Don’t you just love advertising? I do.

I remember the big push a couple of years ago by lenders promoting FHA loans. The FHA loans became popular after the teaser rate loans lost their steam.

Right now, rates are extremely low, but you can’t ride this horse forever either.

So how about home buyer tax credits? The tax credit has been extended, but they won’t last for ever either. What’s next?

Maybe combine everything for awhile. Low rates, tax credits and FHA loans.

The big promotion with FHA loans a couple of years ago when the market started crashing was security. Your loan is protected.

Well, you loan was always going to be around. If a bank failed, the loan would simple go somewhere else and homeowners would still have a mortgage.

In reality, the FHA is insurance for the bank’s protection. (Protecting the bank is okay, they make loans using depositors’ money. Wouldn’t you want them to make prudent business decisions with your money? I would.) The bank receives a claim from the FHA if the loan goes south.

The insurance that borrowers pay is charged by fees set by the FHA. Now, here may be the new push. Lower upfront fees!

Obama wants to reduce the upfront FHA fees. Great, except the monthly amount will be higher costing homeowners more money down the road.

Just as negative amortizing loans had their “low rate” appeal, those loans can cost much more in the end. With the appeal of lower fees, the costs can also be greater in the end.

As with any advertising, whether the campaigns be commercial or political, read the fine print and don’t buy the hype.

I was having lunch with a friend and we were talking about houses, mortgages, loans and purchasing cars. My friend made the statement that he paid cash for his cars and he did not want to pay interest on something that loses value.

His comment is very logical, yet typical.

Paying cash and staying out of debt has some very good merits, after all, look at how many lives have been ruined because of situations revolving around debt. (no pun intended)

However, debt is not the real culprit. Lack of financial knowledge and uncontrolled actions (i.e. spending) or uncontrollable actions (such as health issue) creates devastating circumstances.

Just as I mentioned in my Top 10 article on what to ask a lender, other questions have to be discussed before making the “normal” decisions.

For example, I mentioned the use of money and its purpose is a big determining factor regarding a loan. Therefore, the same can be said regarding paying cash, or not, for a car.

If money is working, i.e. earning interest, dividends, etc., is it wise to take the money out of the asset to pay for a car?

Not necessarily.

If more money is earned than the interest paid, paying cash does not make since, in my opinion, as long as the payments can be made. In addition, by keeping the money, the loan can be paid off when and if necessary.

To continue on with our lunch topic and after my friend mentioned he would not pay interest on an item losing value, I replied, “why would you put a big chunk of your money into a big ticket item [meaning something that cost thousands of dollars] that loses value?”

Realistically speaking, the goal should be to have the ability to pay cash and then make a financial decision based upon the uses of money when getting loan.

I was reading a Top 10 list of things to ask a lender when getting a mortgage. The number 1 question to ask a loan officer at the bank is, “what is the interest rate?” I’ll stop at number one instead of going through the rest of the list simply because asking the rate is simply a common question, but in reality, asking the rate should not be the number one question to ask.

When borrowers ask the interest rate of a mortgage first, they are simply asking the price of the money.

Money, however, is similar to any other product; cars for example.

When buying a car, is the first question to consider the price of the vehicle or the vehicle itself? The answer, in my opinion, should be the vehicle is the first importance, not the price.

Does the car have two or four doors? Is a third seat needed? Am I looking for a family vehicle or an economical vehicle to mainly drive for myself with a passenger or two from time to time. After I answer the question regarding the purpose of the vehicle, then I would look at the price.

Instead of asking the price first when getting a mortgage, or any loan for that matter, the question should be, “what’s the purpose of the loan?” Is the money simply needed to buy a house? Well, yes. Why else get a mortgage?

Obviously, mortgages are to buy property. However, before asking the rate, or price, more considerations should be delved into regarding the loan.

Questions might be, am I wanting to save money or build wealth? A distinction exists between the two.

Saving money, the choice would be to get a low rate with short-term payments, such as a 15-year mortgage. However, the cash flow is greatly reduced with a short-term loan, which can in reality be a very risky move, especially in a slumping and uncertain economy.

Building wealth can come from the use of a loan to buy a potentially appreciable asset, i.e. the house, but also by using debt management, cash flows, etc. to purchase additional assets of value or income generating assets, building for retirement, etc. using the same budget.

Businesses borrow money because the cost of money is lower than other costs as well as considerations for lost opportunities versus not borrowing money. Individuals can do the same. The amount of money people earn can greatly exceed the amount of interest paid. A mortgage can buy the house, but the payments, which are determined by the loan type and interest rate, are a major deciding factor. The payments can be used in pursuing financial goals, which is where the use of the money enters the picture.

