"GETTING RICH IS SIMPLER THAN YOU THINK"-MSN

[Bretsky]

Getting rich is simpler than you think

Blend three ingredients -- a paycheck, discipline and time -- and, you, too, can be a millionaire. It's not always easy, but it's simple. And you have no excuse not to do it.

Here is the single most important thing you will ever hear about investing: Getting rich is simple.

Not easy, but simple.

And here is the second most important thing you will ever hear about investing: You have no excuse not to do it.

Only three ingredients are needed: income, discipline and time. Chances are, you already have two of them, income and time. All you need to do is add the third, discipline. And armed with the following knowledge, that key third ingredient may be a lot easier to find.

Here's how it works: Say you start with nothing, invest $500 (of your income) a month (a healthy discipline), and let your money ride (over time) in diversified investments. Long term, the stock market returns at least 10% annually. Assuming a 10% return, you'd have $102,000 after 10 years, $380,000 after 20 years, and $1.1 million in 30 years.

Here's a similar scenario: If you start with a nut of $50,000 and add only $250 per month, you'd have $180,000, $516.000 and $1.4 million after 10, 20, and 30 years, respectively. All this happens through the power of regular investing and a simple-but-powerful concept called compounding.

Compounding
What is compounding?

Compounding is the reinvestment of the interest you receive from the money you set aside. For example, if you invest $1,000 and earn 10% interest on your principal at the end of each year, you'll get in $100 interest at the end of the first year. If you reinvest that interest, the second year you would start with $1,100, and thus would earn $110 interest. If you stay with it, you'd more than double your money every eight years.

"Compounding," Albert Einstein said, "is mankind's greatest invention because it allows for the reliable, systematic accumulation of wealth." Einstein was a smart man. But you hardly have to be a genius to make this concept work for you.

The real magic of investing comes when you combine the surprising power of compounding with continuous and regular investments -- in other words, discipline.

The best way to make these continuous investments happen is by setting up an account with a broker or mutual fund that automatically deducts a fixed amount from your bank account every month. "Automatic" is the operative word here. Trust me, if you don't set it up that way, it won't happen. Instead, you'll end up pouring money in when the market is soaring and skipping payments when it's heading down. Eventually you'll get discouraged and give up.

Dollar-cost averaging
The process of continuously investing a fixed dollar amount is called dollar-cost averaging -- a term that sounds much more technical than it is. Through dollar-cost averaging, you'll end up buying more shares when a stock or fund is down, and fewer when it's up. For instance, say you're investing $500 monthly in a stock trading initially at $50 per share; so the first time, you buy 10 shares. If the next month the stock moves up to $62.50 your regular purchase will net you only eight shares. However, if the stock drops to $41.67, you'll get 12 shares (not including any transaction fees).

It's easy to set up regular-investment mechanisms, thus harnessing the power of dollar-cost averaging. Mutual funds are the traditional way. But there are other outlets, as well, that allow you to apply the strategy with individual stocks or exchange-traded funds, which are baskets of stocks that identically track standard market indexes, such as the Dow Jones Industrial Average ($INDU).

Risk
Sure, investing in the stock market has risk. There's always the chance the market will go nowhere for the next 20 or 30 years and you'll end up no better than where you started. But there's risk in everything, even CDs.

With CDs, your original investment isn't in danger. Most CDs are insured, and the federal government will step in and make you whole, even if your bank goes belly up.

But a problem crops up when something more sinister surfaces: inflation. At this writing, inflation, running at around 2%, is considered relatively benign. But is it?

Let's do some math. Your real return is the interest you receive less the inflation rate. If your CD is paying 3% and the inflation rate is 2%, you're only making 1% in real terms. If inflation takes off, say to 5%, your CD will probably be paying around 4%. In inflation-adjusted terms, you've lost 1%.

But it can get worse. Inflation hit 14% in the early 1980s. In such times, CDs and similar fixed-income investments don't even come close to the inflation rate, meaning you're losing serious money, in real terms.

By contrast, assets such as real estate and stocks tend to move with prices, and, over time, the stock market has outpaced inflation. For instance, in the 20-year period ending Dec. 31, 2001, the cumulative return of the market, as measured by the S&P 500 Index ($INX), was 1,606%, compared to 88% cumulative inflation over the same period.

What's the point? Yes, there's risk in investing in the market, but the odds are that continuous, regular investing combined with the power of compounding will make you rich.

The odds
If you count yourself a member of the "I want it now" generation, the idea of waiting 20 or 30 years to get rich probably sounds like a dumb idea.

Sure, there are faster ways to get rich. You could win the lottery, or pick the next Intel (INTC, news, msgs) or Wal-Mart Stores (WMT, news, msgs). But don't quit your day job just yet. Your chances of winning big in the lottery run around 15 million to 1, at best.

Meantime, naturally, you would be sitting pretty if you had had the foresight to plunk significant cash into Intel or Wal-Mart 20 years ago. But consider this: You would have lost money if you'd picked Advanced Micro Devices (AMD, news, msgs) instead of Intel, and you'd be broke if you'd picked Kmart (SHLD, news, msgs) (which ended up merging with Sears Roebuck) instead of Wal-Mart. In both instances, your retirement plans would be history.

Here's the bottom line, like it or not: The fate of your retirement, your comfort in older age, probably lies in your commitment to the concepts laid out in the paragraphs above. For the vast majority of us, wealth creation is a slow and steady -- and powerful -- process. The tortoise almost always beats the hare.

It's not easy. But it's very, very simple.

[Partial]

Great article! Is that what you do Brett? Automatically add 500 to the pot of a diversified set of stocks each month?

I feel like I could easily chip in the 500 a month for 30 years to end up with a million dollar by 50.

Now, would it be a better idea to put that money towards a mortgage or put 500 bucks a month into the stock market through an IRA?

[falco]

What?? Compounding interest?? Whoever heard of such a thing....:roll:

[Joemailman]

Doesn't that just make things more complicated?

I bought a Powerball ticket yesterday. Doesn't that count for anything?

[the_idle_threat]

I think the article's point is that you need to buy $500 of powerball tickets per month. Dollar loss averaging, or something like that. :P

[Bretsky]

Great article! Is that what you do Brett? Automatically add 500 to the pot of a diversified set of stocks each month?

I feel like I could easily chip in the 500 a month for 30 years to end up with a million dollar by 50.

Now, would it be a better idea to put that money towards a mortgage or put 500 bucks a month into the stock market through an IRA?


I should post more of these; every weekend I try to spend an hour either researching stock ideas, investment tips, or mortgage articles and staying current on fiscal ideas.

Myself, I have family and am doing alright investment wise. Between the better looking half and myself (we both have full time decent jobs), we are vesting over 1,000 per month into our 401K plans. The plans invest in a diversified set of mutual funds.

Your last point is debateable; if you go pure money and your only goal is becoming rich asap one could argue that living with cheap rent and packing the money away is the way to go. But reality is most will not do that. And if you end up getting married the odds of having two people embrace that strategy is even less.

And owning a home has many many more fringe benefits than pure money.
Pride of ownership, feeling like your money is going toward something that appreciates....ect

To me, common sense dictates your answer to be specialized toward what each person wants to accomplish.

Myself, I bought my first home one year after marriage and have no regrets at all. Bought a little ranch. Had a 15Yr Mortgage and made a bunch of profits off sale of home one to get a sizeable home on round two. This will probably be our last home until we are too old and then we'll probably seriously downsize.

For most people, they are not disciplined enough to pack money away if renting so IMO they are better off buying a home when they are ready and debt free for the most part. We'd have fallen into this category. In reality, owning a home helped educate us into watching our spending habits; when we rented we thought nothing of pissing money away on lots of booze, restaurants, entertainment....etc...

There are many ways to get to your end goal. Most also want a decent sized home and they get there by buying home one, letting it appreciate, and using equity from sale of home one five years later as down payment for a bigger home you can grow in or retire in. That ended up being my strategy, and I have no regrets up to this point.

[LL2]

Bretsky you will be doing a great thing posting these articles to get people to think about investing and managing their money. Do you ever go to www.fool.com? I think it's a great website where you can learn investing basics. I personally subscribe to their Champion Funds newsletter. It's really good, and sure the others are too.

