  I’ve learned I really don’t like owing money!

Some folks believe mortgages and student loans can be classified as “good debt.”  I am cash flowing my college and only going part-time to avoid student loans, so that probably gives you an idea of my opinion there.

As for mortgages, I am very old-fashioned with my notions on those!  A mortgage (which means “death contract” or “death grip” if you translate it from old French) is a means to buy something that would otherwise take you years to save up for.  I still have a mortgage, but look forward to the day it is paid off.  Not too long ago here in America, there used to be mortgage burning parties for when people finally paid off the note on their houses.  It used to be a big deal and a big goal to own your home outright.

A lot of equity.”  I have to ask how “a lot” is defined.  I’m considered hideously conservative when I say I want a 20% down payment to put on a house before I buy next time.  Even as conservative as that may sound, there are areas in America where that still might not leave you with much equity over the next few years as the housing market is plunging in states like California, Nevada, and Florida.

Equity is a slippery eel, as we are finding out.  People who thought they had equity in their homes have woken up to discover they don’t as housing prices fall.  Equity seems to be based not on the mortgage amount paid versus the amount borrowed, but the current appraised value.  If your neighborhood has foreclosures, your appraised value goes down significantly, along with any equity you thought you had.  Until housing prices stabilize, equity has become a mostly fictitious number.

Forced Savings.”  Now we get down the the actual question: is a mortgage a form of forced savings?  I don’t think so.  When I have an actual savings account, I have money in there that earns some interest (of course, that interest is falling lately) and I can withdraw my savings if I need to immediately.  I can’t do that with my mortgage.

Even though I have lived in this house for seven years, a large portion of my monthly mortgage note still goes to paying interest, and absolutely none of it earns interest.  That’s mostly because a mortgage is not an investment, and a house is not a piggy bank.  A house is a home, a place to live.  A mortgage is a “death contract” because with some of these mortgages out there, you’ll be paying it til the day you die.

If I am going to save money, I will put it into an interest-bearing money market account.  Oh wait, that is what I am doing now that the debt is gone!  No forcing necessary.  No one needs to put a gun to my head, because I want to save up money.  Which reminds me: the weakest part to the “forced savings” argument is the fact that if a person wants to pull that imaginary equity out of their home, there are twenty ways from Sunday to do it.  People have been treating their homes like ATM machines, and now the ATM is out of cash.  You can’t forced a person to save.  Either they will because they want to, or they won’t.  A mortgage doesn’t change that.

Foreclosure Crisis Means A Buyers Market

Sunday, March 16th, 2008

My mother used to say, “Every cloud has its silver lining.”  My mom can be described as the eternal optimist.  While I may pride myself on a well-cultivated cynacism, sometimes Mom’s influence shines through.  The current foreclosure and real estate and mousing and mortgage crises are a good example of that.

While I am out delivering pizzas on the weekends, I have an ulterior motive: I am neighborhood-hunting.  Not as specific as house-hunting, but I am keeping my eyes open for a neighborhood and general area I would like to move to in the next two to five years.  Believe me, delivering pizza is perhaps the best way to scout out places to live!

My little city has been lagging far behind the national trend in home prices, with new construction still popping up almost weekly.  It was also lagging behind in the run-up, so I am figuring the market will deflate in another year or two.  That will be the perfect time for me to buy, as it gives me plenty of opportunity to save up a 20% down payment and do the whole mortgage idea right (and finish college also).

I’ve met a few wealthy grey-haired (or no-haired) folks who claim they made their best real estate deals back in the late 70s and early 80s.  That was a bad time for real estate, my parents used to say.  The wealthy ones disagreed: it was true buyers’ market and the best deals could be had if you had the cash.  It’s going to be the same story very soon.

Let’s take Cleveland real estate as an example: since Cleveland (Ohio) practically led the pack nation-wide on the foreclosure trend.  I’ve met a real estate agent from Cleveland on a blogging board, and have to confess she rivals my mother when it comes to optimism.  She is happily telling folks that now is the perfect time to be buying a house up in Cleveland, since it is a serious buyers’ market in the wake of all the foreclosures.

