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Perpetually Poor Or Willingly Wealthy ? It's The Amortization, Silly !

By
Commercial Real Estate Agent with Matthews Capital Markets NMLS 2415712

yogi"It's deja-vu..all over again."

- Yogi Berra

When you're on the wrong side of 40, you possess the luxury of having seen things before.  In many cases, it may be the third or fourth time you see them.  The recent flurry of "responsible lending posts", here on Active Rain, is no different than the criticism levied at the banking industry in the early 90's.

The virtues of an amortized loan can be extolled like some sage nostalgic advice.  The truth is that amortized loans are fantastic...if you are a perpetually poor person.  Let me explain what I mean.  When I say "poor", I mean undisciplined.  This means that you generally can not be trusted with determining your own destiny.  It means that you won't establish a side investment account to invest the difference between a fully amortizing and alternate amortization schedule.  If this is an apt description of your savings and investment habits, go with a 30 year fixed rate, fully amortizing loan.  Better yet, go with a 15 year, fully amortizing loan.  Work really hard to accelerate the amortization on your home with bi-weekly payment programs or money merge accounts.

Expect, however, to be perpetually poor in retirement.  Oh, you'll have a fully paid off house but you'll be broke.  Does that sound doubtful?  Ask anyone who's been used their primary residence as their retirement plan (you know who I'm talking about).  They've probably rationalized their Depression Economics thinking by selling the homestead and retiring to a more "retirement-friendly locale" (READ: cheaper).

Is that REALLY your dream in life?  To pay off an asset you can sell so that you can trade DOWN in retirement?  Maybe you can move to a far-off country to live like a king in retirement!  Of course, you'll complain that you never see your grandchildren because it costs a small fortune just to visit you.

That's not what the willing wealthy do.  The willing wealthy ...READ THE REST AT www.MortgageRatesReport.com


Comments(45)

Gary Miljour
American Financial Network, Inc. NMLS#207208 - Southern Pines, NC
Mortgage Originator NMLS Licensed in AZ and NC

Brian-  For your earlier comment back 

"have mixed feelings about that, Gary.  The "forced savings plan" can be dangerous without liquidity.  One slip-up and it's "so long house".  The real message here is for the perpetually poor to take control, change their habits and willingly strive for wealth.

Nobody wants to be perpetually poor.  Proper planning and guidance can change that status."

Ok, I re-read your post again, and I think your key work is Discipline.  I get it.

I deal with so many 1st time homebuyers and most have Not learned this word yet.  I advice and guide, but they do not always make the best decisions. 

Sep 11, 2007 03:53 AM
Anonymous
Brian Brady

It's all so complicated for me. I know....maybe I'll just go live with Ken Cook.:)

I'm thinking the same thing.  It definitely makes sense to read him, at the very least. 

Sep 11, 2007 04:09 AM
#27
Katie Evans
Keller Williams - Greenville, NC

LOVE THE PICTURE!

Sep 11, 2007 04:38 AM
Pete Tsakiris
Countrywide Home Loans a Division of Countrywide Bank, FSB - Saint Charles, IL
Great article Brian. Very well written.
Sep 11, 2007 04:59 AM
Robert Kerr
Kerr Financial - Warwick, RI

Brian offers good advice, for a predictable, rising market. But today's market - not just housing, but the entire economy - is far from predictable and arguably very sick and degenerating rapidly.

As with most financial strategies in the real world, there are no sure things, no easy binary choices, like "perpetual poverty" or "willing wealth" that are as simple as presented here.

I'll simply close by reminding everyone that no one ever lost all their assets from too little debt.

Caveat Emptor.

Sep 11, 2007 06:08 AM
Joshua Talayka
Chase Internatinonal - Reno, NV
Great post Brian.  
Sep 11, 2007 07:11 AM
Kate Bourland
Marketing with Kate - Redding, CA
Onlilne Marketing Mobile Marketing

As usual throught provoking and great information.  This is not for everyone but for the diciplined and determined it's a great strategy!

thanks

Sep 11, 2007 08:07 AM
Anonymous
Brian Brady

Brian offers good advice, for a predictable, rising market. But today's market - not just housing, but the entire economy - is far from predictable and arguably very sick and degenerating rapidly.

I think I'd rather have the property leveraged to the gills, with an appropriate side investment account, in an unpredictable market; it makes the bank your "partner" more than your lender. 

The first rule of money (according to Ric Edelman)- the amount of your mortgage has absolutely no bearing on the value of your home.  Housing values are determined by buyers and sellers, in an arms-length transaction. 

I'll simply close by reminding everyone that no one ever lost all their assets from too little debt.

If a long-term decline in property prices are the norm, you should sell the property, not pay it down.  If you're trying to ride out a cycle, what better friend could you have than liquidity? 