Also, investing in lottery tickets is not a wise idea folks? Out of that equation above TIME is the most valuable. Once it's gone you can't make it up. The younger you investing start the better off you are. I hope to teach my kids to start when they are in their teens. I didn't start until I was 28. I know people that still haven't started and they are in their mid-30's. When you start late you lose that valuable tool of your money compounding. The Rule of 72 says whatever interest rate you get divide that into 72 and that is how long it will take for your money to double. If you have $50,000 and are getting a 10% average return your $50,000 will become $100,000 in 7 years. The more time you have the more often your money will double.

[Scott Campbell]

There's a difference between becoming a millionaire and becoming rich. The million dollar mark isn't the magical finish line that it used to be. You certainly can't retire at 40 on it.

Partial, I think at your age you should re-calibrate and be shooting for $5M.

[oregonpackfan]

Bretsky,

You make some valuable insights with your articles. Investing at an early age for retirement is crucial in today's world because the era of company sponsored pensions is coming to an end. Financially planning for retirement is being left almost exclusively up to the individual.

I believe I recently saw an article where 50% of American adults have not save a dime for their retirement. Sadly, this figure includes many Baby Boomers who will be retiring in the next 5-10 years. Trying to retire on just Social Security will just not financially cut it. Our country may see many more seniors below the poverty level 10-20 years from now.

While your goal of investing $500 a month is laudable, most Americans lack both the wherewithal and the discipline to do it.

IMO, the topic of money management and investing should be a mandatory class in the senior year of high school. Most teens are not provided any sort of financial guidance by their parents.

Keep the advice coming, Bretsky! :)

[Bretsky]

Bretsky,

You make some valuable insights with your articles. Investing at an early age for retirement is crucial in today's world because the era of company sponsored pensions is coming to an end. Financially planning for retirement is being left almost exclusively up to the individual.

I believe I recently saw an article where 50% of American adults have not save a dime for their retirement. Sadly, this figure includes many Baby Boomers who will be retiring in the next 5-10 years. Trying to retire on just Social Security will just not financially cut it. Our country may see many more seniors below the poverty level 10-20 years from now.

While your goal of investing $500 a month is laudable, most Americans lack both the wherewithal and the discipline to do it.

IMO, the topic of money management and investing should be a mandatory class in the senior year of high school. Most teens are not provided any sort of financial guidance by their parents.

Keep the advice coming, Bretsky! :)

Thanks for the kind words OregonPackfan; I'd certainly agree that more than 50% are not planning for retirement and as I think more and more poeple will have to work well past their hopeful retirement age than the past

Agree that the $500 per month is lofty; I could not have did that in my earlier career years. But reality is, everybody should be deciding on a figure. Whether it's $50 a month or $100 a month of $25 a month, what's most important is to start the habits early. You can always increase the money later; what's hard is getting the discipline to start.

Completely agree about money management; I'd love to see high schooler required to taking a course called "Money Accumulation", and that should outline everything from mutual funds to IRA's to compound earnings to the importance of establishing credit so you are able to attain loans in the future.

BTW, I'd never take any of my views or experiences as advice. I'm just sharing ideas and in threads like these I'm honored if one poster could take an idea I share to better themself and I'd also hope I can steal a couple of ideas from others as well.


Cheers,
B

[Patler]

Those articles are good, but I think young people with student loans to pay, families starting, etc. are often intimidated by the "$500 per month" and other similar large amounts they do not have. What they need to focus on is the value of STARTING, no matter how small, and increasing as they can. When the salary increase comes, keep a little and invest some to increase savings for retirement. Or, take your income tax refund if you get one and put it in your retirement account.

Even small amounts add up. Starting at age 22, investing $100 per month at 10% yields about $640,000 at age 62. If you continue for just 5 more years at age 67 the $680,000 will become $1,060,000. Your actual cash contributions would be only $48,000 and $54,000 respectively.

The key is LONG TERM investing. It is never too early to start, and there is no amount too small to start with. Starting is hard, increasing the amount by committing just a portion of future raises is easy. After a few years, after you see the balance growing and think about what it can mean later in life, you really appreciate it.

[Partial]

Now here is a question that I have been striving to get an answer for for awhile.

I know RG says that he would probably max out the IRA each year before putting that money down on his mortgage when he is young. This seems like a great idea since I just don't see the value of my house going up by 10% a year.

However, what about student loans and stuff? When I consolidate them, what sort of interest rate do you normally get? Should I just put that money down for a year or two and knock those out completely versus putting the money in the stock market? It would likely be less of a headache just to pay them off right away and have one less bill to pay but I would also have less money growing at 10%.

Also, straight out of college is it a better idea to save up money for the down payment versus investing?

What is the order that I should knock out my bills?

[Scott Campbell]

Also, straight out of college is it a better idea to save up money for the down payment versus investing?



I think you're making too much out of that question. You can probably be successful both ways. The important thing is to manage your burn rate. Save more - consume less. That's especially important when your young.

In my opinion, the return % on your investments isn't nearly as important when you're young and have little net worth. Working on your rate of savings is much more impactful.

[oregonpackfan]

Partial,

It sounds like you have a good financial head on your young adult shoulders.

In answering your questions, perhaps you should consider the advice of a fee-based, rather than commission-based, Certified Financial Planner to answer your specific questions. He(she) could provide you with more comprensive answers and guidance than semi-knowledgable guys like me.

I am glad you are considering saving/investing at a young age. I have never heard of a wealthy individual claim, "I started investing at way too young!"

[Scott Campbell]

While your goal of investing $500 a month is laudable, most Americans lack both the wherewithal and the discipline to do it.


I think the number completely depends on the circumstances. The couple with one job that struggles to save $400 a month could be considered more disciplined that the dual income no kid couple that easily puts away $500/mo. but could be putting away $800/mo.

I agree with Patler. It's all about discipline. Save till it hurts, and then save a little more.

[Scott Campbell]

In answering your questions, perhaps you should consider the advice of a fee-based, rather than commission-based, Certified Financial Planner to answer your specific questions. He(she) could provide you with more comprensive answers and guidance than semi-knowledgable guys like me.


I agree to a point. But you don't need a CFP to tell you about the advantages of a Roth, 401K or home equity. Most people can take care of the no brainer stuff by themselves.

Save the professionals for the truly high degree of difficulty stuff.

[retailguy]

There's a difference between becoming a millionaire and becoming rich. The million dollar mark isn't the magical finish line that it used to be. You certainly can't retire at 40 on it.

Partial, I think at your age you should re-calibrate and be shooting for $5M.

While it is true that $1m isn't what it used to be, at a 5% return that's still $50 grand a year in perpetuity. You can easily invest in a mutual fund that'll average 10%, many average more over a 10 year period.

The enemy in american life is NOT INVESTING, or anything else, it's PLAIN and SIMPLE - BORROWING MONEY.

If you didn't have a car payment, and lived in a "common sense" house that you could pay for in 15 years, didn't have credit card debt and paid CASH for anything consumable, THEN how much money could you save?

There is a reason that Bank of America is the 12th largest corporation, and it IS NOT because they look out for the "little guy".

"Gotta have it NOW" has costs.... BIG ONES!

[GrnBay007]

I agree with Patler. It's all about discipline. Save till it hurts, and then save a little more.

All great advise! But then also please be smart enough to retire at an age you can still enjoy yourself. I've seen far too many people that keep staying that extra year for the money....one year leads to an extra 6-7. I've seen so many people retire and then die soon after. What is the sense of all the saving and discipline if you never get to enjoy it? My Dad was lucky enough to enjoy 20+ years of retirement....said he never regretting retiring at a younger age.

[Bretsky]

There's a difference between becoming a millionaire and becoming rich. The million dollar mark isn't the magical finish line that it used to be. You certainly can't retire at 40 on it.

Partial, I think at your age you should re-calibrate and be shooting for $5M.

While it is true that $1m isn't what it used to be, at a 5% return that's still $50 grand a year in perpetuity. You can easily invest in a mutual fund that'll average 10%, many average more over a 10 year period.

The enemy in american life is NOT INVESTING, or anything else, it's PLAIN and SIMPLE - BORROWING MONEY.

