Success Warrior: The Blog That Embraces ADHD

Interest, PMI and the sinister Refi

I have seen a pattern in the people around me play itself out several times.  It's a pattern that ensures their financial slavery.  The five year refinancing of their homes.  The trap has so many factors going against people that it is surprising that people do it...but they do and so we will discuss it here.  What's wrong with the 5 year refi?

1.  We have talked about what a complete waste of money PMI is.  When you keep your loan from going below the 80% mark, you are making sure that you are always paying PMI.  You can't continue to throw money away if you want to make money.  PMI is a gift from you to the bank.  Does that bother you at all?

2.  Do not ever be confused by the "great interest rate" that you are getting.  If you have a 6% interest rate, there is only one way to pay that amount of interest.  You have to pay off your house in one year.  If you don't, you are paying more than 6%.  The longer it takes, the more interest you are paying.  If you are going to pay for 30 years, then you are talking about something in the range of 180% interest (30 years X 6% a year).  Is there anyone out there that wants to pay 180% interest on anything?  But that's a discussion for another post.

What I want to get at is this.  Take your payment and subtract your PMI, your home insurance, and your taxes.  What is left is the amount of interest you are paying.  What you will see is that each month, you are paying something in the area of 80% interest in your first few years.

Everytime you refinance your house, you keep yourself paying this incredibly high amount of interest.  Think about it each time you make a payment.  80% of your payment is profit for the bank and doesn't help you.  Can you really afford to throw away 80% of your money?

3.  The last part of this trap is the icing these people put on their cake.  They do a refi so that they can pay off all their other bills that have accumulated over 5 years.  Pay off medical bills, pay off credit cards, and pay off the old car.  They now have a lower overall outgoing payment.  This can be good!  It really can, if used correctly.  It's not great but it can still be worked into a great thing.

But that's not what happens, is it?  Gee, now they have more money left over each month so what do they do?  Go buy a new car.  Run up the credit cards.  Live life like they make more money for a year or two and then what?  They try to hold out for a few years while the value of their house goes up so that they can get it refinanced and do it all again.

Each refinance doesn't get them ahead, it puts them further behind until there is little chance of ever achieving financial freedom.

Tomorrow:  Keeping up with the Joneses.

Interest: those that understand it receive it, those that don't pay it

That's what one of my economics professors told me about 20 years ago.  It has stuck with me even if it has taken me this long to figure it out completely.  It's a lesson that I want to pass on to anyone that will listen.  Interest is one of the biggest factors when we talk about the rich getting richer and the poor getting poorer.  There are other factors such as PMI which just outright penalizes people that don't have enough money but I think interest may be the single most important factor.

You are either losing money or you are gaining money.  This quickly tells you which side of the line that you are on.  If you are investing money and paying interest at the same time then you have to figure out which one of the two you are doing more of to find out where you stand relative to the line.

Quite frankly, the object of the financial game is to be on the side of the line where you are earning interest.

If you want to take control of your financial future, you can't just give money away to banks. 

On top of that, it just makes no sense.  Why would people pay more for something than it's worth? 

There are several answsers.  To satisfy instant gratification.  Conditioning.  Everyone buys things on credit right?  Because that's the only way they can afford it (now there's a joke).

If you can't afford it, can you afford to pay extra for it?  If you can't afford a $500 TV, can you really afford a $600 TV?

But people do it and banks are ready to "help", while they stiffen up bankruptcy laws to make it harder to get out of the trap.

And it all comes back down to interest.  Are you paying it or receiving it?

Tomorrow, we visit PMI again.

The Rich Get Richer, the Middle Class Get Poorer

In "America: Freedom to Fascism," there is a conspiracy theory about why this is going on.  I don't know about the finger pointing but I do know that there are two things that are true.  Poorer people are easier to control.  The middle class is shrinking with more people falling on the poor side of the line than the rich.

And there is no doubt that the system is set up to just this.

Everyone knows at some level that the system works this way but they fail to take that knowledge and put it into action.  My wife and I discuss these things and are working on our plan to fix things for ourselves.  Yesterday we were talking about Private Mortgage Insurance (PMI).  This falls into the plan of making the rich richer at the expense of everyone else.

For those of you that don't know, PMI is an extra fee that you pay to the bank if you can't come up with a 20% down payment for your house.  Most people today don't have 20% saved up for their house and so they end paying this extra fee.  You are giving money to the bank just because they have you by the short and curlies.  You either pay it or you don't get your house.

Sure you can get a loan for the 20% if you want.  Banks are always willing to give you an 80/20 deal.  The reason they do this is because you pay a higher interest rate on the 20% so they end up getting the extra money anyway.  They get richer while you throw money away.

The thing with PMI is that it isn't needed because your house is collateral on the loan.  You don't need insurance.  Your house is the insurance.  You either pay for the house or the bank kicks you out and sells it to get their money back.

Tomorrow, more on interest.

America Freedom to Fascism Authorized version

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A search into income tax leads to something bigger.

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Following is the blurb that came with the video:

Please visit http://www.freedomtofascism.com to purchase the DVD.

This is the "Director's Final Cut" authorized version of Aaron Russo's documentary, America: Freedom To Fascism (AFTF). It is being uploaded to Google Video for the first time during the evening of October 19-20th, 2006. Aaron has listened to everyone's feedback - volunteers, students, lovers of freedom & liberty, young and old alike - and, true to his word, he is putting this up "for free" on Google Video knowing that the hour has come for Americans to either be awakened to restore the Republic or be swept aside by the dark global forces of fascism that seeks to enslave mankind.

AFTF's main focus comes in a statement with six very simple words: SHUT DOWN THE FEDERAL RESERVE SYSTEM!!

After viewing the movie, please be sure to visit http://www.freedomtofascism.com where you will soon be able to view a much higher quality "pay per view" Internet version of AFTF, buy the DVD and sign up as an affiliate to sell/distribute DVDs to others.

We also urge everyone to be sure to sign up as volunteer, register for email alerts and tell your family, friends and neighbors about this groundbreaking movie.

Welcome to the Success Warrior Blog

Hello,

This blog is for all those people that have asked me to do a blog away from Blogit.  This blog will contain a wide range of topics on what ever strikes me on that day.  Topics will include thoughts on my son, success, personal finance, funny things that go on around me, the Rams, and probably more on my son. 

Thank you for stopping in..

-Alan
aka SuccessWarrior