When you get right down to it, personal finance and business finance are really not any different. Just because the clock says 5 o’clock time and it’s to go home doesn’t mean the financial brain should shut down. The same business principles of using money to make money can be applied after hours in a personal setting as well.

The realization is buying a house and buying money, the loan, are independent processes. The house serves purposes such as a place to live and maybe investment potential to boot. A loan has its purpose too. The loan provides access to capital in a short amount of time, wealth building potential and the use of OPM (other people’s money) just to name a few.

The purpose of the vehicle needs to be addressed before asking the price, and the purpose of the money needs to be answered before asking the price, or rate, as well.

Earlier this year, the Obama administration came out with a program to help homeowners avoid foreclosure. With the economy the way it has been, assistance is definitely needed for some people.

However, as I wrote earlier, the problem with the loan modification program is that this can allow judges to modify contracts – and altering contracts can be a scary thought. Like it or not, a contract is a contract so that both parties know what to expect. I’m definitely not here to defend lenders, and credit card companies changing rates to default rates based upon accounts with other companies is sickening, but how would you like it if you had an agreement and someone came in and made you change it?

Knowing the terms and conditions should be fairly straight forward on mortgages. Even with more complex loans, such as options ARMs, the rules are still pretty straight forward. Borrowers should understand what they are signing on any loan before signing.

Life happens, jobs are lost and health problems occur. Therefore, with these types of occurrences, this is all the more reason to understand financing, even if on a small scale. Financial knowledge should include the mortgage, real estate, investing, etc.

Getting back to contracts, contracts for housing are fairly standard and apply to all people. Bailouts and loan modifications apply to a limited number of people at the expense of everyone.
What is potentially more devastating than a bad economy and taxes to cover losses is the idea of government intervention into private affairs.

For example, the loan modification participation by loan service companies is voluntarily. However, Big Brother is sending what appears to be groups of people with sunglasses and suits, or SWAT Teams, into businesses to monitor their activities and get reports daily.  And those who don’t participate, well, those companies will get on the hit list. For shame, but it should be the government shamed for tactics to discredit those who don’t go along with their agenda instead of adding real oversight.

I remember a really profound statement made by my college professor back in the late 1980′s. He simply said, “If you want to be a good marketer, you must be able to stereotype.”

Okay, stereotyping became profiling and profiling became discriminating or even racist. But aren’t tax laws doing exactly that? Discriminating.

Business, such as a grocery store, do not discriminate. They know their customer base. Anyone can go in and buy a case of Coke or Pepsi. However, you will see stores have products, such as Mexican food or Chinese, seafood, health food, or chicken fried steak, geared toward the clients in the area.

My professor’s statement really does make sense because each culture is different and people generally associate with those who have things in common.

The ironic thing is that business segment their market to serve the customer base. Yet, when the government segments the market, it is really acting in a discriminatory manner. Sure, collecting data depending on if a person is white, black or African American, Hispanic (which ethnicity, not race – a person can have a Hispanic ethnicity and be considered white), Asian, disabled, veteran or whatever determines trends as far as society goes. But, should a group of people get preferential treatment? We hear quite about “does not discriminate against…or based upon…”. However, discrimination happens.

Take the homebuyer’s tax credit.

Why should just first time homebuyers get a credit? Anyone who wants to buy a home should get the credit.

Well it looks like the extension to the homebuyer’s tax credit will be extending according to an article from NPR sourcing the Associated Press. The extension will have an added feature. Homeowners can get a credit too when purchasing a new home, but with a catch. The limit is not $8,000 like the first time buyers get, but $6,500 for those who have been in a house for at least five years.

I’ll get to the five years in a minute, but first, aren’t the prices of homes, closing costs, etc. the same whether the buyers purchase a house for the first time, or once a year or every five years? Should the credit simply apply to all purchases  – period?

Who pays for the tax credit for a few home buyers?  Not everyone, unless the tax is in the form of a national sales tax or something where everyone pays, not just those taxpayers discriminated against.

Getting back to the five year period, the average life of a mortgage is around 4-5 years. Hmmm. If you want understand more about the behind the scenes workings of banking, real estate and markets, check out my soon to be released book, Lenders, Loans & Lucky Losers.

For now though, people and businesses understanding their target market segment is simply understanding their market with no underlying motives.  In a tough economy, extra money to throw around is not available and the money must be spent wisely and effectively.