If you didn't have a car payment, and lived in a "common sense" house that you could pay for in 15 years, didn't have credit card debt and paid CASH for anything consumable, THEN how much money could you save?

There is a reason that Bank of America is the 12th largest corporation, and it IS NOT because they look out for the "little guy".

"Gotta have it NOW" has costs.... BIG ONES!


To expand on this, in the home industry I see customers with the "gotta have it now" mentality making silly decisions all the time.

Now right or wrong, understand that I am in the school of thought that buying a home is a good investment.

But as many are building their equity, others, instead of paying their home loan down, develop the "gotta have it now" mentality with many goodies that are not necessities.

Gotta have that Name Brand 65" HDTV for the new house
Gotta have the New High End New Washer and Dryer
Gotta get a newer car
Gotta improve this and replace this and that in the house.

But have no excess money and barely enough disposable income to do this

But they gotta have it now...........

So consumers come in and get a Line of Credit at Prime (8.25% or Prime Plus 1 depending on their credit..etc).

Then they find more goodies to get. Up goes the credit cards.

And before they know it they are incapable of saving anything and are buried in debt.

Then they borrow from their 401K; and the revolving circle of troube is in full force.

A few years later they come to see me to consilidate everything. And then they begin all over again.

This is what NOT to do.

Like packing money away in investments (a good habit), this cirle of terror develops into a bad habit for a greater % than those saving.


Cheers,
B

[Bretsky]

Now here is a question that I have been striving to get an answer for for awhile.

I know RG says that he would probably max out the IRA each year before putting that money down on his mortgage when he is young. This seems like a great idea since I just don't see the value of my house going up by 10% a year.

However, what about student loans and stuff? When I consolidate them, what sort of interest rate do you normally get? Should I just put that money down for a year or two and knock those out completely versus putting the money in the stock market? It would likely be less of a headache just to pay them off right away and have one less bill to pay but I would also have less money growing at 10%.

Also, straight out of college is it a better idea to save up money for the down payment versus investing?

What is the order that I should knock out my bills?


First off, if there are any high interest credit cards it's best to knock those off.

To be honest, I don't have a good command on the student loan industry.
I've seen rates from 3.99-7.99 on these and honestly I don't know what differentiated the clients.

If I'm at 3.99 and can afford a house, that does not hold me back from going forward or putting that money in investments over the loan. 7.99 is more debateable.

The days of houses going up 10% a year are not around right now; in my area they are still appreciating 3-4%.

RG is not a big fan of buying a house unless you have 20% down and can immediately do a 15Yr Fixed Rate Loan; we just agree to disagree on that one because I don't think that's at all practical in today's world and that strategy would not have worked for me at all.

I keep going back to believing if you have the basic concepts down and develop some sort of plan and execute it, you will be successful.

Because we are all in differing circumstances so there is no exact plan for all


Cheers,
B

[Patler]

However, what about student loans and stuff? When I consolidate them, what sort of interest rate do you normally get?

The interest rate you get for consolidating student loans depends on the interest rates and balances of the loans being consolidated. It's a blended rate calculated from the existing loan terms.

The biggest advantage in consolidating is that the interest rate is then fixed. The original student loans have variable interest rates (which for the last 4-5 years has meant constantly increasing!). For people who were borrowing about 5-8 years ago, the interest rates were extremely low. By consolidating, they were able to lock in the low interest rates for the life of the loans. On of my kids had loans as low as 3% and consolidated about 3-4 years ago at a fixed rate of 4%. I understand current rates are somewhere around 8% on originating loans.

[Scott Campbell]

Gotta have that Name Brand 65" HDTV for the new house
Gotta have the New High End New Washer and Dryer
Gotta get a newer car
Gotta improve this and replace this and that in the house.


Agree with everything your wrote. However I would make a distinction between the first 3 items you list and the last one. I've always catagorized spending as either "consumption" or on a "appreciating asset". In the world of personal finance, all spending is not equally evil. In my home, consumption spending is universally bad. But spending on the purchase of an appreciating asset - not so bad. You may just be rearranging $$$ on your balance sheet. A great example of this is the do it yourselfer purchasing materials for a home remodeling project. If the materials cost $20K, the labor costs $10K, your home appreciates $25K, and you did the labor - you come out $5K ahead on your personal balance sheet. It has nowhere near the negative effect of spending $20K on a car that will depreciate down to 0 over time.

Of course even in the case of good spending, you can't go crazy and create cash flow problems.

[Scott Campbell]

All great advise! But then also please be smart enough to retire at an age you can still enjoy yourself.


Great advice. I tell my Dad all the time that retirement is wasted on old people. He then waves his Social Security check in my face and reminds me that I'll probably never get to cash one.

[Partial]

Now here is a question that I have been striving to get an answer for for awhile.

I know RG says that he would probably max out the IRA each year before putting that money down on his mortgage when he is young. This seems like a great idea since I just don't see the value of my house going up by 10% a year.

However, what about student loans and stuff? When I consolidate them, what sort of interest rate do you normally get? Should I just put that money down for a year or two and knock those out completely versus putting the money in the stock market? It would likely be less of a headache just to pay them off right away and have one less bill to pay but I would also have less money growing at 10%.

Also, straight out of college is it a better idea to save up money for the down payment versus investing?

What is the order that I should knock out my bills?


First off, if there are any high interest credit cards it's best to knock those off.

To be honest, I don't have a good command on the student loan industry.
I've seen rates from 3.99-7.99 on these and honestly I don't know what differentiated the clients.

If I'm at 3.99 and can afford a house, that does not hold me back from going forward or putting that money in investments over the loan. 7.99 is more debateable.

The days of houses going up 10% a year are not around right now; in my area they are still appreciating 3-4%.

RG is not a big fan of buying a house unless you have 20% down and can immediately do a 15Yr Fixed Rate Loan; we just agree to disagree on that one because I don't think that's at all practical in today's world and that strategy would not have worked for me at all.

I keep going back to believing if you have the basic concepts down and develop some sort of plan and execute it, you will be successful.

Because we are all in differing circumstances so there is no exact plan for all


Cheers,
B

Could you explain the bolded more?

[Bretsky]

Now here is a question that I have been striving to get an answer for for awhile.

I know RG says that he would probably max out the IRA each year before putting that money down on his mortgage when he is young. This seems like a great idea since I just don't see the value of my house going up by 10% a year.

However, what about student loans and stuff? When I consolidate them, what sort of interest rate do you normally get? Should I just put that money down for a year or two and knock those out completely versus putting the money in the stock market? It would likely be less of a headache just to pay them off right away and have one less bill to pay but I would also have less money growing at 10%.

Also, straight out of college is it a better idea to save up money for the down payment versus investing?

What is the order that I should knock out my bills?


First off, if there are any high interest credit cards it's best to knock those off.

To be honest, I don't have a good command on the student loan industry.
I've seen rates from 3.99-7.99 on these and honestly I don't know what differentiated the clients.

If I'm at 3.99 and can afford a house, that does not hold me back from going forward or putting that money in investments over the loan. 7.99 is more debateable.

The days of houses going up 10% a year are not around right now; in my area they are still appreciating 3-4%.

RG is not a big fan of buying a house unless you have 20% down and can immediately do a 15Yr Fixed Rate Loan; we just agree to disagree on that one because I don't think that's at all practical in today's world and that strategy would not have worked for me at all.

I keep going back to believing if you have the basic concepts down and develop some sort of plan and execute it, you will be successful.

Because we are all in differing circumstances so there is no exact plan for all


Cheers,
B

Could you explain the bolded more?

It's certainly ideal if somebody can put 20% down on a home. But that would not have worked as well for me .

It's real simple; when my wife and I were both working before home ownership we were free spenders. We went out to restaurants several times a week, and thought nothing of dropping a loot of money at the bars or entertainment events. Had little to no conscience for spending, and we were still able to set aside some money. Just not what we should have been
And with little or no spending conscience or pride of ownership in a home, we had no responsibilities and no worries.

The way we spended our money, it'd have taken us 3-5 more years to save 20% down for a home and we turned out far better for doing it sooner.