 


 

Sep 11, 2007 09:20 AM
#33
William Johnson
Retired - La Jolla, CA
Retired
Hello Brian, Another great post that more clearly explains why 95% of citizens at retirement are broke or near broke. Very good explanation of leveraging assets.
Sep 11, 2007 09:22 AM
Anonymous
Brian Brady

I have even fought with my parents about this issue and how they're ill prepared to retire since their house is free and clear!

So did I, David- back in 1992.  Fortunately, they listened to people far smarter than I and took the advice I'm offering today.  

I'm so much more Warren Buffet than Robert Kiyosaki, David.  Leigh Brown hit the nail on the head when she mentioned no consumer debt.  Prudent use of leverage, using ratios cited here, can optimize your assets and diversify property equity into various asset classes; it can actually reduce the volatility on your net worth.

N.B (to all) - I never said to borrow against your home to buy a Hummer; I said to borrow against your home to diversify into more liquid assets.  If you believe we're in a LONG TERM deflationary environment, you shouldn't own real estate, nor stocks, nor keep money in the bank for that matter.  You should own long-term government bonds. 

If US government bonds default, you should own guns because people will be stealing food from each other.

Sep 11, 2007 09:36 AM
#35
Sharon Simms
Coastal Properties Group International - Christie's International - Saint Petersburg, FL
St. Petersburg FL - CRS CIPS CLHMS RSPS
Borrow money to buy appreciating assets - never borrow money to buy depreciating "stuff" .
Sep 11, 2007 11:46 AM
Tracy Santrock
Santrock Realty Group Inc. , - Cary, NC
Raleigh - Cary Broker

My hubby came from the depression era......He has no concept of a loan.  Obviously he's not American.  this is not the American way.

Sep 11, 2007 12:33 PM
Bob & Carolin Benjamin
Benjamin Realty LLC - Gold Canyon, AZ
East Phoenix Arizona Homes
Interesting post. Thanks for sharing with us all.
Sep 11, 2007 02:07 PM
Aaron Gordon
Branch Manager - Las Vegas, NV
Home Loan Consultant - Las Vegas, NV

Brian--- This is so true and the very best financial advise there is.  

HOWEVER, the challenge here is that more than a few AR agents will email this to their clients, most undisciplined, who will enter programs like this, like they already have, and further muddy the foreclosure waters of today tomorrow.  

This great post should come with a bold warning label. 

WARNING:  If you save less than a minimum of 10% of your gross salary each year, please disregard until the day that you commit to do so.

Sep 11, 2007 02:15 PM
Anonymous
Eric Bunn

I'm hoping they start teaching this in school so we don't see relapses.  My parents are boomers and they still cling to the Depression Economics and that's all I heard when I was a kid.  Luckily, knowledge and wisdom are out there if you just look. Thanks for the info.

Sep 11, 2007 02:54 PM
#40
Rob Robinson- Lehigh Valley PA
Bertrum Settlements (Title & Abstract) - Allentown, PA

lol Aaron you are correct.  If you have not maxed out your 401K savings at LEAST with matching employer contributions... do not pay any additional towards your house.

I was AMAZED at the 'intelligent' people I worked with in a previous life that didn't 'get' how a $0.50 match per dollar up to 6% was a GREAT deal. Unbelievable.

I've talked to people that scoffed at $0.10 per dollar matching by employers. I'm like "Dude, that's 10% - tax deferrered",  Amazing. 

Sep 11, 2007 09:56 PM
Chris Lengquist
Ad Astra Realty - Olathe, KS
Kansas City Real Estate Investing
Brian, I just felt the need to link to this post.  Thanks for your permission.  :)
Sep 11, 2007 10:27 PM
Ken Cook
Content, coding, marketing, host. - Marietta, GA
Content Marketer/Creator

Okay - everyone, come on and live with me. I need the cleaning help. Brian you may find this interesting - as I was reviewing the visitor logs from our main website I noticed two instances of searches which were roughly "why is mortgage interest front loaded".

I can't wait until I see an advertisement for a 30 Year Same As Cash Mortgage Option. (Some low life scum national lender who advertises on cable 24/7 and is having a very hard time would actually concoct something like that just to get their phone to ring.)

Sep 12, 2007 01:42 AM
Rob Robinson- Lehigh Valley PA
Bertrum Settlements (Title & Abstract) - Allentown, PA

Dear Ken... i'm a bed wettter.

 

Just thought you'd want to know. My family should be there in about an hour.

Sep 12, 2007 02:23 AM
Scott Cowan
RE/MAX Professionals - Olympia, WA

Brian-

 

Another well written post. Thank you for sharing your thoughts with all of us here on AR. I must admit that we have not be following this great advice. I will be sitting down with my wife and going over this topic to see if we can get on the track to not retire broke. Thanks for more data for our conversation.

Best,

Scott 

Sep 12, 2007 10:42 AM