A loan that'll get ugly fast

[trumptman]

LATIMES (http://www.latimes.com/business/la-fi-option11dec11,0,4921051,full.story)

EVERY day, Will Hertzberg owns a little less of his three-bedroom house in Corona.

Like hundreds of thousands of other homeowners around the state, Hertzberg has a mortgage that lets him choose how much he pays each month.

Like many of them, he always chooses to pay as little as possible.

Much like with the food thread, here we see the paradox of too much choice. When this gentleman is allowed to choose, he chooses to lose.

Earlier generations bought houses knowing they had no choice but to keep paying at the same rate for three decades. Their reward: the ability to sleep well, knowing their payments wouldn't abruptly adjust upward.

They also lived with that same linoleum in the kitchen from thirty years prior. They didn't refinance to add on, to upgrade, to update, to anything.

One of his options is to pay $2,513 a month. That would cover the principal and interest as if it were a traditional 30-year loan.

A second possibility is to pay $2,279, which would cover only the interest.

But each month he always takes the cheapest option: paying $1,106 and promising to make up the shortfall later.

This is a loan that allows one to dig themselves into a very deep hole yet you can see the advantages of it when applied properly. You don't have to be late on a loan when you can adjust the payment. If one spouse becomes temporarily unemployed, you can get by easier. Life's calamities are much easier to absorb when you can alter your debt payment by $1400 per month.

Last year, 1 in 5 loan applicants got one.

That is a lot.

HERTZBERG bought his house 11 years ago for $129,995, immediately after his second divorce. (He has no children.) Since then, Corona and the Inland Empire have boomed.

Comparable homes in his neighborhood fetch more than $400,000. With fresh paint and a few repairs, Hertzberg could probably sell his place for $275,000 more than he paid.

He would see little of that, however, because he's already seen so much. Over the years he has taken out $190,000 in cash through refinancings.

Hertzberg's home equity paid off his credit cards, financed trips around the world that allowed him to indulge his passion for photography, bought a $32,000 Toyota Avalon and enabled some lousy investments. He bought dot-com stocks and lost money. To recoup those losses, he bought commodities — and lost money faster.

I suppose I could feel bad for this gentleman for likely needing to walk into this loan. However he clearly has been using his house as a free money ATM for years now and using it to finance all manner of frivolous spending.

I know I am older for these boards, but in "real life" everything is still run by the baby boomers. 80% of my co-workers are 56 year old Will Hertzberg's and I have watched them go this route with their own personal finances. That doesn't mean all of them, but certainly more than should be comfortable spending this way at so close an age to retirement.

Two points...

1. Should loans like this be allowed to the general public? Historically they were limited to upper income levels while the democratization of debt has created Will Hertzberg's it has also likely created some success stories of folks who were able to finance opportunities.

2. How will America deal with boomers like Hetzberg, folks who not only didn't save over a lifetime, but managed to turn their advantages into debt, all while allowing deficit spending in the government and leaving a Social Security and Medicare entitlement that is going to go bankrupt after some how redeeming the IOU's that act as "assets" in their accounts?

Thoughts...

Nick

[AsLan^]

I'm not too sure about the big picture.

But I think these loans are a pretty good idea. Perhaps there should be some regulation on how they are presented to the consumer, maybe make it mandatory that people have to attend some kind of finance class before taking out any kind of credit.

Thats actually not a bad idea really. Part of the reason we have a drivers license is to prove we are competent at driving. On the road our actions can affect others. Perhaps we could use a license for credit.

It actually immediately reminded me of two other consumer disadvantageous schemes that people complain about. The reverse mortgage, in which you practically sell your house to the bank for a monthly stipend for the remainder of your life, and the pay day loan, lol, let that cheque bounce, see what happens, it's like Russian roulette.

Both of these credit agreements target the people who might not be able to make good decisions about credit (I don't know that statement to be true but it sounds right). If they are being used to take advantage of otherwise productive citizens (or previously productive in the case of seniors) and the net result would be detrimental to society at large, i.e. encumbering a person with so much debt that they are no longer able to function properly in society (pay day loan people), then it should be regulated by government.