When we bought our first home, it taught us to become more frugal. We put our money into home improvements that allowed the home to appreciate more instead of the care free wining and dining world, and we learned a lot more fiscal responsibility from owning a home. We adjusted our lifestyle and paid attention to where money went.

We bought a very modest first home; paid it down about 40% and then sold that home and used the money made from that home sale to put 20% down on a significantly larger home. This will probably be our last home unless we downsized due to old age.

Buying that first home sooner rather than later was the better decision for us

[retailguy]

Bretsky,

Allow me to explain.... I give you an "A" for effort, but a "C" for execution! :D


I do believe that EVERY homeowner should put down 20% on a home, and furthermore should carry NO GREATER than a 15 year FIXED rate loan.

Failure to do that ignores RISK and that risk will bite you in the ass when you least expect it. Timing has the "benefit" of making it appear that risk doesn't exist. When Bretsky bought his home, the market was strong, rates were low, at historic lows and headed downward. Those items OFFSET the risk, more luck than plan, and so buying without 20% worked out well for him. He beat the risk. It doesn't always work out that way.

Recently, one of the biggest subprime mortgage lenders (New Century) went bankrupt because they had so many foreclosures that they couldn't service their own debt. Behind that bankruptcy are thousands of foreclosures of good people and good families WHO BOUGHT SOMETHING THEY WERE NOT READY FOR, OR COULD NOT AFFORD. Everyone talks about their home being a "blessing" and the "best investment" they'll every make. Think it is true for those folks who are in foreclosure?

How many of those foreclosures were due to adjustable rate mortgages or high second mortgages? The vast majority of them, of that I am sure. These people believed the American dream was "HAVE IT NOW". You don't need to plan. You don't need to save. There is a loan that I can qualify for.... Therefore, I can afford the house. Then, life happens, and their lives are screwed for the next 10 years, OR LONGER.

Bretsky says he "learned" to save by owning a home, and furthermore that he "learned" the value of building wealth by buying a home. I'd disagree with that, on my belief that the "habits" were present before they bought the home, but weren't being executed. They didn't learn it so much as they began to do it when they bought the house.

Markets change almost overnight, and RISK changes right with it. You have to plan for the future when you make a decision of this magnitude. Thousands of families didn't plan, and as a result went through foreclosure and possibly bankruptcy too. Their dream became a nightmare. Bresky's dream became a blessing. Timing and luck. That's the majority of the difference.

Partial, I firmly believe if you don't have a 20% down payment, and cannot afford a 15 year fixed rate mortage - YOU CANNOT AFFORD THE HOUSE. It may appear that you can, but most likely you cannot. You might get lucky and buy in the right part of town, or in the right market, so that the risk doesn't hit you like a baseball in the forehead, but, if you've got my kind of luck....

A home is a blessing, don't make it a nightmare. Plan and learn to save outside homeownership. Improve your chances of success and minimize your risk.

Hear this very clearly - THERE IS NOTHING IN THIS WORLD THAT YOU HAVE THAT I WANT IF I HAVE TO BORROW MONEY TO GET IT. NOTHING.

[Bretsky]

Failure to do that ignores RISK and that risk will bite you in the ass when you least expect it. Timing has the "benefit" of making it appear that risk doesn't exist. When Bretsky bought his home, the market was strong, rates were low, at historic lows and headed downward. Those items OFFSET the risk, more luck than plan, and so buying without 20% worked out well for him. He beat the risk. It doesn't always work out that way.


This is not true regarding the timing of my first home; I bought my first home 10 years ago. The 30 Yr Fixed Rate at that time was 7.75%.

I don't know about how strong the market was then; I was a teacher.

But the rates were not low at that point.

[Bretsky]

Recently, one of the biggest subprime mortgage lenders (New Century) went bankrupt because they had so many foreclosures that they couldn't service their own debt. Behind that bankruptcy are thousands of foreclosures of good people and good families WHO BOUGHT SOMETHING THEY WERE NOT READY FOR, OR COULD NOT AFFORD. Everyone talks about their home being a "blessing" and the "best investment" they'll every make. Think it is true for those folks who are in foreclosure?


It's not fair to use the example of subprime lenders as an average example IMO. They are lending to high risk people at higher rates than normal.

Often they are lending to people who should not buy a home IMO. You are right in that regard.

But the home is the best or one of the best investments that I and many others have made IMO.

[Bretsky]

Bretsky says he "learned" to save by owning a home, and furthermore that he "learned" the value of building wealth by buying a home. I'd disagree with that, on my belief that the "habits" were present before they bought the home, but weren't being executed. They didn't learn it so much as they began to do it when they bought the house.


This is probably accurate. But I'd add that it wasn't going to get executed until home ownership. We were living the high life and needed added responsibility to watch our spending habits. And we're far ahead of where we would have been by buying a home with far less than twenty percent down IMO

[Bretsky]

Bretsky,

Allow me to explain.... I give you an "A" for effort, but a "C" for execution! :D


I do believe that EVERY homeowner should put down 20% on a home, and furthermore should carry NO GREATER than a 15 year FIXED rate loan.

Failure to do that ignores RISK and that risk will bite you in the ass when you least expect it. Timing has the "benefit" of making it appear that risk doesn't exist. When Bretsky bought his home, the market was strong, rates were low, at historic lows and headed downward. Those items OFFSET the risk, more luck than plan, and so buying without 20% worked out well for him. He beat the risk. It doesn't always work out that way.

Recently, one of the biggest subprime mortgage lenders (New Century) went bankrupt because they had so many foreclosures that they couldn't service their own debt. Behind that bankruptcy are thousands of foreclosures of good people and good families WHO BOUGHT SOMETHING THEY WERE NOT READY FOR, OR COULD NOT AFFORD. Everyone talks about their home being a "blessing" and the "best investment" they'll every make. Think it is true for those folks who are in foreclosure?

How many of those foreclosures were due to adjustable rate mortgages or high second mortgages? The vast majority of them, of that I am sure. These people believed the American dream was "HAVE IT NOW". You don't need to plan. You don't need to save. There is a loan that I can qualify for.... Therefore, I can afford the house. Then, life happens, and their lives are screwed for the next 10 years, OR LONGER.

Bretsky says he "learned" to save by owning a home, and furthermore that he "learned" the value of building wealth by buying a home. I'd disagree with that, on my belief that the "habits" were present before they bought the home, but weren't being executed. They didn't learn it so much as they began to do it when they bought the house.

Markets change almost overnight, and RISK changes right with it. You have to plan for the future when you make a decision of this magnitude. Thousands of families didn't plan, and as a result went through foreclosure and possibly bankruptcy too. Their dream became a nightmare. Bresky's dream became a blessing. Timing and luck. That's the majority of the difference.

Partial, I firmly believe if you don't have a 20% down payment, and cannot afford a 15 year fixed rate mortage - YOU CANNOT AFFORD THE HOUSE. It may appear that you can, but most likely you cannot. You might get lucky and buy in the right part of town, or in the right market, so that the risk doesn't hit you like a baseball in the forehead, but, if you've got my kind of luck....

A home is a blessing, don't make it a nightmare. Plan and learn to save outside homeownership. Improve your chances of success and minimize your risk.

Hear this very clearly - THERE IS NOTHING IN THIS WORLD THAT YOU HAVE THAT I WANT IF I HAVE TO BORROW MONEY TO GET IT. NOTHING.



Even though I often debate with RG, I want to add that I agree with many of his views. I just don't agree with the 20% down principal and I've personally witnessed many personal situations that would support my views.
I'm sure that RG has also seen bad situations that would support his view as well.

I'd also note that I've been originating home loans for over five years now so I will have a bias view. But I also think facts will back my view up. Less than .5% of the purchases I've closed have resulted in foreclosures, and that was a good deal at the time of closing but a situation that just went bad.

[retailguy]

Failure to do that ignores RISK and that risk will bite you in the ass when you least expect it. Timing has the "benefit" of making it appear that risk doesn't exist. When Bretsky bought his home, the market was strong, rates were low, at historic lows and headed downward. Those items OFFSET the risk, more luck than plan, and so buying without 20% worked out well for him. He beat the risk. It doesn't always work out that way.


This is not true regarding the timing of my first home; I bought my first home 10 years ago. The 30 Yr Fixed Rate at that time was 7.75%.