Ok, so why am I reading a Cleveland real estate blog?  No way am I moving back up north!  I happen to enjoy her commentary and wit on subjects where politics, real estate, and finance tend to converge.  Oh yeah, and she has great tips for buying a home, getting ready for a mortgage (something I haven’t done since 2001), and she must have that serious bargain shopper gene that is hardcoded on my X chromosomes also, because she just bubbles over at the idea of this being a perfect buyers’ market.

Oh yeah, my kind of buyers’ agent.  Now, if I could just make up my mind which neighborhood I’ll want to move to in a couple years … because it will be a buyers’ market down here by that time.

Reader Input: Have You Seen This Article?

Tuesday, March 4th, 2008

I got an email from a reader yesterday, Kissairis (pronounced “Kiss-Iris” and yes I asked LOL) that simply said:

I came across an article at that I thought you would find interesting — people are foreclosing on their mortgages but still paying their credit cards because they use them everyday

 And of course here is the article in question.  USAToday calls the trend “alarming” which might just qualify as the media understatement of the year.  This is beyond alarming and disturbing, this is a sign of BIG TROUBLE.

Maybe I’m a bit old fashioned, but I was taught you always pay secured debts first.  Ok, ok, so my personal finance education was a bit um, lacking growing up and sort of consisted of financial crisis management.  But the point remains: if it can be repossessed you paid that bill first.  The most important secured debt was always the mortgage!  If your car got repo’ed you could always go get a beater for a couple hundred dollars cash that you could putt-putt to work and back in.

My point is: WOW have things changed!  I honestly do not understand how a person can be behind on their mortgage but completely current on their credit cards and car note.  Do these people plan to live in their cars?  Seriously, I am not being a smart(donkey) here.   Just what is their plan and method of thinking on this??  The article isn’t very specific, other than people saying they need to get to work and buy gas and eat, with no thought given to where they will live after their houses are foreclosed.

As for the credit card angle in the article: Folks, it is time to put the credit card crack pipe down!  It is time to get your priorities straightened back out!  The party ended and now it’s time to suffer through the hangover:

an Equifax analysis shows that 38% of delinquent mortgage borrowers had kept all their credit card bills current, and 62% had kept all their auto loans current in the two-year period ending in July 2007. In the past, most people would pay late on their credit cards and auto loans before doing so on their mortgages.

Finally, another cherry-picked quote from the article:

“That suggests that people are turning to their cards in times of financial need,” Zandi says. “They’re losing jobs and overtime hours and other income and trying to supplement their lower incomes with more spending on credit cards.”

Where I come from, if your income goes down you cut expenses.  You don’t keep living like you did before the income drop!  If your income goes down significantly, you sell things, preferrably things that have bills attached to them.  You take extra jobs, and you do what you need to do to keep food on the table (even if it’s mac ‘n’ cheese and peanut butter sandwiches) and the roof over your head.

Maybe I come from a different mindset than the people in the article.  I’ve been poor before, and I’ve been too broke to pay attention at least three major times in my life.  These people described in the article don’t seem to be able to comprehend that “broke” can be survived without too many psychological scars.  These people in USAToday will be tomorrow’s homeless folk … but their credit cards will be current.

Scary times we live in now….

I Think This is BAD Money Advice

Monday, February 25th, 2008

I usually don’t go this far out on a limb and straight up call someone’s opinion about money wrong … but this advice sounds downright financially dangerous to me!  I will state off the bat I don’t know this blogger from Adam and found the post while browsing the popular list over at  Here’s my beef:  Personal Finance Guide (dot org) not only recommends using a HELoC as an emergency fund, but claims having a CASH emergency fund is costing “more than you think” and goes on to extoll the virtues of digging yourself deeply into debt when an emergency happens.  (Interestingly enough, a year and a half ago, this same blogger thought emergency funds were a GOOD idea.)