These loans that you are talking about seem pretty interesting though and I personally like the idea. I'm not sure they require any regulation by the government because they don't appear really disadvantageous to society as a whole. In this particular case, Mr. Hetzberg is divorced and has no children and so has been living the good life without having to worry about leaving a legacy to support his loved in the event of his death.

[midwinter]

/me checks loan payment schedule...yup. 30 year fixed. making at least 2 extra payments per year.

[MarcUK]

I think that in a few decades there is going to be a global social catastrophe on a scale not witnessed before.

here in the UK, we've had a sustained property boom that should have ended years ago. Now people are spending virtually all their income to support their mortgage and spending more on credit cards to finance their life. Everyone thinks they're rich because their house is worth something, but I believe it is virtual wealth.

I've decided to stay out of this loop. I spent the last five years paying off my debt - its been painful and had to make alot of sacrifice, but i owe noone, pay for everthing upfront, and am starting to think about small investments or savings for the spare cash. All i have to do, is meet my rent commitment every month and pay the utilities.

On the surface, i appear to live a very simple life, dont own much, car, tv, computer, bed, guitar, hifi, some books....um thats it - and would certainly not give the impression i am well off, but I think im on a winner here - well certainly not a looser anyway.

I see alot of people, knowing that they're spending all their money on their mortgage, driving around in hp cars that they'll never pay for, 3 foreign holidays a year, houses rammed with possesions, giving the impression they're well off, but are actually up to their necks in debt repayments they'll never pay off, and im glad my simple existance doesn't have this noose.

One minor downturn and all these people living on the edge are going to be hung drawn and quartered. Thats a large proportion of the working and middle class in the UK, whats it like over the pond?

One minor downturn in the 30 years you're taking a huge gamble on in your finances - its very likely to happen. Given the extreme fragile nature of the cliff everyone is standing on, one minor downturn is going to turn into an avalanche pretty quick.

I seem to remember a story. For the first part of my working life, i built a very grand house in the sand - i saw the error in this and when it got washed away i rebuilt myself a hut on the rock. It can only get better for me from here out.

[AsLan^]

I seem to remember a story. For the first part of my working life, i built a very grand house in the sand - i saw the error in this and when it got washed away i rebuilt myself a hut on the rock. It can only get better for me from here out.

Nice little parable there.

I just learned to live in the water ;P

[MarcUK]

mutant!

[trumptman]

These loans that you are talking about seem pretty interesting though and I personally like the idea. I'm not sure they require any regulation by the government because they don't appear really disadvantageous to society as a whole. In this particular case, Mr. Hetzberg is divorced and has no children and so has been living the good life without having to worry about leaving a legacy to support his loved in the event of his death.

Well you neglect to deal with the second part of the my point though. The man is 56, marginally employed, likely to lose his only asset and thus become a ward of the state throughout his retirement.

He isn't just leaving his lack of planning to his kids, but everyone's kids.

/me checks loan payment schedule...yup. 30 year fixed. making at least 2 extra payments per year.

Only 2?:lol:

What do extra payments do? Get you done faster?

You can't be serious right? Play with a program that does loan amortization.

I see alot of people, knowing that they're spending all their money on their mortgage, driving around in hp cars that they'll never pay for, 3 foreign holidays a year, houses rammed with possesions, giving the impression they're well off, but are actually up to their necks in debt repayments they'll never pay off, and im glad my simple existance doesn't have this noose.

One minor downturn and all these people living on the edge are going to be hung drawn and quartered. Thats a large proportion of the working and middle class in the UK, whats it like over the pond?

One minor downturn in the 30 years you're taking a huge gamble on in your finances - its very likely to happen. Given the extreme fragile nature of the cliff everyone is standing on, one minor downturn is going to turn into an avalanche pretty quick.

It is indeed that way "over the pond." The American savings rate is negative.

Nick

[AsLan^]

Well you neglect to deal with the second part of the my point though. The man is 56, marginally employed, likely to lose his only asset and thus become a ward of the state throughout his retirement.

He isn't just leaving his lack of planning to his kids, but everyone's kids.

Do we even do that in the states?

That's a serious question though, I was under the impression we had no safety net in the states.

[MarcUK]

It is indeed that way "over the pond." The American savings rate is negative.