I don't know about how strong the market was then; I was a teacher.

But the rates were not low at that point.


Perspective is a GREAT thing! I would characterize rates of 7.75% as historic lows... See, I remember 16% to 21% rates. 7.75% is what I financed a car for, when I financed cars, that was prior to 1991...

7.75% is a GREAT rate in my world, and rates went from 7.75% down to what, say, 5% at the lowest?

[retailguy]

Recently, one of the biggest subprime mortgage lenders (New Century) went bankrupt because they had so many foreclosures that they couldn't service their own debt. Behind that bankruptcy are thousands of foreclosures of good people and good families WHO BOUGHT SOMETHING THEY WERE NOT READY FOR, OR COULD NOT AFFORD. Everyone talks about their home being a "blessing" and the "best investment" they'll every make. Think it is true for those folks who are in foreclosure?


It's not fair to use the example of subprime lenders as an average example IMO. They are lending to high risk people at higher rates than normal.

Often they are lending to people who should not buy a home IMO. You are right in that regard.

But the home is the best or one of the best investments that I and many others have made IMO.


Well, the subprime market is where problems APPEAR, First. If these markets continue, they'll creep into your business as well, but, considering your model, they'll be less apparent. Face it, you focus on the "best" buyer out there, those, by default have "lower" risk. That's why they're the "best".

But, you're talking about a very small market segment, Bretsky, and probably the ones that can "handle" the most risk. Risk will still bite though, and hard.

[retailguy]

Bretsky says he "learned" to save by owning a home, and furthermore that he "learned" the value of building wealth by buying a home. I'd disagree with that, on my belief that the "habits" were present before they bought the home, but weren't being executed. They didn't learn it so much as they began to do it when they bought the house.


This is probably accurate. But I'd add that it wasn't going to get executed until home ownership. We were living the high life and needed added responsibility to watch our spending habits. And we're far ahead of where we would have been by buying a home with far less than twenty percent down IMO

Here's an article for you.... Some good info here, I agree with a lot of it, but NOT all of it.... But something to think about...

http://articles.moneycentral.msn.com/Banking/HomebuyingGuide/WhyRentToGetRicher.aspx?page=1


Why rent? To get richer

A contrarian's view: Houses don't appreciate any faster than the level of inflation over the long term, so forget about buying a home and put your savings into stocks.

By SmartMoney

I have something un-American to confess: I rent an apartment despite having enough money to buy a house. I plan to keep renting for as long as I can. I'm not just holding out for better prices. Renting will make me richer.

I normally write about stocks for SmartMoney.com, but the boss asked me to explain to readers my reason for renting. Here goes: Businesses are great investments while houses are poor ones, so I'd rather rent the latter and own the former.

Stocks versus houses: Returns
Shares of businesses return 7% a year over long periods. I'm subtracting for inflation, gradual price increases for everything from a can of beer to an ear exam. (After-inflation, or "real," returns are the only ones that matter. The point of increasing wealth is to increase buying power, not numbers on an account statement.)

Shares have been remarkably consistent over the past two centuries in their 7% real returns. In Jeremy Siegel's book "Stocks for the Long Run," he finds that real returns averaged 7% over nearly seven decades ending in 1870, then 6.6% through 1925 and then 6.9% through 2004.

The average real return for houses over long periods might surprise you: It's virtually zero.


Shares return 7% a year after inflation because that's how fast companies tend to increase their profits. Houses have their own version of profits: rents. Tenant-occupied houses generate actual rents, while owner-occupied houses generate ones that are implied but no less real: the rents their owners don't have to pay each year.

House prices and rents have been closely linked throughout history, with both increasing at the rate of inflation, or about 3% a year since 1900. A house, after all, is an ordinary good. It can't think up ways to drive profits like a company's managers can. Absent artificial boosts to demand, house prices will increase over long periods at the rate of inflation, for a real return of zero.

Robert Shiller, a Yale economist and the author of "Irrational Exuberance," which predicted the stock-price collapse in 2000, has recently turned his eye to house prices. Between 1890 and 2004, he says, real house returns would've been zero if not for two brief periods: one immediately after World War II and another since about 2000. (More on them in a moment.) Even if we include these periods, houses returned just 0.4% a year, he says.

The average pundit, planner, lender or broker making the case for ownership doesn't look at returns since 1890. Sometimes they reduce the matter to maxims about "building equity" and "paying yourself" instead of "throwing money down the drain." If they do look at returns, they focus on recent ones. Those tell a different story.

Between World War II and 2000, house prices beat inflation by about 2 percentage points a year. (Stocks during that time beat inflation by their usual 7 percentage points a year.) Since 2000, houses have outpaced inflation by 6 percentage points a year. (Stocks have merely matched inflation.)

Stocks versus houses: Valuations

But though stock returns have come from increased earnings, house returns have come from ballooning valuations, not increased rents. The ratio of share prices to company earnings (the price-earnings ratio) has remained relatively steady. It's about 16 today, close to both its 1940 value of 17 and to its 130-year average of about 15. Not so the ratio of house prices to rents. In 1940, the median single-family house price was $2,938, according to the U.S. Census Bureau, while the median rent was $27 a month, including utilities. That means the ratio of prices to annual rents was 9. By 2000, the ratio had swelled to 17. In 2005, it hit 20. We can adjust for the size of dwellings, but it doesn't make much difference. The ratio of single-family house prices to three-bedroom apartments is 19. In SmartMoney's hometown of Manhattan, where more detailed data is available, the ratio of condo prices per square foot to apartment rents per square foot is 22.

* Video: Should you rent or buy?

Two main events have caused house valuations to inflate since World War II. First, the government subsidized housing by relaxing borrowing standards. Before the creation of the Federal Housing Authority (FHA) in 1934, homebuyers who borrowed typically put up 40% of the purchase price in cash for a five- to 15-year loan.

By insuring mortgages, the FHA permitted terms of up to 20 years and down payments of just 20%. It later expanded the repayment periods to 30 years and reduced down payments to 5%. Today, down payments for FHA loans are as low as 3%. Aggressive lenders offer loans with no down payments or even negative ones so that homebuyers can borrow the full purchase price plus closing costs. Some require little documentation of income, assets or ability to pay.

That means more Americans can win loans for homes, and they can win them for far more expensive homes than their incomes had previously allowed. Two-thirds of American households own homes today, up from 44% in 1940, even though the percentage of Americans living alone has tripled during that time. The ratio of house values to incomes has risen 260% in just under four decades.

A second event helped boost house demand in recent years. Share prices plunged in 2000. The Federal Reserve, fearing that the decline in stock wealth would cause consumers to stop spending, reduced the federal-funds rate, the core interest rate that determines the cost of everything from credit cards to mortgages, to 1% by summer 2003 from 6.5% at the start of 2001. Since most of the cost of financing a house over 30 years is interest, monthly house payments shrank and demand for houses soared. In some markets a string of big yearly increases in house prices led to panic buying.

Stocks versus houses: Conclusion
For house returns over the next 20 years to match those over the past 20, the government and private lenders would have to "up the ante" by relaxing borrowing standards further. Given the recent attention paid to swelling foreclosures, that seems unlikely. I suspect real returns will turn negative over most of the next two decades, but that house prices won't necessarily dip. Since 1963, they've done so in only two years versus 18 for stocks.

That's because homeowners mostly just stick it out rather than sell during soft markets. But if house prices remain flat, they produce negative real returns due to the creep of inflation. According to calculations made by The Economist in summer 2005, house prices would have to stay flat for 12 years with annual inflation at 2.5% for the ratio of prices to rents to fall from its 2005 perch to merely its 1975-to-2000 average.

So to sum up why I rent: Shares right now cost 16 times earnings and over long periods return 7% a year after inflation. Houses right now cost 19 times their "earnings" and over long periods return zero after inflation. And they look likely to return less than that for a while.

Questions and objections
In what follows I've tried to anticipate and address questions and objections:

"You can't live in your stocks" or "Renters throw money down the drain."

Rent is the cost of owning shares with money you would otherwise spend on a house. Houses have ownership costs, too: taxes, insurance and maintenance. Rent costs about 5% of house prices each year if we apply the price-rent ratio of 19. House incidentals often cost around 2%.

