While driving home, I heard a typical hyped up debt free commercial.  The ad said mortgages should be illegal.

If mortgages were illegal, what would housing sales be without loans?

Now considering most people need a place to live, there are a few choices.  First, live with relatives, who bought a home.  However, did they have to get a loan to buy the house?  Second, rent.  Renting is not always a bad idea, just as homeownership is not always a good idea.  Both scenarios have pros and cons.  Third, buy a house.  Based upon Census information, about 48.7 million people have regular and/or home equity mortgages.

With a population of 307 million, approximate 1 out of 6 have a mortgage.  Estimates show 24.3% are under the age of 18, so homeownership in this age group can be kicked out leaving  232.4 available to own a house.

Households in 2000 were105,480,101 and persons per household were 2.59 in 2000 as well.  If you take 307 million people and divide by 3 people per household today, that leaves about 102+ million households which is a close estimate to Census’ past data.

With almost 50 million people having some type of mortgage out of 100 million households, it’s easy to see homeownership would be difficult without a loan.  Therefore, if mortgages were illegal, housing sales would be much lower; and a 27% decline would be the good news.

Just as homeownership or renting has pros and cons, so do mortgages.  Mortgages have pitfalls as we all know, but provide benefits.  The benefits are not just the ability to purchase property, but can increase wealth as well.  Therefore, and having said all of this, don’t buy the hype blasted all over the airwaves.

If you want to turn the tides against the economic superpowers and mega-machines, read Barking With The Big Dogs; if not follow the crowd.

Many people believe banks are out to get borrowers and cheat them. I would have to agree to a certain extent, because I have met some lenders I would never use. At the same time, I’ve met just as many, if not more, realtors causing me to run in the opposite direction as well.

I once had a realtor, who was also a and mortgage loan officer, say I was cheating myself by figuring qualifying payments based upon net income vs. gross income.

Okay, so I could purchase a more expensive house and qualify for a more expensive mortgage using gross income. Is this qualifying amount to my benefit, or the realtor and mortgage company? (Obviously having a nicer house has many benefits.)

If I knew for certain my income was going to increase, I would have to agree to a certain extent that I am cheating myself.

However, with insurance, taxes, utilities, maintenance, etc., these factors make a big difference in the amount of money left over each month.

The debt ratios for qualifying for a mortgage are 28/36, or 28% and 36% respectively, meaning 28% of income goes for housing and 36% is for total debt. (Some programs allow for higher ratios.)

For simplicity purposes, I’ll use 25% instead of 28%, or 1/4, since it is easy to figure in my head.

With an income of $100,000 per year, the paycheck’s gross amount is approximately $2,000 per week. (50 weeks x $2K. I’ll leave the other two weeks for vacation.)

$2,000 per week is approximately 1/4 of the monthly income. Four weeks per month, even though technically there are 4.33 weeks per month on a yearly average.

If you use 25% of the gross amount, then your principal and interest payment would be equal to one’s weeks pay, or $2,000. But this amount is gross income.

Take 7.65% for Social Security and Medicare plus income taxes. For simple math, let’s say the combined total taxes are approximately 25% of income.

Now the net income is $1,500 per week which accounts for taking out the 25% for taxes vs. $2,000 gross weekly amount.

$500 per month is a big difference in payments.

To give you an idea how $500 per month equates, a thirty year fixed rate mortgage at 6% is equal to $600 per $100,000 loan.

$100,000 loan = $600 / month.

$200,000 loan = $1,200 / month and so on.

If you have a $500 difference per month in payments, the difference is nearly $100,000 difference in a house. ($83K actually.)

Now you see why some realtors and loan officers say you are cheating yourself? You could buy a nicer house for an extra $100,000.

Moving up to a nicer house, the extra $100,000 is a big difference in commissions too. By using the smaller qualifying figures, I’m really cheating the reator and loan officer, not just myself.

Therefore, I think I’ll stay conservative and use the “net” income for many reasons. And, I’ll probably be glad I cheated myself for doing so.

I’m really not to concerned with the “green” movement. I think “green” is a fad and obviously has political agendas. However, I do believe in efficiency, which is not a fad and won’t go away. Henry Ford and mass production was about efficiency.

As far as environmental concerns go, I’m not fond on the idea of dumping toxic waste in a river. However, technology has come a long way allowing for energy sources of the past to be very clean today.

But getting back to the idea about efficiency, check out what an apartment in Hong Kong, China can look like. I’m sure he loves his place, but I like space and would rather be in Texas. With technology, I can work live in Texas and do work in other parts of the world, and that is a transformer.

