Girls Just Wanna Have Funds » Financing

American Dream Reloaded

Ginger — Wed, 16 Jan 2008 10:00:15 +0000

I came across this article Dispelling The Myth That Home Ownership Is Your Best Investment over at Millionaire Mommy Next Door. Already, I can tell that this blog will be a favorite! She’s challenging some well established views about the road to wealth in America. One of those being that buying a home is the “American Dream”.

Wow! Get ready to be challenged because she kicks a$$!

Don’t get me wrong, I have no regrets in buying our home. However, given the current market trends, especially here in the DC metro area I have started to think about whether or not it was truly a wise financial decision. I love the house, neighborhood and stability of knowing that this is ours and I dont have to answer to a landlord but there are some truths in her main points. I think if we can move away from the emotional aspect of buying a home we will be able to dissect whether or not it is a wise decision. And, of course there are so many variables to consider: current market, market projections, status of the mortgage industry, economy etc etc.

But let’s look at a few of the more salient points:

The Motley Fool, The Worst Investment Ever:

“Think about it for a minute. What characteristics do Fools look for in a great investment? Positive cash flow, low expense ratios, low transaction fees, and historically proven returns. Using these criteria, the average house falls well short of the all-time best.”

We typically think of our homes as investment vehicles which will take get us on the path to wealth. But I would caution this line of thinking especially in a market like today’s. I think five years ago many of us were singing a different tune given the incredible real estate boom we experienced here in DC. However, when you factor in home inspection fees, Realtor fees (you should know that the buyer is really paying this!), closing cost fees, HOA fees, maintenance, taxes etc etc it really chomps away at your bottom line. I’m not advocating going out and selling your house, but think about what you are putting into it financially and how much you stand to make when you do sell.

Homeowners typically only thinking about profit in terms of purchase price-resale price=profit. Not so fast. You’ll need to add in all of the above to really determine if you’re making a profit. Again, this is specific to local markets and individual situations. I just want you to be well informed.

Wall Street Journal, Your Home Isnâ€™t the Nest Egg That You May Think It Is:

“Mortgage interest is rent that you pay to your lender for the use of its money rather than to a landlord for the use of his house.”

“the costs of owning a home — buying it with a long-term mortgage and then paying taxes on it, insuring it, repairing it, renovating it — sap most of what most homeowners think they make in price appreciation.”

This hurt when I read it. Think about it, you don’t truly own your house until you pay the last dime on your mortgage. When you do pay off your mortgage you’re paying back a ridiculous amount of interest when you could be paying yourself first instead of the bank. When you consider that if you borrow $100,000 for 30 years at 8% you will end up paying the lender over $264,000 ($100,000 principal loan amount and $164,000 in interest). Isn’t that amazing? We’ve never been challenged to think otherwise!Â Just that buying a home=American Dream. If one were to take the same mortgage payment and invest in lets say the stock market which Ive read has average returns of around 7-10%, we could be paying ourselves that interest over 30 years. Of course Im not taking into consideration taxes and the like but I’m sure whatever you pay in taxes is less than the annual property taxes, insurance and maintenance on a home.Â This really revolutionizes Pay Yourself First school of thought.

“It may be late for a lot of homeowners to read this, but here it goes anyway: It’s risky and bad planning to have too much of your net worth in your principal residence. No prudent stock-market player would put 60% or 70% of a portfolio in just one stock, but millions will hold that much or more of their total net worth in just one house.”

Gosh I’m being slayed here. With the little I do know about investing, I know that you never put all your eggs in the same basket. so why do we do that in the case of our homes? We are often advised to DIVERSIFY our portfolios so as to avoid losing everything should one part of the portfolio tank. Right now I know so many homeowners are feeling the bite as the market slumps and the value of their homes depreciate.

OK. BREATHE!