If you have $300,000 and a choice between spending it on a house or shares, you'll pay $6,000 a year in incidentals if you buy the house or about $15,000 a year ($1,250 a month) in rent if you buy the shares. But the shares will return $21,000 a year after inflation while the house will return zero. (My numbers work out even better than these. I pay a smidgen less than $1,250 a month for rent, while house prices in my neighborhood are far higher than $300,000.)

Note that houses and shares have transaction costs, too. Homebuyers pay around 1% in closing costs when they buy and 6% in broker commissions when they sell. Share buyers pay $10 trading commissions, which are negligible for buy-and-hold investors.

[Patler]

Bretsky,


I do believe that EVERY homeowner should put down 20% on a home, and furthermore should carry NO GREATER than a 15 year FIXED rate loan.

Failure to do that ignores RISK and that risk will bite you in the ass when you least expect it. Timing has the "benefit" of making it appear that risk doesn't exist. When Bretsky bought his home, the market was strong, rates were low, at historic lows and headed downward. Those items OFFSET the risk, more luck than plan, and so buying without 20% worked out well for him. He beat the risk. It doesn't always work out that way.

......

Partial, I firmly believe if you don't have a 20% down payment, and cannot afford a 15 year fixed rate mortage - YOU CANNOT AFFORD THE HOUSE. It may appear that you can, but most likely you cannot. You might get lucky and buy in the right part of town, or in the right market, so that the risk doesn't hit you like a baseball in the forehead, but, if you've got my kind of luck....



What you refer to as "lucky" is in fact just intelligent investing.

I have owned 5 houses. I have NEVER had a down payment of more than 5%. The original mortgage on each was 30 years. I have bought in all different markets, including once when mortgage interest rates were around 12-15%. When rates are high, few people buy, and it is often easy to find undervalued houses. As soon as interest rates decline, house values increase. That's what I did with my first house. I needed a 30 year mortgage to make the payments affordable, but I knew each year would be easier, and rates would have to come down. Rates declined, prices increased, I sold my house in just over two years for 80% more than what I paid for it. I had done some updating to it and a lot of cosmetic repairs that added to the investment cost, but it was still a great return.

While in graduate school I bought another, and stayed in it for a while after. A little over three years and I sold it for 50% more than I paid.

The key is to fall in love with an investment opportunity, not a particular house, if you are doing it for short term profit. Look at the dollars first and foremost.

[Bretsky]

Bretsky,


I do believe that EVERY homeowner should put down 20% on a home, and furthermore should carry NO GREATER than a 15 year FIXED rate loan.

Failure to do that ignores RISK and that risk will bite you in the ass when you least expect it. Timing has the "benefit" of making it appear that risk doesn't exist. When Bretsky bought his home, the market was strong, rates were low, at historic lows and headed downward. Those items OFFSET the risk, more luck than plan, and so buying without 20% worked out well for him. He beat the risk. It doesn't always work out that way.

......

Partial, I firmly believe if you don't have a 20% down payment, and cannot afford a 15 year fixed rate mortage - YOU CANNOT AFFORD THE HOUSE. It may appear that you can, but most likely you cannot. You might get lucky and buy in the right part of town, or in the right market, so that the risk doesn't hit you like a baseball in the forehead, but, if you've got my kind of luck....



What you refer to as "lucky" is in fact just intelligent investing.

I have owned 5 houses. I have NEVER had a down payment of more than 5%. The original mortgage on each was 30 years. I have bought in all different markets, including once when mortgage interest rates were around 12-15%. When rates are high, few people buy, and it is often easy to find undervalued houses. As soon as interest rates decline, house values increase. That's what I did with my first house. I needed a 30 year mortgage to make the payments affordable, but I knew each year would be easier, and rates would have to come down. Rates declined, prices increased, I sold my house in just over two years for 80% more than what I paid for it. I had done some updating to it and a lot of cosmetic repairs that added to the investment cost, but it was still a great return.

While in graduate school I bought another, and stayed in it for a while after. A little over three years and I sold it for 50% more than I paid.

The key is to fall in love with an investment opportunity, not a particular house, if you are doing it for short term profit. Look at the dollars first and foremost.

It's good that there are differentiating views in here.

There are different paths to get to where we want to be.

[Partial]

The message I take away from this discussion is to work harder in your 8-9 hour day than anyone else in the office does so you quickly climb the ladder and make the big bucks. Then, you can afford a home regardless! :wink:

[Bretsky]

The message I take away from this discussion is to work harder in your 8-9 hour day than anyone else in the office does so you quickly climb the ladder and make the big bucks. Then, you can afford a home regardless! :wink:


Among the best advice I've listened to was from Bruce Williams and Clark Howard, two all around brilliant people who host talk radio.

Every day, every hour, you make little decisions that lead to your future wealth, or lack of it.

It's not just about when to buy a house. Be conscious of fiscal matters with everything....buying a car/lawn mower/house/ what you spend for goodies and at restaurants/buying a round for the bar/ buying used or new goodies...etc

It's the daily decisions that will define you years down the road.

As far as this discussion goes, if you map out a path to take, and then execute the plan you will be better off that most. Sometimes the path gets changed or altered, but if you have one you will be further ahead than most out there.

[retailguy]

I agree with this Bretsky. The thing that gets missed here, is that it "sounds" so easy anyone can do it.

Patler chimed in about all the money and "flips" he's done in real estate. You talk about that too.

Yet no one warns what happens if things don't go well. No one "tells" those reading this "HOW" to do this "investing".

Quite honestly, luck plays a big part in the deal. Timing is CRUCIAL to making a real estate transaction successful.

But, the fact remains. If you put 20% down on a house, you are not likely to EVER lose that house in foreclosure. If you put down less money, the odds of having a crisis related to ownership of that property go up exponentially the less down payment you had.

I just spoke with a woman today. In her early 50's. Husband got sick, lost his job. They owe 115,000 on a 110,000 house, and their income got cut by 2/3rds... They HAD good credit. Their dream turned into a nightmare.... They WILL lose this house. He has no insurance, no job, no money and won't likely return to work. IF they had equity, at least they had something to sell. Now they have to beg the 2nd mortgage lender to let them short sale it....

It HAPPENS.

[Patler]

Patler chimed in about all the money and "flips" he's done in real estate. You talk about that too.



Really, just two flips, although they certainly weren't called that then. Both were houses that I knew I would not own long, so I looked for good deals. Investments. Houses that were very much underpriced. How did I know for sure they were underpriced? Because even the bank was willing to finance almost 100% of the purchase price, with insignificant cash from me. Of course 40 years ago we knew our bankers very well, and loan determinations were an individual thing among people who knew each other.

But, if you want to do that, DO NOT LOOK FOR AND FALL IN LOVE WITH A HOUSE! Look primarily at the financial deal associated with it. It's just like buying a stock. Don't fall in love with a particular stock. You must be dispassionate about it, and completely analytical.

[MJZiggy]

Hear this very clearly - THERE IS NOTHING IN THIS WORLD THAT YOU HAVE THAT I WANT IF I HAVE TO BORROW MONEY TO GET IT. NOTHING.

Wait 'til your car blows up (literally--thank goodness no one was hurt), you live a couple miles from a bus stop, you have to get to work, and the insurance company gives you crap for a claim settlement. You can only borrow Dad's car for so long before he gets a little testy about it.

[Patler]

But, the fact remains. If you put 20% down on a house, you are not likely to EVER lose that house in foreclosure. If you put down less money, the odds of having a crisis related to ownership of that property go up exponentially the less down payment you had.

I just spoke with a woman today. In her early 50's. Husband got sick, lost his job. They owe 115,000 on a 110,000 house, and their income got cut by 2/3rds... They HAD good credit. Their dream turned into a nightmare.... They WILL lose this house. He has no insurance, no job, no money and won't likely return to work. IF they had equity, at least they had something to sell. Now they have to beg the 2nd mortgage lender to let them short sale it....

It HAPPENS.

