No More Car Payment

[Taylor]

I realised that could sound like opposition to Taylor's post, and it wasn't meant to. I agree that Christian education is valuable for many people, and that it involves sacrifices and can be done without massive debt. My parents sacrificed a lot to put my siblings and me through Adventist schools. We just decided differently for our own children, and of course every decision has costs and benefits.

Na Bravus...you's considered a friend..no worries. :)

[Dr. Shane]

Originally Posted By: Shane

If we can't afford a 15 year loan we can't afford the house... We shouldn't borrow more for education that we will make our first year out of school...

I presume the proverbial 'we' is just speaking of yourself! I'M sure you don't mean that everyone should be following your advice, eh!

The 15 year loan advice comes from ministries like Crown Financial Ministry and Dave Ramsey. I think many of our Adventist Conference Stewardship directors would agree with that.

The student loan advice comes directly from the federal government's mandatory student loan counseling that every student has to take before getting a student loan.

So yes, I think that advice is good for everyone.

[fccool]

I also agree with Olger's other point: *everyone* should be able to do something practical with their hands. I worked my way through college in factories and lumberyards, and rebuilt engines and a variety of other things, and am confident to do most things around the house. Someone with a university degree who can't plant and tend a garden, fix a tap washer, clean the air filter of a lawnmower or whatever is, IMO, not properly educated.

Well, on top of that I think that we should not teach our children to specialize. That was not what education was back in the days. Today we have a specialization degrees for temporary positions that may be lost fairly soon due to technology advances, or demand drops. Then they have to go back to school and specialize again.

I can speak for my area of multimedia production... I would not advice anyone to go to college to learn that. By the time you get out, the software that you learned is fairly outdated, and in most cases what took 2 days to do... now takes a couple of clicks. So, teach your kids to be self-learners. When a resume and a demo-reel drops on my desk, I am more impressed with self-learners, because they really figured it our on their own, and show that they can keep up with whatever you throw at them. Unfortunately, the college interns that we've had so far... I had to hold their hand wherever they go, as they are in a "culture shock" that the theory is quite different from reality. So, they end up re-learning everything anyway.

It was hilarious to the extend that we have had a guy with a business major... who just was looking for something to do over the summer, and a guy who specialized in animation software. We ended up showing both of them what to do, because both of them had little clue. The guy with the business major was eventually a better animator than the guy who spent 4 years studying it. I could not believe it! We ended up putting him on credits for animation and compositing on the film we were working on.

[GreatLakesGramma]

"If we can't afford a 15 year loan we can't afford the house."

Truth.

og

I disagree. When we bought our house, we got a 30 year mortgage. At the time, our payments were slightly less than what it would have cost to rent a house or apartment. Now they are a LOT less. If our income dropped to the point where we couldn't afford the payments, we also couldn't afford to rent anything fit to live in now. But if that did happen, we could sell the house. And though the equity is considerably less than it was last year at this time, it's still enough that we could buy a mobile home, put it on our own land, and live with neither rent nor mortgage. If we'd been renting all these years, loss of income would leave us homeless instead.

And in the long run, we'd have paid considerably more for the "privilege" of ending up homeless.

[Jeannieb43]

A good way of paying off a mortgage faster is to get a 30-year mortgage, but to make double payments. If you pay your regular mortgage payment on the first of the month, and then a second payment of the same amount on the 15th of that same month, you'll end up paying off your entire mortgage in 15 years -- saving a whole lot of interest, and owning your home free and clear much sooner!

The reason for getting a 30-year mortgage rather than a 15-year mortgage is to protect in case you get into tough economic times, and then you'd be able to fall back onto paying just one payment each month.

[Bravus]

It'll actually be a lot less than 15 years, due to getting the miracle of compound interest working for your rather than for the bank. Haven't run a simulation recently but I seem to recall it being something like 8 years from examples I've seen.

[Dr. Shane]

Biblically we should strive to live debt free. The borrower is the slave of the lender (Prob. 22:7). If a person wants to pay a 30 year mortgage off in 15 years they double up on the principle. That is what I do and I have a 15 year mortgage. An amortization schedule tells how much of each payment is going to the principle and how much is going to the interest. Say payment #19 has $75 going to the principle and $805 going to interest and payment #20 has $78 going to the principle and $802 going to the interest. What we can do is when making payment #19 we pay the $880 payment plus the $78 principle of payment #20 and will thus save the $802 from payment #20.

