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.

About a week and a half ago, Friday the 25th I believe or Saturday, I was listening to Barney Frank give some quick responses to a Q&A session on the steps in Washington regarding recent financial legislation.

A couple comments Mr. Frank made referenced banks which would require them to hold more loans versus selling them on the secondary market. Another topic referred to YSP and mortgage brokers.

I’ll leave the second topic to be discussed in the chapter “The Banker’s Secret” in my book, “Barking With The Big Dogs”, but for now, let’s see if the new legislation is really good for you and me and America as a whole.

When I heard his comments, I immediately thought the comments are good talking points, but more to the story exists which probably won’t be heard on CNN or Fox.

So, here is my take on just parts of the recent financial overhaul.

The new recent proposed legislation requires banks to hold more cash on hand, and is not a bad idea. However, new changes may require banks to hold more mortgages too thus affecting the transfer of loans to the secondary market. (The secondary market is where mortgages are in investments such as mutual funds for example which the Average Joe may own.)

The secondary market helps the big banks and small banks and individuals too regarding the flow of money and money earned. However, small and regional banks may not have the ability to sell as many loans or do as much business, thus potentially hurting the local banking community.

If banking laws require lenders to hold loans and keep larger deposits, the changes could be a huge benefit to the largest banks since smaller institutions may not have the balance sheet requirements to compete. Holding loans also reduces liquidity, the free flow of markets and the ability to loan money to more people can diminish.

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.

Okay, Radio Gaga has nothing to do with Lady Gaga. Actually, Radio GaGa Radio Goo Goo are lyrics from an old Queen song.  However, the title of this article has to do with the gaga and goo goo of advertising.

While driving, I was listening to a commercial about mortgages. The ad started out saying something like this. “Mortgages should be illegal.”

Then the ad went on to mention that on an average of loan of $200,000 over thirty years, the borrower would send in over $400,000 to the bank including interest. That’s almost half a million dollars!

Obviously sensationalizing half a million dollars going to the bank makes a borrower want to pursue the product the commercial is pitching – a get out of debt and build wealth scheme.

Without debating whether or not wealth can be built using debt is another topic for discussion, the focus here is to cut through the hype of the commercial.

To begin, on a $200,000 mortgage for thirty years at 6% interest, the payment is $1,199 – call it $1,200 for simplicity purposes. Over thirty years, or 360 payments at $1,200 per month, the total outlay by the borrower is $432,000. And yes, this money goes to the bank. However…

$200,000 of the $432,000 goes to principal reduction; or to put the example in another context, the borrower is reimbursing the bank for paying for the property in the first place as opposed to the individual paying the seller.

If cash had been paid for the house, the amount $200,000 is paid by the homeowner anyway. Therefore, $200,000 is a wash for buying the house. This money is spent regardless of getting a loan or paying cash. Therefore, the remainder $232,000 is interest.

Now is paying $232,000 a lot of interest? Sure it is.

Is it wise to pay such an enormous amount of interest to the bank? Maybe.

What will determine if paying interest is wise depends on a couple of questions.

First, is saving money important or making money important?

If saving money is important, paying off a mortgage quickly reduces the amount of interest owed.

Second, if making money is important, then consider “what are you doing with your money?”

If you are making money and creating more income and wealth, sending money in those asset and income directions may be more important than saving the interest. After all, businesses borrow money to make money and without OPM (other people’s money), generating income may not be possible.

If the gains are greater than the amount of money paid, paying large amounts of interest is a wise choice.

Just as paying interest is a choice, individuals have the choice whether or not to believe the hype pitched in advertising, but a little financial education require one to think just a little…and that leads us to my next topic…

Save more, think less.

Whether a bank is privately held or nationalized, loans still work the same way.

A 30 year fixed is a 30 year fixed, and so are 15 year fixed rate mortgages as well. However, there is more to it than what is the rate, what is the payment. You can read what I mean in Barking With The Big Dogs. I’ve posted several chapters.

What may be different in the private sector banking versus socialized banking are limited loans types, such as an interest only.

I’m not suggesting that everyone get an interest only mortgage, but it is not a stupid loan as some would say. It’s actually a very good loan. You just have to see beyond the hype, or negative hype.

Limiting products is good for the bank, not the borrower.

With all of the problems in the financial world today, the pay option mortgage is said to be the problem that started it all. I would disagree.

The real problem is when the government passes laws and regulations, such as the Community Reinvestment Act of 1977 under Jimmy Carter, basically forcing banks to lend to risky borrowers. Also, lack of education in our schools.

I was watching a person talk about these pay option mortgages on his website and he made this point over and over about the cause of the meltdown which started the financial crisis a couple of years ago.

He used lots of graphs and charts that were overwhelming and compelling. However, on his very own site, an article (that he put up) went on to say that these loans were very good for the borrower and lender for the last 20 years!

It should be clear that the loan is not the problem, but rather the problems are much deeper.

It’s not a particular loan, but the action of people and businesses that create the problem.

I’m not sure who actually said it, but the quote was something like this, ” it takes more knowledge to borrow than to save.” Possibly Robert Kiyosaki.

Maybe having more knowledge is tough and is why the “get out debt” or “all debt is bad” people are so popular…it’s easy for everyone to talk about, and easy for some people to sell – such as a talk show host. If a person has a degree in finance, why would that person not teach what he knows versus saying debt is dumb? The answer, debt is dumb is easy to sell the masses.

In actuality, borrowing is the simple side to finance and very easy to understand, it’s just made very complicated.

Not all people should borrow money. Not all loans are meant for all people. But for those willing to learn how the banking game is played, they can come out winners of tomorrow.

Therefore, the real key to success and building wealth is knowledge.