Success Warrior: The Blog That Embraces ADHD

How Easy Is It To Take Money From Consumers?

Ironically, it's just about like this:

There is one big difference though.

In the real world, the shyster just sits in his office and all the kids come to him and give him their candy.  They also promise to give him any other candy they can get too.

This Is Probably The Hardest Part Of The Money Choice Program

My wife overheard a conversation the other day that she shared with me this morning.  A couple were going to refinance their house and were going to get an "interest only" refi.  I can't remember if I've covered this here but I go into it in some detail in my book.  The short of it is that for most people, these are a bad deal.  For mortgage companies they're great.  That's usually how it works.  If it's wonderful for the mortgage company, you're getting screwed.  If it's good for you, they aren't getting any money.

The conversation came to an end with a shrug and the words, "I've accepted that I'll always be in debt."

The hardest part of my job is breaking the programming that the banks have instilled in the general public.  People don't have to always be in debt.  In fact, people can get out of debt rather quickly if they want.  They don't try.  One of the reasons they don't try is because of this belief.  There are other reasons but this is a big one.

Have you seen this game? Have you played it?

Many people keep their debt at the highest level that they can.  If they have enough money to afford the low, low, monthly payment, they buy.  When they reach the point that they can no longer afford to do that, they have to go to plan B or plan C.

Plan B is the refi.  Take out the equity in your house and pay everything down so that you can charge everything back up again.  In effect, you raise your rent every 5 years.  At the end of 30 years, instead of owning a house, you are still renting your house.  Plan B works as long as the housing values are going up, which isn't right now so we have to go to Plan C.

Plan C is to get strict with yourself for a few months and pay off a couple of things to free up enough money monthly so that you can charge something new.  Unfortunately, this is a common game.

The good news about Plan C is that if someone were to stop and look for a second, they would realize how quickly they can pay things off.  It's amazing how fast this can happen when people are trying to get their shiny new toy.  If they would just keep it up for a little while longer, they would never have to charge again. 

I put this in the comments a couple of days ago but I'll put in this post to make sure everyone has seen it.  The danger with owing all of your money to someone else each paycheck is that there is no room for life to happen.

A lot of people are a doctor visit, a broken pipe, or a blown transmission, away from complete disaster.  If you take money from your bills to cover the necessary repairs, you find yourself behind on your payments.  Late fees and increased interest rates make it hard to get back on the plus side.  A couple of cards are late, then a couple more, and then you find yourself in a situation that looks absolutely hopeless.

If you make a late payment on a credit card, many companies increase the interest rate by 30% because now you are "high risk".  On many cards, the late payment penalty is more than the payment normally would be.  And if the combination puts you over your credit limit, you get zinged with an over your limit fee.  It's like trying to swim up a waterfall.

Looking at the chart of mortgage amortization

If you look at the chart of a typical mortgage, you see that when you get to the last half of the life of the loan, the amount of money going toward principle really picks up speed.  You spend the first half of the loan paying more in interest than what goes toward the principle.

Understanding this, it then figures that you should try to get to that halfway point as quickly as possible.  Even if you don't want to follow through and just pay off your house, you should put extra money into it until you tip the scale.  When more of your regular payment is going to principle than interest, you could go back to the regular payments and you will have saved more than a decade of time and tens of thousands of dollars.

That's what the chart suggests but that's not what usually happens.

Most people either move or refinance every 5 years.  They spend all their time in the very worst period of their loan.  In those same 5 years, they could completely change their life financially.  Instead, they dig themselves into deeper debt, raising the total amount they owe and the amount of their monthly payments.

People get caught in a trap of their own making.  They refinance to lower their monthly payments and then they charge things up to the point where they owe more each month than before.  Most people could get out of financial trouble without refinancing.  Refinancing might be a possible answer for some but once they refi, they need to not charge anymore and pay the mortgage down.

At least to the halfway point.

Money for a good purpose with a condition

I was reading an article in Money magazine yesterday about using the equity in your home to pay off credit cards.  The article states that it's a good idea especially if your credit cards have a high interest rate.  The last sentence in that section of the article says, "don't run up a new card balance." 

The same thing can be said about credit card introductory offers.  Cards that will allow you to transfer funds and then pay 0% interest for 6 months are great.  At least I think they're great.  I've used one because 0% sure beats the heck out of 15% or 20% or more. 

The catch of course is that you have to pay off as much as you can in those 6 months and then not use your cards anymore.  Most people probably don't do either.  Of course, that's what the credit card companies are banking on, isn't it?  They just want you to switch over their card and bring as much debt to their card as possible so that when the six months are over, the interest is as high as possible.  They don't want to wait for you to charge things up on the card.  They want you to start out with it maxed if possible.  They know that most people won't actually pay more than the minimum payment during the introductory offer and then they can start the squeeze.

Do you know anyone that won't rent because . . .

Do you know anyone that won't rent because they say it's a waste of money?  I do.  I know lots of them, in fact.  They make it sound like anyone that does rent a place to live is stupid and is throwing away money.  Equity.  Home ownership.  No landlord.  If you rent and you've talked to a "home owner", you've heard it all and can probably add to my list.

I put home owner in quotes because most people don't actually own a home.  The bank owns the home.  Next time you run into someone who goes on and on about owning a home, ask to see the title.  If it's their home, they will have the title.  If it's not their home, they won't.  Simple enough. 

In fact, most people I know rent their homes and raise their rent every few years.  Before they start telling renters how stupid they are, home owners better make sure they aren't doing this.  If you refinance every few years, you are essentially renting your house and raising your own rent.  And there is no real equity built up when you do this.  Most people really can't count their house as an asset. 

There are lots of factors to look at when trying to decide between renting and buying.  I'll look at some of the factors over the next couple of days.  One thing I'll mention today is that US citizens move a lot.  Most people don't stay in a house very long.  They want to be home owners but even when they don't refinance, many of them move. 

If you aren't going to build up equity in a house then maybe you should compare your interest payment to rent in the area.  If this is going to be a short term (less than 5 years) stay, renting could save you money.  If you were to put the difference between your rent and the cost of a house payment into a mutual fund, you could create your own equity.

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.