Choosing a 30 year mortgage or choosing a 15 year mortgage is not just a matter of personal choice like choosing a Mazda or a Toyota. It is the difference of choosing 30 years of indentured servitude or 15 years of indentured servitude. Depending on the interest rate and the price of the house it will also be the difference of about $50k to $150K over the life of the loan. Has anyone other than me noticed that bank buildings tend to be bigger and more luxurious than church buildings? There are some big and luxurious churches but there are more big and luxurious banks. That is because people pay more money to banks in interest than they give to churches in offerings.

Look at the math:

$200k house, 10% downpay 30 year loan at 6.5% $1,138 a month times 360=$409680!

$200k house, 10% downpay 15 year loan at 6.2%(yes its cheaper) $1,538 a month times 180=$276840

If you cant afford the 15 year loan, buy 74% as much housing so $148k instead of $200k.

$148k house, 10% downpay 15 year loan at 6.2%(yes its cheaper)

$1,138 a month times 180=$204840

This means a 15 year loan on a 148k house will cost exactly half as much as a 30 year loan on a 200k house!

[Neil D]

Um....I'm in the market for a house....and the only loans out there now require 3.5% per $100k down for an FHA home ...or 20% down for a conventional home loan....at least in my area...

Where are you coming up with a 10% down?

[Dr. Shane]

The 20% down is due primarily because of the financial crises we are in. Last year, before the crisis hit, my secretary bought a new home with no money down. Banks were also loaning money out to home buyers for the down payment. So a home buyer would take out two loans. One for the home and another for the down payment. There were a lot of home buyers that were buying homes with less money down than what the first and last month's rent it would take to get an apartment.

Regardless, the numbers can be adjusted for different amounts of money being used as a down payment and no matter how we play with those numbers a 15 year loan is a lot better deal for the consumer than a 30 year loan. Just look at a nice tall bank building and it is little wonder that they are getting the better end of the deal.

[GreatLakesGramma]

The reason for getting a 30-year mortgage rather than a 15-year mortgage is to protect in case you get into tough economic times....

[Dr. Shane]

Getting a 30 year loan is not the only way to get a lower house payment. The other option is to buy less house. A family can always sell the house later and upgrade if their income increases. Buying a house on a 30 year loan is understandable when the person doing it has never had good financial counseling. I have made a lot of stupid financial mistakes because I didn't have good financial counseling. 30 year loans make the bankers rich. That is an undeniable truth. Trying to defend a 30 year loan is like trying to defend using a credit card with 18% interest.

A home financed on a 15 year loan has more equity after five years than a home financed on a 20 year loan does after 10 years. It is like buying a television at some rent-to-own shop. It is just a poor financial decision.

Now, concerning cars. The best deals are normally found at auctions and in the classified. Buying a car on a used car lot is a little better than buying one from a dealer but those are professional sales people whose livelihood depends on them getting more money for the car than it is worth.

[GreatLakesGramma]

Shane, you're entitled to your opinion. But I don't agree with you, and I never will. You can say what you want, but there is no such thing as a fixed rule that fits everyone under every circumstance. In our case, "less house" would have been either too small, in an unsafe or unhealthy condition, or in an unacceptable location.

It was more important to us to live on a single income and for me to be home to raise the kids and homeschool them, and also to live in the country and have a big garden, room for the kids to spend time outside without having neighborhood kids around to be a bad influence, and living in peace and quiet, instead of being forced to listen to other people's bad taste in music at high volume when we'd really rather listen to the birds sing and the wind blow. AND to keep my grandparents' house in the family. Our priorities are different than yours. We would rather let the bank have more of our money than live in what we could afford with only a 15 year mortgage. That is our choice to make. It has nothing to do with bad financial counseling.

[Dr. Shane]

Not just my opinion. It is the consensus of Christian financial ministries like Crown Financial Ministries and Dave Ramsey. Call your local Conference Stewardship Director and he or she will probably agree too. It is what it is. Please, don't put my name on it because I really don't deserve that honor. I realize some people can not and never will be able to admit they goofed up. I can and I do. I am human and not above making mistakes. A 30 year mortgage is a mistake. And it is a very common mistake.

