Sunday, December 2, 2007

It reads:

gee-thanks, originally uploaded by -SPK.

You could spend $9,999,818.88 more without increasing shipping.

Wow, thanks.

I wonder how many people have taken advantage of that!

Financial health, or financially unhealthy?

I read an interesting article in the LA Times today about how Americans are tapping their home equity (the value in the home vs. the loan owed to the bank) to pay for things like credit card debt, trips, etc.

The article was more informative and didn't take any sides. Here are two quotes that made me angry and realize that people will say anything to make money.

"If you paid your mortgage off, it means you probably did not manage your funds efficiently over the years," said David Lereah, chief economist of the National Association of Realtors and author of "Are You Missing the Real Estate Boom?" "It's as if you had 500,000 dollar bills stuffed in your mattress."

He called it "very unsophisticated."

Anthony Hsieh, chief executive of LendingTree Loans, an Internet-based mortgage company, used a more disparaging term. "If you own your own home free and clear, people will often refer to you as a fool. All that money sitting there, doing nothing."

That's when it hit me, what the problem is: Education. Lack of it. Let me back it up with facts:

You have a $300,000 mortgage and are paying 6.5% for 30 years. Your payment includes principal (the $300,000 the bank gave you) and the interest (the money the bank makes when you borrow). Your payment? $1,896.20

That's made up of $1,625 of interest and $271.20 of principal in the first month of the loan. Yeah.

See, mortgages are structured so the bank makes most of their money in the beginning of the loan and much less at the end. So, what do banks want you to do? GET ANOTHER LOAN!

What would happen if you did not get another loan, rather - you put an additional $200 towards your mortgage every single month?

What I didn't mention yet is that when you pay extra on your mortgage each month, that extra goes directly towards your principal and since the bank's interest is just a percent of principal - over time you pay less in interest. But how much less?

How does $103,450 sound in savings? Yep. And your reduced the length of your mortgage by 6 years and ll months.

Here's the breakdown for you non believers: Your extra $200 per month ended up being $55,200 and because you didn't pay interest on that amount, you saved $103,450 in interest. (your $300,000 is always the same)

I guess you are now "a fool" and "very unsophisticated".

See, the real issue here is that people have not been educated on finance. In most high schools, kids are not taught simple finance. Balancing a check book, loans, interest, taxes, investing, etc.

When I was buying our house, I lived on this web site. Karl's Mortgage Calculator, and I can honestly say, it was the first and so far the last time that I actually donated money to a website that asked for it. I heard Joe Biden say something that I think really fits here: "...don't tell me what your priorities are -- show me your budget and I'll tell YOU what your priorities are."