Nick

I do wonder though, if this is all pointless? Id like to do the sensible thing, but frankly if every greedy fucker is going to go down the drain when the shit happens, and that is pretty much half of everyone, then the scale of the ensuing economic collapse is pretty much going to make my small investments worthless.

I could go out tomorrow and live a few years of the fast-lifestyle on my credit card alone, and pretty much file for bankruptcy to wipe it clean, I wouldn't actually lose anything worthwhile. Would sure be fun.

[Frank777]

/me checks loan payment schedule...yup. 30 year fixed. making at least 2 extra payments per year.

Yep. That's definitely the way to go. Most people don't realize how much those extra payments can save.

[midwinter]

Yep. That's definitely the way to go. Most people don't realize how much those extra payments can save.

Ours save something like $40K over 30 years.

[e1618978]

I do wonder though, if this is all pointless? Id like to do the sensible thing, but frankly if every greedy fucker is going to go down the drain when the shit happens, and that is pretty much half of everyone, then the scale of the ensuing economic collapse is pretty much going to make my small investments worthless.

I could go out tomorrow and live a few years of the fast-lifestyle on my credit card alone, and pretty much file for bankruptcy to wipe it clean, I wouldn't actually lose anything worthwhile. Would sure be fun.

Look at past economic collapses as your guide - the stock market and the real estate market have little correlation, if the real estate market collapses that does not mean that your stocks will as well (in fact, people will be pulling money out of real estate and putting it into stocks, so the stock market may benefit from a real estate crash). Your best bet in an over-heated real estate market is to rent like you are doing, and put as much money into the stock market as possible (once you are out of debt, as you are).

When the real estate market crashes, you will have a nest egg that you can use as a down payment when you take advantage of the distress of others by buying their bankrupt housing investment for a discount. I don't know if mortgage interest is deductible in the UK, but it is in the USA which makes a house an unbeatable investment if you don't overpay. The actual house depreciates over time, though, so if you have the choice a small house on land is better than a big house with no land.

[BRussell]

Ours save something like $40K over 30 years. We refinanced a few years ago to a 15-year loan. The total cost of the home cut about in half.

[midwinter]

We refinanced a few years ago to a 15-year loan. The total cost of the home cut about in half.

Maybe after we both make associate....

[BRussell]

Much like with the food thread, here we see the paradox of too much choice. I'm interested in your reference to this. What's the background on it?

The reason I ask is that there's a guy in my area of research (Barry Schwartz) who has done a lot of this stuff. Are you familiar with that?

[groverat]

This is simple, it is a problem of values. Modern industrial consumer culture is completely rootless and soulless.

I will tell you guys the quick story of 3 couples. CoupleA, CoupleB, and CoupleC. All three couples are similar in age and make (combined) roughly the same per year.

CoupleA: Married 3 years with a 2-year-old child. The husband's 401(k) is maxed out (attorney). The wife's 403(b) is maxed out (teacher). They invest roughly 20% of their after-tax income in various stocks, bonds, and funds. They carry $2400 in consumer debt, all 0% interest with money in a 5%-gain savings account with funds sufficient to pay off those consumer debt loans once the 0% grace period is over. Both the husband and wife have consolidated their student loans ($79k) and pay them off on time (not early, because they feel they get a better return investing the extra). They currently carry at $2100/mth mortgage on a home, an older home on a big lot. - Background: both raised middle class

CoupleB: Married 2 years with no children. The wife's 401(k) is maxed out (attorney). The husband's 403(b) is maxed out (teacher). They invest roughly 20% of their after-tax income in various stocks, bonds, and funds. They carry $600 in consumer debt, all 0% interest with money in a 5%-gain savings account with funds sufficient to pay off those consumer debt loans once the 0% grace period is over. Both the husband and wife have consolidated their student loans ($65k) and pay them off on time (not early, because they feel they get a better return investing the extra). They pay $1210/mth for an apartment. - Background: both raised lower middle class

CoupleC: Married 4 months with no children. The wife invested $2500 in her 401(k) last year ($14000 was the maximum). The husband contributed nothing to his 401(k).They invest 0% of their after-tax income. They carry roughly $20,000 in consumer debt, all on various credit cards with varying interest rates. They pay the minimum on their student loans. They carry a $2600/mth mortgage on a home, a brand new home on a half-lot. - Background: both raised upper middle class

All roughly the same spending power. All roughly the same "needs". All living in the same city. It is amazing what a few simple decisions can do. It is a matter of financial intelligence and, more importantly, good values. I shudder to think what happens to CoupleC in a few years.