[GreatLakesGramma]

I am not putting your name on it. And it doesn't make any difference who says it. We are the only ones who have the right to choose what our priorities will be, especially when we are following God's leading in doing so.

[Neil D]

Not just my opinion. It is the consensus of Christian financial ministries like Crown Financial Ministries and Dave Ramsey. Call your local Conference Stewardship Director and he or she will probably agree too. It is what it is. Please, don't put my name on it because I really don't deserve that honor. I realize some people can not and never will be able to admit they goofed up. I can and I do. I am human and not above making mistakes. A 30 year mortgage is a mistake. And it is a very common mistake.

and in the process, insult someone's choices, and lifestyle and principles ......

.....Not the best of responses...

[Dr. Shane]

Most of us make financial decisions based on either what our parents did our what our peers are doing. No one should look down on someone or insult someone for getting a 30 year mortgage. That is not what I am trying to do. However once we realized that we have fallen into the same trap that most of America has, there is no shame in admitting that. In fact, if a person with a 30 year mortgage refinances and gets a 15 year mortgage that is in itself admitting something.

However it isn't just Christians. I got my business degree from Minnesota State University, Mankato and there in my finance class our professor told us not to get a 30 year mortgage and showed us why.

[GreatLakesGramma]

In fact, if a person with a 30 year mortgage refinances and gets a 15 year mortgage that is in itself admitting something.

You can't accurately reach any such conclusion without knowing more than you do, such as how many years were left on the previous mortgage. And also whether or not someone was/is paying more than the minimum on either mortgage.

Like JeannieB said, the purpose of a 30 year mortgage is as a safety net - important when your income is not dependable. It's good for the slow years, but there is no law preventing you from paying as much as you want in the good years. When it comes to keeping a roof over my head, I prefer to play it safe. But I also have no intention of remaining in debt any longer than necessary, regardless of the dates on the papers.

[Dr. Shane]

No, the purpose of a 30 year mortgage is to make bankers rich. The 30 year mortgage is not designed to benefit the consumer. That is what folks like Dave Ramesy, Larry Burkett and my college professor have been telling us all along. Now we can either believe them and act on that truth or call them a liars and send our bankers on exotic vacations while they build themselves luxurious skyscrapers.

[fccool]

I agree. You may be paying 150% of the value of the house in interest alone on top of the actual value of the house.

Ether way, I take an extreme position when it comes to this issue decide that we are going to buy our condo for cash. Once we save up more, we will trade it for a house.

There are a couple problems with "owning" a house right off the bat... as many of my friends are now finding out. The mentality was that the housing prices will constantly rise, so it is justifiable to go into debt to build up that "equity".

The problem of course, as Shane pointed out, is that while the house appreciation will vary (both appreciate and depreciate) the interest payments remain constant.

So, if you have bought a house for 150k, and it dropped to 130 due to the overvalued market... You are now locked into your mortgage until you can either come up with extra 20k and sell the house, or until housing prices will again match the original value. The only way you can walk away is to default, in which case you forfeit the invested equity (which in this case was no better than rent). On other hand, if you rent, your only obligation is the period of time that your lease is signed.

But, here's why I would recommend renting instead of buying for the younger people right now.

1) When you buy a house, what you will be paying to the bank is not the only costs associated with house ownership. You have to pay property taxes every year on the house. When your heater/air conditioner breaks down... guess what, that's and extra money out of your pocket. The heating bill is much higher for a house than an apartment. And generally, it's expected that you will spend around 1% of the value on repairs, lawn care... not to mention all of the time associated with these tasks.

2) When you rent, although you do pay money to landlord, instead of the banker, if you are smart about it you can save much more money by renting.

For example. Our two bedroom apartment rent right now is $670/month... which includes the cost of heating. If we bought a comparable size of a house (which has to be fairly old), it'd probably cost us around 100k (taking the lowest possible scenario). If we did take out a 15 year loan for it at current APR... we'd end up paying total of about 50k in interest... or 3300 per year in interest. On top of that, you can add various fix up costs of 1%, or 1000... taxes on property of about 800, and insurance... let's say $400 and additional heating and AC costs of about 500 (being generous here).

