The biggest concern of people approaching retirement today is that they will outlive their savings. The current expectation is that
4% of households will retire totally Self-Reliant, therefore most people will be dependent on retirement money that is
outside of their control, like Social Security. The reason that they don't have control of their retirement is because they have
failed to save up the money that they will need to live off of.
As explained in the "Lifestyle and Debt" section, many people never have any funds available to invest in themselves because
they bought the most expensive car or house that the bank would let them have. They have nothing left after making their bigger than
necessary payments while racking up credit card debt to support their impulse buying.
In our humble opinion, our country's love affair with debt is largely due to a serious lack of Financial-Literacy training coupled with the
barrage of false information from people hoping to sell them something that they don’t need. And then there is the misinformation coming
from politicians and government officials who benefit from misleading you into voting for them and backing their programs. One example
of misleading information is from mortgage companies trying to sell debt to anyone they can:
Renting vs Owning
People are constantly told that, "owning a home is better than renting because you never get your rent back."
The money lenders push the idea that buying a home is "always" an investment and that the house will "always" sell
at a price that covers all of your costs, payments, and then some so you'll walk away with money in your pocket.
What the lenders tell you is that this "claim" is based on the assumption that housing prices will always go up. However, the
reason it is called the Housing Market is because home prices fluctuate like in the stock market. Nobody knows if a home will
be worth more when one needs to move or cash in on it, and in the last several years we've seen several housing market crashes
resulting on people being upside-down on their home loans (i.e., the loan is bigger than what the house will sell for).
Something else the lenders don't spend very much time talking about is the interest on the loan. While most people are aware that
their initial payments are mostly interest, they typically don't understand what that looks like. In fact, very few people
understand how an amortized loan works.
For example, for the first 5 years of a loan your payments will be about 80% interest and 20% principle. That means that out of an
$800 payment only $160 actually goes to paying off the loan.
The mathematical truth is that a disproportionate amount of the interest is paid early in a loan. In a typical 30 year
loan you will pay a quarter of the total interest in the first 5 years and two-thirds of the interest at the half-way
point of the loan.
Unfortunately, the trend is for people to refinance or buy a new home every 5 years, which is when you're mostly paying interest.
This is obviously counter-productive to getting out of debt and building an effective retirement, but exactly what the banks want
and try to entice you to do.
The next misdirection that Lenders are frequently guilty of is not telling you how much the loan
is really going to cost.
They don't like mentioning the fact that if you have a 5.5% interest rate then you will eventually pay twice the original cost
of the home and at 9.5% you pay triple the original cost of the home.
These and some other important numbers are in the federally required
"Truth in Lending" document, including
1) the APR (Annual Percentage Rate), 2) the amount financed, and 3) the total payment. The APR is the real interest rate and
will always be more than the bank rate that was quoted. The APR is bigger because it includes all of the fees, charges, and
"points" like the Loan Origination fee - what you pay the bank to get the loan, typically around $3,700.
(Note - sometimes a lender will claim that there are no up-front or closing costs, but that probably
means that the costs are buried somewhere in the loan and you will be charged interest on them. This means that the
loan will will cost you more in the long run and is just another way the systems gets more out of you.
The other two important numbers prominently featured at the top of the "Truth in Lending" report are: 1) the "amount financed",
which is the total interest that you will pay, and 2) the "full amount" that you're scheduled to pay over the course of the
loan.
We've been involved in a number of these transactions and our experience has been that these numbers are often "glossed over"
at closing because by the time people finally got to the "closing" they are so beaten down by the process that all they really
want to do was get the papers signed and take "ownership" of the home, regardless of the "REAL" cost.
The person facilitating the "closing" knows this and wants to get you through this final daunting exercise as quickly and
painlessly as possible, for "everyone's" benefit.
You're supposed to get a preliminary copy of the closing papers prior to the closing and we feel that it would be wise for you to take
a good look at the numbers so that you'll know how much the loan is really costing you. This is a good time to determine
what your total interest paid will be for the first 5 years will be.
Interest Payments on a $165,000 home
| APR | Total Interest at 5 yrs | Total Loan Interest | % of Principle | Total loan cost |
| 4.0% | $29,659 | $118,635 | 72% | $283,635 |
| 4.5% | $33,990 | $135,960 | 82% | $300,960 |
| 5.0% | $38,445 | $153,780 | 93% | $318,780 |
| 5.5% | $43,065 | $172,260 | 104% | $337,260 |
| 9.5% | $83,614 | $334,455 | 203% | $499,455 |
The final potential problem with owning a home is that if and when you need to move, you may have to sell the home or risk serious
financial consequences. It's not been uncommon for homeowners to find themselves paying two mortgages or a mortgage and a rent
payment while trying to sell the home. Some people have had to walk away from a home to avoid bankruptcy when they couldn't
maintain both payments.
In conclusion, it is important to point out that the purpose of this section was not to say one shouldn't
ever
take out a loan to buy a house, car, or something else on credit, but to make you aware of some little known factors.
One thing that we've learned in the financial world is that there is no such thing as One-Size-Fits-All.
What this means is that owning a home is not right for everyone, nor is renting because there are pro's and con's to both.
Buying a home is a big commitment and you need to carefully evaluate your situation and then choose what works best for you.
We just want you to be aware of some of the aspects of owning your own home so you can make a better choice.
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What should your debt ratio be?
The borrower's DTI is important to lenders because it gives the lender an idea of how much additional debt someone may be
able to handle. A DTI ratio of 33% is generally acceptable, which makes one wonder how having
one-third of one's
income tied up in debt is OK? In fact, lenders are often willing to in-debt you to a DTI of 36%. Inexplicably, some
government loans allow a ratio as high as 43%. It seems that they are more interested in getting their hooks into you,
than for your welfare.
What's disturbing about these high ratios is that most people are also paying about a third of their
income to taxes and than having to pay for everything else (food, gas, utilities, insurances, entertainment, clothes, medical,
car maintenance, retirement, etc.) from what's left of the check.
It's important to remember that just because the lenders are willing to in-debt a third or more of your income, that
doesn't mean that you should borrow that much. When you do, you are literally trading away your future well-being
for a bigger house, car, or _______ today (fill in the blank).
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