What’s the lesson here? Think through each and every major financial decision and decide whether or not it will net a significant profit given your individual situation. The American Dream is great in that you feel invested in the economy’s growth and being a part of something larger, however will it truly take you on the path to wealth? If so, know when to jump ship. Right now I’m sure many wish they’d jumped ship 18 months ago and must wait for this slump to pull through. If you’re thinking about buying, ascertain what this will mean for you? Is it simply the achievement of buying a home or are you banking on the fact that your home’s value will increase and net a profit when you sell? Consider what you will put into the home after the purchase: taxes, insurance, maintenance, upkeep etc etc. I don’t know the answer as I’m still reviewing our own situation because I’m in total moneymaker mode right now. But, this isn’t to dissuade anyone from buying a house. Like the original author of this article, I am only here to impart information and hopefully educate in the process. Make the right decision for you, not one based solely on the “Dream”.

Have you bought into the American Dream?

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Technorati Tags: mortgage industry, The Motley Fool, Mortgage interest, American Dream, principal residence

Beat Finance Companies Skunk Drunk On Their Own Kool-Aid

Ginger — Sat, 12 Jan 2008 20:41:08 +0000

(Photo: Istockphoto)

ABC finance company called early this morning to inform us that we were late on our first payment for a recent furniture purchase. We apologized for the late payment and explained that we thought that the terms included no payments for 12 months because we planned to pay it off in full in June.

Step 1:

Understand the terms of your finance agreements before you sign it.

The terms of the agreement are the standard No Finance Charges for 12 months! Awesome Right? But for some reason I thought it read No Finance Charges AND No Payments for 12 months. My mistake. So I asked the CSR for the promotion termination date to which he replied November 28. I asked him to divide the payments equally so that it would be paid off by that date if not by the 1st.

Step 2:

When utilizing a No Finance Charges for 12 months!/12 Months Same as Cash promotion divide the payments by the months allotted and pay it off within that time, ideally sooner.

After requesting that he divide the payments equally and set up each check for that amount through the final payoff amount he remarked that I was smart to do this because most people do not. He said they just pay the minimum which in this case was 1/3 of the payment needed to avoid finance charges at the end of 12 months. I told him that my goal was to beat them at their own game. “Smart woman”, he said.

He proceeded to set up the payments for the first 6 checks and then I would need to call back at the end of June in order to continue. Not so fast buddy. Since every bill I have is automatic I figured yet another way to beat him at his game. I asked him how much of the balance would be paid off by June and then asked him to divide the result by 4 which would take me into November. He gave me the final number and I told him that I would set it up in my Bill Pay system through my bank.

Step 3:

Make every bill you pay automatic.

DO NOT FORGET TO DO THIS! June is a long ways off so I know that if I don’t do this now then I’ll forget.

He remarked again at how so many people lack the ability to think forward when taking advantage of these promotions and end up paying an absurd amount in finance charges just because its such a low amount. I confirmed each payment and wrote down my confirmation numbers in my notebook and thanked him for alerting me to this oversight. He thanked me for thinking ahead and then went on to remove the late fee and said that it wouldn’t be reported to the credit bureau. Woo hoo!

Step 4:

Never pay just the minimum payment required. Paying the minimum payment is a joke and you’ll get no where fast doing that.

Step 5:

Get organized. There’s nothing like beating the finances companies at their own game using their money! Its sweet! But only if you organize your information to know when each promotion ends, check in with the bank/finance company once every 3 months to make sure everything is on schedule and voila, you’ve beat them at their own game.

Let’s Review:

Understand the terms of your finance agreements before you sign it
When utilizing a No Finance Charges for 12 months!/12 Months Same as Cash promotion divide the payments by the months allotted and pay it off within that time, ideally sooner.
Make every bill you pay automatic.
Only take on a promotion like this if you know that you’re able to make the monthly payments needed to avoid finance charges.
Get organized. Beat them at their own game. Set it and check up on it just to make sure the payments are going as scheduled.

Tip: Only take on a promotion like this if you know that you’re able to make the monthly payments needed to avoid finance charges.

Checkmate bishes!