Whether or not a forclosure will happen isn't necessarily affected by how much equity you have in it. It becomes a cash flow problem. If you do not have the cash to make the mortgage payment for X months, the lienholder will foreclose. If the lady you mentioned and her husband have no income, it wouldn't matter if they only owed $50,000 on the house. If they don't make the payments thay will still lose the house eventually. The difference is that after the lienholder sells the property and recovers their costs, there MIGHT be something left for the original owner. Alternatively, the couple could make a quick sale themselves, to get out from under the mortgage, but they still would not have the house. Its lost either way.

What I did was as a young couple with my wife. If we made a mistake, we had time to recover. For us, buying the first two houses was not unlike starting a business. Both were undertakings to make money, and we really were careful in how we did it, even though it stretched us financially..

It strikes me that the people in your example have more problems than just the lack of equity in their house. Negative equity in their house, no insurance and apparently no savings of any sort, even though their best earning years may have passed. I'm not blaming them, because I have no idea what the causes may have been for the situation they are in, but they seemed to have piled risk upon risk upon risk. That is never wise, and it becomes less wise the closer you get to retirement.

I'm surprised the lender(s) didn't require mortgage payment insurance with the negative equity situation.

[retailguy]

Hear this very clearly - THERE IS NOTHING IN THIS WORLD THAT YOU HAVE THAT I WANT IF I HAVE TO BORROW MONEY TO GET IT. NOTHING.

Wait 'til your car blows up (literally--thank goodness no one was hurt), you live a couple miles from a bus stop, you have to get to work, and the insurance company gives you crap for a claim settlement. You can only borrow Dad's car for so long before he gets a little testy about it.

I've heard this excuse a thousand times. Reality - a $100 car will get you to work. There are dozens of cars just outside the city limits on an old highway with a for sale sign in them.

You can "justify" any spending if you really want to do that.

[Bretsky]

I just spoke with a woman today. In her early 50's. Husband got sick, lost his job. They owe 115,000 on a 110,000 house, and their income got cut by 2/3rds... They HAD good credit. Their dream turned into a nightmare.... They WILL lose this house. He has no insurance, no job, no money and won't likely return to work. IF they had equity, at least they had something to sell. Now they have to beg the 2nd mortgage lender to let them short sale it....

It HAPPENS.


Maybe I'm dead wrong here, but I'd be surprised if that picture was ever perfect credit wise. Owing 115,000 on a 110,000 house goes against the common sense of a solid credit borrower. It sounds like bad decisions were already made. When they go over 100% they are probably going to a high risk broker with high rates and are already in trouble.

Banks will not loan over 100% at time of purchase; these warning signs could possibly have been seen before getting into the negative.

I've did over a couple hundred home purchase loans; two have went bad. Both due to mitigating personal circumstances beyond ability to pay.

Most first time homebuyers are doing 100% financing these days. I have not had one of those go bad in five ......knock on wood....years.

[retailguy]

Whether or not a forclosure will happen isn't necessarily affected by how much equity you have in it. It becomes a cash flow problem. If you do not have the cash to make the mortgage payment for X months, the lienholder will foreclose. If the lady you mentioned and her husband have no income, it wouldn't matter if they only owed $50,000 on the house. If they don't make the payments thay will still lose the house eventually. The difference is that after the lienholder sells the property and recovers their costs, there MIGHT be something left for the original owner. Alternatively, the couple could make a quick sale themselves, to get out from under the mortgage, but they still would not have the house. Its lost either way.

What I did was as a young couple with my wife. If we made a mistake, we had time to recover. For us, buying the first two houses was not unlike starting a business. Both were undertakings to make money, and we really were careful in how we did it, even though it stretched us financially..

It strikes me that the people in your example have more problems than just the lack of equity in their house. Negative equity in their house, no insurance and apparently no savings of any sort, even though their best earning years may have passed. I'm not blaming them, because I have no idea what the causes may have been for the situation they are in, but they seemed to have piled risk upon risk upon risk. That is never wise, and it becomes less wise the closer you get to retirement.

I'm surprised the lender(s) didn't require mortgage payment insurance with the negative equity situation.

Yes it's a SERIES of bad decisions. If they only owed $50k they could sell PRIOR to the foreclosure, and pocket cash. Unfortunately, they "thought" they could pay their way out of debt with yet another loan. They never had "much" equity in the home, but they were not required to purchase disability insurance (another bad move).

Patler, I've experienced financial decisions on both sides of the fence. No one prepared me for the downside. Most of my clients would say the same.

I've handheld dozens of people through bankruptcy and losing everything. Not many have gone back into consumer debt, and most own a home now that is LESS than 25% of their take home pay.

There is a reason that the turtle usually wins the race.

[retailguy]

Maybe I'm dead wrong here, but I'd be surprised if that picture was ever perfect credit wise. Owing 115,000 on a 110,000 house goes against the common sense of a solid credit borrower. It sounds like bad decisions were already made. When they go over 100% they are probably going to a high risk broker with high rates and are already in trouble.

Banks will not loan over 100% at time of purchase; these warning signs could possibly have been seen before getting into the negative.

I've did over a couple hundred home purchase loans; two have went bad. Both due to mitigating personal circumstances beyond ability to pay.

Most first time homebuyers are doing 100% financing these days. I have not had one of those go bad in five ......knock on wood....years.

perfect? NO, but probably good enough for a loan from your bank. You wouldn't have done the second refi, but otherwise, you'd have been proud to have them as a client.

You have just emerged from one of the best 5 year track records for real estate in a long time. As I said before, you deal with the "cream of the crop" in terms of borrowers. If this market continues, you'll see a rise in your late pay rates, and an increase in foreclosure activity. Yours will never be very high though, for the credit risk reasons we've discussed.

New Century did go broke though, it's NOT a mirage. The secondary market does foreshadow to a small degree what happens in the rest of the industry.

Lets check back with this discussion in a year or two. We'll see what happens.

[Bretsky]

Hear this very clearly - THERE IS NOTHING IN THIS WORLD THAT YOU HAVE THAT I WANT IF I HAVE TO BORROW MONEY TO GET IT. NOTHING.

Wait 'til your car blows up (literally--thank goodness no one was hurt), you live a couple miles from a bus stop, you have to get to work, and the insurance company gives you crap for a claim settlement. You can only borrow Dad's car for so long before he gets a little testy about it.

I've heard this excuse a thousand times. Reality - a $100 car will get you to work. There are dozens of cars just outside the city limits on an old highway with a for sale sign in them.

You can "justify" any spending if you really want to do that.


completely agree

[GrnBay007]

There is a reason that the turtle usually wins the race.


There's NO reason to bring Ted Thompson into this discussion!!
:P :P :P :P


Interesting points of view, btw.

[Bretsky]

perfect? NO, but probably good enough for a loan from your bank.


You are probably right; I'm surprised at some of the no money down stuff that gets approved these days. And I'm the eternal optimist so if I'm surprised then the deal has some hefty risk.

You wouldn't have done the second refi, but otherwise, you'd have been proud to have them as a client.


Anybody who goes over 100% equity is making a huge mistake; that's why I questioned the credit as I'm surprised good credit people would get roped into this. It's a recipe for disaster nearly all of the time.


[i]You have just emerged from one of the best 5 year track records for real estate in a long time. As I said before, you deal with the "cream of the crop" in terms of borrowers. If this market continues, you'll see a rise in your late pay rates,

I'll openly admit that I already have seen the raise in late pays. And I've did more counseling of customers in helping them make it the past year as opposed to the first four

[retailguy]

These people, not surprisingly are not bright (intellectually). HS diploma's, worked blue collar their whole career, but very hard workers. They rely on, and believe, the advice they are given.

Friends told them, debt consolidation was a great move. Friends and their banker told them they could buy a house with 5% down. But, NO ONE, told them how to budget, or that they couldn't go out to eat, or that borrowing for a washer/dryer was not smart.

Reality - If they had put 20% down, and not refinanced for debt consolidation, they could liquidate the house and probably would be ok. However, now, they have to fight because they didn't plan. Hey, I'll be the first to admit that life happens, but good planning helps with that. Bad planning ruined that and leaves them with no options.

This is the danger of not putting 20% down. The downside doesn't compensate for the risk. That's my main point....

[retailguy]

There is a reason that the turtle usually wins the race.