GASP!  CHOKE!  SPUTTER!  This blogger even says to use a HELoC to buy groceries when money is tight!  What is wrong with this picture??  Buy groceries and pay for them for the next several years???  Of all the “debt-is-good” planets people can live on, this one has to be the most hostile to personal financial wealth!

The really bad part is this blogger is not alone with this idea of using a HELoC instead of a cash emergency fund.  Some bloggers are not as specific about using credit instead of an emergency fund, but the idea remains.  There are MANY more examples, but these were mentioned when I brought the subject up on a blogger board I frequent.

I have said it before, I don’t think HELoCs are good for much at allNot to “pay down” credit card debt (note the quotation marks!), and definitely not for an emergency fund.  What if the emergency is a job layoff?  Or a double job layoff (both you AND your spouse)?  How about some idiot running a red light drunk and T-boning you, resulting in a prolonged hospital stay and time out of work?  How about an injury that results in permanent disability?  Even worse yet, how about a death in the family?  All of these things happen to people every day in America!  Are any of these situations an example of when you want to go into MORE debt?

Or here’s another real-life example this blogger obviously didn’t consider: what if you live in an economically depressed area … like maybe Michigan?  What if you live in the “foreclosure capital of the USA” as Detroit, Michigan (replacing Stockton, California) has been declared lately?  Or any other region where home values are plummenting as the housing market bubbles burst?  All of a sudden, you might not HAVE equity in your home anymore!  If that happens, using this blogger’s advice …POOF!  You don’t have an “emergency fund” anymore.  Even worse yet: what if you find yourself upside-down in your mortgage because home values declined?

Yes, I know cash actually does go down in value.  It’s what we commonly call inflation.  But I don’t think inflation is nearly as high as some of the declines in housing values going on right now.  Plus cash doesn’t put you in debt.  The last thing I would want in an emergency would be more bills that need to be paid … and a HELoC puts your home up as collateral.  So if the emergency is prolonged and you use a HELoC, not only do you have another bill, but if you can’t pay that bill you are in danger of losing your home.  NOT a good plan!

I will personally stick with my plan of a cash emergency fund.  I personally advocate others do the same.  It just isn’t worth the risk!

Paying Off the Mortgage - Good or Bad?

Wednesday, February 20th, 2008

I had an interesting conversation late last night in the chat room when a guy asked if I thought paying off his mortgage would be a bad or good idea.  There is also a very good thread on that topic in one of the MyTMMO message boards.  It seems there is this theory that it is “better” to keep the mortgage and put any extra money into an investment account of some type and that somehow works out better mathematically.

In fact, that was the fellow’s argument last night.  He has the cash on hand to pay off ALL his debts, mortgage included.  But his hesitation last night was that he would earn $6,000 more over the course of 7 years by not paying off his house now.

Y’all know me … I was scratching my head over this one.  When I asked for more details, especially on the “how” part, he said he could earn 4% on his savings and come out $6,000 ahead during the next 7 years of his mortgage.  That’s either a money market account or a bond fund I figure, and rather conservative.  So, I asked a few pointed questions:

  • Just how much has the Fed cut interest rates recently?  And what are they predicted to be doing with the interest rates?
  • Has he ever heard the words “bear market”?
  • and the most effective: $6,000 divided by 84 months is how much extra money per month?

 That last question is what got him.  LOL He didn’t answer me with a figure, so since I feel lazy this morning I broke out my calculator function.  This guy is agonizing over $71.43 per month over the next 7 years.  From what he indicated about his tax bracket, I think this might be less than one hour of work per month for him.

I’m not a true math geek.  In fact, when you start throwing the alphabet into math problems, I start losing interest in it.  If you throw in the Greek alphabet I start disliking math.  I will confess to nerd status as I figure my miles per gallon with every fill up on my Pizza Taxi, and still enjoy fiddling with my monthly budget numbers.  I don’t know how they figure up mortgage amortization charts, but I know enough about mortgage amortization charts to know I like being way ahead of their time schedule.  It ties into my “hate to pay interest” philosophy.