Watch the short video and share. You may pick up a concept to be used in your home, office or garage.

I was reading an article from a person who gives personal financial advice.

One person asked the so-called expert what is a good hedge against inflation?  (The reason I say so-called is because the commentator gives generic advices that is easy to sell and easy for people to understand without have to gain further details and insight.)  The “advisor” said real estate  – paid with cash.  But then again, you have to understand the expert is a person who has been, if not still is, a realtor.

I wouldn’t necessarily agree that a house is a good hedge against inflation.  As I’ve stated before in “How to hedge against inflation“, I think increasing your income is the way to hedge against inflation.

Then another person asked about real estate.   The same “advisor” said this is a good time to borrow.

So which is it, pay cash or borrow? I would expect this “flip flop” action coming from Washington.

Now in defense of the “advisor”, not everyone can pay cash and maybe the last comment from the person in the audience cannot afford to pay cash.  And yes, I would agree, it is a very good time to borrow, and probably a good time to buy a house as well.

But if you could pay cash, would you?  Really?

Factors that should be considered include, real estate, mortgages, investments, inflation, time value of money, etc.  All of the aforementioned topics are not complicated, but may require a little more time than the popcorn in the microwave to learn.

Therefore, don’t get suckered in to the hype about real estate from a realtor, or the easy advice of paying cash by a debt free pundit.  The information may be given because it’s an easy sell, and not real education.

Check out Chapter 3 – It’s All Hype.

The odds are always with the house, or the bank. I was playing poker with my son. We are simply playing a game of cards, but it is fun to win. (And yes he won too.) Someone wins and someone loses, that just the fact of life. It doesn’t matter if it is checkers, cards, football, baseball or whatever. However, we have the choice to play or not to play games.

But in the game of life, we don’t always have choices when it comes to playing with our money.

No, I’m not talking about poker or any other game. Rather, I’m talking about taxes, inflation, loans, insurance or the stock market. These are “games” that we play everyday. If you don’t learn the rules of the games, the house has the odds.

Have you ever noticed the size of the financial institutions or government monetary figures? Sure you have.

$900 billion or a trillion, such as in the bailout figures.

These institutions use debt and loans all of the time even if they do not use the terms debt or loans. For example, a certificate of deposit at a bank is really a loan from us to the bank. The bank pays CD holders interest and uses the money to turn around and make more money.

The thing about it is that it is not necessarily the debt that causes problems as the debt free pundits proclaim, but rather the actions the action people take when buying items and spending money regarding the financial decisions made. What I mean is did money get spent on vacations, jewelry, boats, or whatever? I $100 or $200 here and there starts to add up. Or, is money invested at random just because some said buy this stock or mutual fund rather than research the markets, trends, etc. Another example might be to buy and hold instead of selling at the appropriate times.

In reality, who has more money, the institutions that use debt properly or the people who tell tell you to get out of debt?

Some banks will go broke, as we have seen, and some will win big. Some win. Some lose. But these players know the game and are playing against other experts.

Most homeowners, and I have made mistakes in the past too (as a result, I have decided to delve into the real estate and banking business rather than just take someone’s word for it), are really not an expert in real estate.  Neither are many realtors or bankers that I’ve come across for that matter either.  To give you an idea of what I mean, is a house really an investment? The property can be, but in most cases it’s not – except to the realtor (or person who loves real estate) giving the sales pitch, or the people who write the tax laws, such as capital gains. More on this in Barking With The Big Dogs. You can also get an idea of housing from my post dealing with the property being a hedge against inflation by reading here.

Therefore, keep your poker face on when it comes to looking for a house.

Even people who preach getting out of debt don’t always tell the whole story. Maybe because they don’t want to tell you or because they don’t know the game itself.

Similar to playing poker, if you are playing poker, you don’t show your hand. You bluff and make it look good if your hand is not very good.

When listening to a show on getting out of debt, or all debt is bad, how much would you put in their “pot” just to sit at the table and learn what you already know… such as don’t spend more than you make.  I would hate to have a 15 year mortgage and lose a job just simply trying to avoid debt.  That’s pretty risky.  Are you willing to bet the house?

Losing income is much more damaging than having debt.  But if you do lose income by all means you do want to get out of debt as fast as possible provided you do not give up additional income in the process, i.e. liquidating income producing assets.  Rather, if you are not making money, then it’s time to walk away from the table.

Before you sit at the table in a bank or at a real estate office (or wherever), you had better learn the rules of the game so you can level the playing field.  Otherwise, they may just clean house.

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