There's NO reason to bring Ted Thompson into this discussion!!
:P :P :P :P


Interesting points of view, btw.


Isn't this site becoming a dissertation on the "turtle"? :P

[retailguy]

Anybody who goes over 100% equity is making a huge mistake;



I'd just change one thing - Anyone who goes over 80% equity is making a huge mistake. :P 8-)

[GrnBay007]

I'll put my two cents in....no need to borrow for that!! :P

I think it'd be great to be in a position to put 20% down. When purchasing my second house.....first on my own, I didn't have 20% to put down on the purchase. I don't think it's a must in order to succeed. I think it's all in what you do and how you handle things after the purchase. I took a 30 year loan and now have a plan in place to have it paid in 15 years...no later than 18 yrs. One thing I don't think has been mentioned for homeowners and I'm a firm believer in it is having a certain amount of cash on hand for large repairs/expenses. That is an area people don't like to think about and don't plan for.....who wants to? But if something should happen it prevents from using credit or taking a home equity loan out.

[MJZiggy]

That's very true 007. When you least expect it definitely applies. I already have an inventory of the only things in this house that haven't broken yet and am putting aside the money to fix them now so I won't have to put repairs on the credit card later.

[oregonpackfan]

I'll put my two cents in....no need to borrow for that!! :P

I think it'd be great to be in a position to put 20% down. When purchasing my second house.....first on my own, I didn't have 20% to put down on the purchase. I don't think it's a must in order to succeed. I think it's all in what you do and how you handle things after the purchase. I took a 30 year loan and now have a plan in place to have it paid in 15 years...no later than 18 yrs. One thing I don't think has been mentioned for homeowners and I'm a firm believer in it is having a certain amount of cash on hand for large repairs/expenses. That is an area people don't like to think about and don't plan for.....who wants to? But if something should happen it prevents from using credit or taking a home equity loan out.

007,

As you probably know, many financial planners recommend people keep an emergency fund worth 3-6 months salary to handle unexpected financial emergencies be it job loss, loss of car, etc.

It sounds like you and MJZiggy are already observing those guidelines.

[Bretsky]

Anybody who goes over 100% equity is making a huge mistake;



I'd just change one thing - Anyone who goes over 80% equity is making a huge mistake. :P 8-)

That we will never never agree on. Too extreme IMO and most benefit from howe ownership and reality is very few have 20% down til second home

[Bretsky]

I'll put my two cents in....no need to borrow for that!! :P

I think it'd be great to be in a position to put 20% down. When purchasing my second house.....first on my own, I didn't have 20% to put down on the purchase. I don't think it's a must in order to succeed. I think it's all in what you do and how you handle things after the purchase. I took a 30 year loan and now have a plan in place to have it paid in 15 years...no later than 18 yrs. One thing I don't think has been mentioned for homeowners and I'm a firm believer in it is having a certain amount of cash on hand for large repairs/expenses. That is an area people don't like to think about and don't plan for.....who wants to? But if something should happen it prevents from using credit or taking a home equity loan out.


Good points

[Partial]

Anybody who goes over 100% equity is making a huge mistake;



I'd just change one thing - Anyone who goes over 80% equity is making a huge mistake. :P 8-)

That we will never never agree on. Too extreme IMO and most benefit from howe ownership and reality is very few have 20% down til second home

What constitutes equity?

[MJZiggy]

Equity is how much you owe vs. how much the house is worth. The market value of the house goes up, you have more equity.

[GrnBay007]

The difference in what you owe on your home and what it's worth.

[Bretsky]

Anybody who goes over 100% equity is making a huge mistake;



I'd just change one thing - Anyone who goes over 80% equity is making a huge mistake. :P 8-)

That we will never never agree on. Too extreme IMO and most benefit from howe ownership and reality is very few have 20% down til second home

What constitutes equity?

When you buy a home equity would constitute the difference between the purchase price and what you owe on the home loan.

So if you buy a house for 120,000 and put 20% down (24,000) you have a loan for 96,000 and a beginning equity position of 24,000.

Now if you own a home for a few years, your equity position increases as you pay the loan down and the value of the home goes up.

What RG was referring to is he feels it's a mistake for anybody to buy a home with a Loan (96,000 in above example) to Value (120,000 in above example) Ratio of over 80%.

He believes people should save up enough to put 20% down on a home and should not buy one sooner. Once you get to that level the odds of a person losing their home are very very minimal.

I've seen too many people succeed by putting either no money down or 5% down and then sell the home and use the sale proceeds to buy their next home to agree with his belief there.

But RG correctly points out I'm mainly dealing with strong buyers

Of course I'd argue if they are strong buyers than the 20% down rule should be tossed right out the window.

Cheers,
B

[GBRulz]

I disagree about the 20% scenario. I think more homes go into foreclosures because banks will pre-approve you for a loan much higher than you can probably afford. People see that they can have this huge house, low monthly payments for a few years, etc but they fail to think about a rainy day. I was shocked to hear that my bank would approve me for 180k loan. I'm like "um, I'd like to have a life outside of paying for my home"

Would I like to live in a more expensive home? Sure, why not? But I am single and if I lost my job (which is exactly what happened two months after I bought my house by the way) would I still be able to afford those payments? had I bought a more expensive home, I would have had to sell it because of the job loss. Things like this are what you need to consider when buying a home.

So many people take advantage of the credit extended to them and that is where the foreclosures and getting in trouble takes place. Not because they take out a 30 year fixed loan and not put 20% down. Personally, I took the 30 but make higher payments most of the time. I hope to have my house paid off in about 12 more years. Each situation is different, I don't think this is a book written rule about what is right and wrong about what to put down on a house.

[Bretsky]

I disagree about the 20% scenario. I think more homes go into foreclosures because banks will pre-approve you for a loan much higher than you can probably afford. People see that they can have this huge house, low monthly payments for a few years, etc but they fail to think about a rainy day. I was shocked to hear that my bank would approve me for 180k loan. I'm like "um, I'd like to have a life outside of paying for my home"

Would I like to live in a more expensive home? Sure, why not? But I am single and if I lost my job (which is exactly what happened two months after I bought my house by the way) would I still be able to afford those payments? had I bought a more expensive home, I would have had to sell it because of the job loss. Things like this are what you need to consider when buying a home.

So many people take advantage of the credit extended to them and that is where the foreclosures and getting in trouble takes place. Not because they take out a 30 year fixed loan and not put 20% down. Personally, I took the 30 but make higher payments most of the time. I hope to have my house paid off in about 12 more years. Each situation is different, I don't think this is a book written rule about what is right and wrong about what to put down on a house.

Good points; right now the difference between a 30Yr and 15Yr Loan is only about .25% on the interest rate. Some actually prefer the 30 due to monthly flexibility and then just pay ahead.

You bring up another good point. Good credit customers can often get approved for more than what they should be buying for. And yo8u smartly realized, and hopefully were told to a point, that what you could get approved for and what you can afford might be two different things.

I have a hard time blaming the banks for this; we're given rules and when buyers come in looking for homes that are higher than they should pay I'm not convinced it's our job to talk them out if it. But we should discuss risk.

I do show people their total debt to income ratios and strongly suggest where people should be looking at in terms of price range, but that's as far as I go. If somebody does want to buy in a higher range than they should, if I don't get them approved they'll go to the local mortgage broker and get rippped off. At least I'm being honest and up front with them and treating them fairly.

My only point is some of the responsibility has to go back to the clients as well.

[packinpatland]

I'm too lazy to read all the previous posts. Has much been mentioned about good old 'sweat equitiy' in regards to home owning and selling?
We took out a 65K construction loan 23 years ago. At the time, it was a stretch. Today, with a few addtions and ALOT of sweat equity, our home could easily sell for over 650K.
My daughter and her new husband have done exactly the same thing, with only owning their home a few years, they saw a profit of over 100K.
We weren't afaid to live on plywood floors for awhile, or wash the dishes instead of having a machine do it...............it all paid off. It was work, but was worth it..

[Bretsky]

BUMP FOR OLD TIMES SAKES

SOMEBODY WANTED TO KNOW WHERE THE MONEY THREAD WENT; I"M SEARCHING AND FOUND THIS ONE

I'll find the other too