That being said, I am totally in favor of paying off a mortgage as soon as you can.  Numbers be damned LOL  There is a solid and strong appeal to the notion of owning the home I live in: outright, completely, and fully owning it.  There is an even stronger appeal to the dream of not owing any payments to anyone for anything, except for utility use and groceries. 

I am so looking forward to the day I get to that point in the Dave Ramsey plan!  It won’t be until the end of the year at the absolute soonest, because there are steps in between paying off consumer debt and paying off the mortgage that are vitally important and simply cannot be skipped.  After we pay off the truck note we will be out of consumer debt (that’s Baby Step 2).  Then we need to build up the big honkin’ emergency fund - 3 to 6 months of expenses (we are going for only 3 months since hubby is military and has pretty good job security right now) which is Baby Step three.  Baby Step 4 is saving 15% of our income for retirement, and Baby Step 5 is saving for my rugrat’s college.  Paying extra on the mortgage is Baby Step 6, and is done after all the previous ones are in place.  But it sounds like a truly great place to be!

I can imagine life without a house note (mortgage) now.  I can imagine the walkaway power it gives someone in a job they don’t like.  I can imagine the freedom it gives when the worry about how to pay a house note is gone.  I can imagine how little stress there will be about job changes (voluntary or not), retirement, the prospect of starting a business, and most importantly the lessening of stress if a major medical emergency rears its head.  I can think of a LOT of reasons paying off a mortgage is good, even though I can’t assign a number value to them.

And if the guy I talked to last night for some reason doesn’t like being completely debt free including his house, he can always go get another mortgage!  LOL  Somehow I don’t think he will.  I asked him to tell me next month how it feels to not have a house payment.

Haven’t the Mortgage Lenders Learned Yet?

Tuesday, February 5th, 2008

This repost from the My Total Money Makeover forum would indicate that mortgage lenders have learned absolutely nothing from the current subprime mortgage mess!  Isn’t this how so many people got into financial trouble to begin with?

Yesterday I talked to a Wachovia mortgage consultant (my landlord wants me to buy the condo I’m renting). I knew I wasn’t ready to buy, but I figured, what the heck, let’s see what they have to say.

Nice girl, but when I gave her the honest numbers about my salary and self-employment income AND my $700/mo minimum debt payments, she told me I would qualify for around $210,000-$220,000. So I said, “Really? Wow! How much would the monthly payment be?”

“Well, that’s the thing . . . It would be about $1450 if you bundled in tax and HOA.”

Well, gee, thanks but no thanks! I had already told her that my monthly debt payments are $700/month, so that would leave me $700/month for everything else in my life!

Now I don’t have any handy-dandy financial calculators I can link to, but these numbers look “wrong” to me.  Just how long is this mortgage?  What is the interest rate?  What kind of terms?  Was there any down payment in this discussion?  The person who posted this thinks it was a quote for a zero down fixed 30 year mortgage, but the numbers still sound off to me.

This is just a shining example of complete irresponsibility on the lender’s part.  They are trying to approve someone who brings home approximately $35,00 per year for a mortgage of $210,000 … almost SEVEN times her annual income.  The recommended mortgage amount should be no more than twice annual income according to “old” common sense conventional wisdom.  On what planet is this a “good idea”?  The payment quoted is approximately 50% of her monthly bring-home (after taxes) income, about double the usual recommended percentage.  As another MyTTMO member quipped, “…lenders are still giving people enough rope to hang themselves.”

All I can say is this mortgage “consultant” is either blatantly incompetent or trying to set this person up for failure.  It’s rather obvious the mortgage lender won’t be holding this note, but trying to sell it off.  The mortgage consultant doesn’t care if this mortgage is insane for this income level, or that one tiny hiccup in the querent’s financial life will trigger an inevitable foreclosure if she took this ridiculous loan.  The mortgage lender won’t be around for that.

And that right there is one of the main problems behind the current subprime mortgage crisis here in the U.S.  The lenders who originated these bad mortgages didn’t keep them … instead they handed them off as fast as a hot potato or a hand grenade with the pin pulled.  The people who approved this kind of mortgage get paid simply on making a mortgage, not necessarily making GOOD rational loans.