So, overall you end up with 7200 of overhead, as opposed to 8040 rent.

One may look at it and think... hmmm, house seems like a better deal. BUT! If you are in a financial predicament, you can most certainly walk away from rent without much trouble... and the saved principal. You can not always walk away from a house.

I understand that this scenario will not fit everyone equally. But this is the reason why we decided to rent and save for a condo.

[Dr. Shane]

Renting is necessary for many people at least in the short term. Some people don't have good enough credit to get a home loan so they have to rent until they can build up their credit. Some have jobs that are constantly moving them around so they would never live in a home to build up any equity. And, of course, young people need to save up for a down payment.

However I don't believe a person should rent for the long term unless their employment is constantly moving them around. Let's look at the Houston market for an example.

A three-bedroom condo can be purchased for around $70,000. A two-bedroom can be purchased as low as $30,000 but average around $55,000. (Not taking into account the high-dollar condos). Given 20% down and a 15-year loan with 6.5% interest that would give a person payments of $455/month for the 2 bedroom and $548.month for the 3 bedroom. Add about another $70/month for taxes.

A two bedroom apartment in Houston is going to cost at least $650/month and a three bedroom is going to be closer to $900. All rent paid is lost income and in the end the renter has nothing.

The other option is buying a mobile home. Money spent on a mobile home is lost income unless the person buying it plans to live in the home until they die. But even under such circumstances the a mobile home should not be parked in a rental park. If a person chooses to buy a mobile home they should look for a repossessed home that is less than five years old and purchase a lot of land to park it on at the same time as purchasing the home. In the Houston area a person can buy a 3 bedroom, double-wide mobile home set up on an acre lot for $80K.

Those with bad credit can often buy a home contract-for-date. This is especially true for buying mobile homes already set up on lots (not in a rental park). Mobile homes are harder to sell so owners will often sell them contract-for-deed. However many regular homes are sold contract-for-deed. The disadvantage of a contract-for-deed is that the interest rate is higher. Instead of getting a 6.25% or 7% interest a buyer will pay 10% or 12% interest. If going this route, just make sure there is no penalty for paying the home off early - there usually isn't.

It is true that the home owner has to pay taxes and maintenance. However the renter pays these too - just indirectly. The biggest reason to buy a home is so that when a person retires they have a place to live that is paid for. A home also serves as an investment in case a person ever wants to sell it but many people will die in their home in which case that is not an issue. Others will want to sell their home after they retire and buy a small condo and an RV.

[Bravus]

Different situations also change what works best. I believe in the US the interest on your own home loan is tax deductible. In Australia that's not the case but the interest and costs on an investment property are. So right now we're renting the place we live in and buying an investment property. We can rent this house for about half what the mortgage on it would be, and get all the benefits of renting that fccool outlined above, but because we are also buying (and renting out) an investment property we are still on the equity and appreciation roundabout. Not for everyone, but the most advantageous approach for us at the moment.

[Dr. Shane]

Bravus, so is the person renting your investment property paying more rent than your mortgage payments on it?

[Bravus]

No, significantly less: with the way Australian property prices have shot up in the last decade, almost every rent is about half the cost of the mortgage on the same property. But all costs and losses on the property are tax deductible, and I make enough money that that's helpful. So we probably pay out something like AU$14,000 per year on top of what the tenant pays in rent, for mortgage, property taxes, management, maintenance and body corporate fees, and get something like half of that back from the taxman at tax time (good forced saving!). So we're really only ahead when the property appreciates - but there seems to be pretty good evidence that it will in the long term. The alternative would be to be paying about the same on everything but getting none of it back on tax.

[Dr. Shane]

I have had people tell me here in the US that they have a 30 year mortgage so they can get a tax deduction. That makes me want to wrap my head with duct tape so it doesn't explode. If a tax deduction is what they want they can just give more money to the church instead of the bank. I suspect what they really want is a big house for a small payment.

[fccool]

One of the problems with buying a house right now, is that (I believe) these are still somewhat overpriced. I think that prices still have some ways to go till the market bottoms out.