Perhaps the solution to fix the current subprime mortgage crisis is too simple: make lenders hold the mortgages they write and approve.  I think suddenly we would see a level of sanity return to the market quick fast and in a big hurry!  Down payments would suddenly come back into fashion.  Reasonable debt to income ratios would once again be considered.  Exotic and financially toxic mortgages would disappear.

 Maybe it’s just a pipe dream….

Pay Off Credit Cards with a HELOC?

Wednesday, January 30th, 2008

Y’all have seen the ads: some smiling beautiful person is trying to tell the world how much easier their life is since they “paid off” their credit card bills by using their HELoC (Home Equity Line of Credit).  It might have been on TV, in the newspaper, on the radio, or even online.  It’s touted as the “smart” thing to do.  There is so much wrong with this idea, I am not even sure where to begin!

First, let’s tackle the erroneous notion that you can “pay off” debt by borrowing (more debt).  Yes, a HELoC is borrowing…it’s borrowing against the equity of your HOME.  Dave Ramsey has a cute but very true saying: “You can’t borrow your way out of debt.”  He is 100% right on that point.

Now let’s look at the (lack of) wisdom in this strategy: The notion that taking unsecured credit card debt and moving it to a secured debt situation is “smart”.  Credit card companies will scream, holler, and cry blue murder if you don’t pay them … trust me I have had personal experience with this … but the worst they can do is ding up your credit report (and score) then discharge the debt and sell it to a collection agency who usually has as bad or worse phone tactics. 

A HELoC puts your home up as collateral.  At best, if you can’t pay on a HELoC they put a lien on your home.  I have heard in some states, a HELoC in default can trigger foreclosure proceedings.  So what is smart about that?

“But the interest rate is so much better…!”  Yeah, there is a reason: secured debt is always a lower interest rate because if you default  they can always come seize the collateral to recoup their losses.  Therefore the loan is less of a risk for the lender when they can take your car or house and sell it at auction.

“But it’s one easy payment…!”  First of all, I have never actually had an “easy” payment.  All payments have some degree of pain associated with them, even my mortgage (which apparently means “death contract” according to David at My Two Dollars).  Second of all, it might be “easy” now, but what happens when there’s a layoff, or medical emergency, and you suddenly aren’t working or working less than before?  Instead of a bunch of little payments you can prioritize, you have one big payment now and it’s an all-or-nothing situation.

Even worse, I have seen, heard, and read many financial experts say people should open up a HELoC as an emergency fund rather than save up cash!  According to statistics (and yes I know statistics are one of the three kinds of lies), the number one reason for bankruptcy today is a sudden medical emergency and the bills and debt and time out of work associated with it.  If this is your emergency, how can it possibly be smart to jeopardize your home as well as all your other debt obligations?  Or if your emergency is a layoff, how can anyone call it smart to take on more debt - especially the secured kind?

The absolutely most irresponsible marketing of a HELoC is for “fun” stuff: vacations.  This is the one I have never been able to understand, even in the depths of my financial ignorance.  Why in the world would anyone offer up their home as collateral for a vacation?  Someone please explain the rationale behind this notion!  I just don’t get it at all … what is the justification thought-process behind this?  I know it’s being continuously marketed for so long because the marketing works and people actually do this - I just don’t understand why.

I know I am biased; I am debt-adverse.  The only two things I can possibly think of to use a HELoC for are major home repairs and major home improvement before a sale.  Definitely not for transferring credit card debt … definitely not for emergencies … and absolutely not for fun stuff!  In fact, I am wondering if the HELoc-mania as a financial panacea is part of the reason people are finding themselves upside-down in their mortgages, and if it is part of the reason for the foreclosure rate now hitting records?

Just one final thought: your house is not supposed to be an ATM machine; it should be your home and castle!  Maybe we should go back to that idea.

 Note: This is part of a group project about mortgages, homes, and foreclosures involving several PF bloggers, and I will provide a wrap-up on Thursday evening or Friday morning of everyone particpating.