1. Should loans like this be allowed to the general public? Historically they were limited to upper income levels while the democratization of debt has created Will Hertzberg's it has also likely created some success stories of folks who were able to finance opportunities.

Usury should be prohibited.
There should never be an interest rate higher than 10%, ever, for any reason with regards to private citizens.
People should be disallowed all credit and loans after a certain amount of mismanagement on their part.

2. How will America deal with boomers like Hetzberg, folks who not only didn't save over a lifetime, but managed to turn their advantages into debt, all while allowing deficit spending in the government and leaving a Social Security and Medicare entitlement that is going to go bankrupt after some how redeeming the IOU's that act as "assets" in their accounts?

I think the "Social Security is doomed" naysaying is misguided. The real threat to SS is our government raiding its coffers to pay for non-SS expenditures.

There are too many problems with the way our culture operates to list without getting too depressed to type, but one of the big ones is how little people are educated with regards to finances. All high school programs should include intensive personal economics courses, so that we do not send people out into the adult world with no idea as to how things work.

[trumptman]

Do we even do that in the states?

That's a serious question though, I was under the impression we had no safety net in the states.

There is, but it requires you to be bankrupt.

I do wonder though, if this is all pointless? Id like to do the sensible thing, but frankly if every greedy fucker is going to go down the drain when the shit happens, and that is pretty much half of everyone, then the scale of the ensuing economic collapse is pretty much going to make my small investments worthless.

I could go out tomorrow and live a few years of the fast-lifestyle on my credit card alone, and pretty much file for bankruptcy to wipe it clean, I wouldn't actually lose anything worthwhile. Would sure be fun.

There are plenty of inflation hedges out there. It does make a large difference over a lifetime. Perhaps everyone will be wiped out but someone will need to clean up the mess and it can be you.

I'm interested in your reference to this. What's the background on it?

The reason I ask is that there's a guy in my area of research (Barry Schwartz) who has done a lot of this stuff. Are you familiar with that?

I have the book and it is on my January break reading list. I'm not going to claim to be familiar with it yet.

Nick

[midwinter]

...Anyway.

The purpose of extra payments is to pay off the loan faster, right?

Sort of. It's to pay less in the long run.

[trumptman]

...Anyway.

The purpose of extra payments is to pay off the loan faster, right?

It's much more than that Shawn. On a thirty year note, for example with a $200,000 loan, you end up being charged $900-1000 a month as interest on your loan. The principle only goes down $200-300 a month in the early years of the loan.

So if your house payment is $1200 (only principle and interest) you are basically paying say.. $250 principle and $950 interest.

So when Midwinter makes an extra payment he doesn't just pay the loan down faster. He saves the interest he would have paid during those payments in order to move the principle down the same amount.

In this example, two extra payments (say $2400) on principle would save you approximately $9120 in interest.

Nick

[Frank777]

Most mortgages have a clause saying you can make at least one extra payment a year.
But some banks don't go out of their way to tell you, for the reason Trumpt has just described.

[PBG4 Dude]

You can make extra principle payments every month. I've been doing that since day 1 of my mortgage. My ~$100/month extra principle payment turned a 30 year mortgage into a 13yr 8month mortgage. I refinanced to a 10yr mortgage in 2k5 while rates were still at historic lows and saved even more time & money.

[midwinter]

You can make extra principle payments every month. I've been doing that since day 1 of my mortgage. My ~$100/month extra principle payment turned a 30 year mortgage into a 13yr 8month mortgage. I refinanced to a 10yr mortgage in 2k5 while rates were still at historic lows and saved even more time & money.

We came close to refinancing then, too, but when we started to look at it, they payoff for us wasn't enough. If we'd had one of those 15% APRs, though, I'd have done it in a heartbeat. But we were looking at shaving off only about a point or a point and a quarter.

[trick fall]

We came close to refinancing then, too, but when we started to look at it, they payoff for us wasn't enough. If we'd had one of those 15% APRs, though, I'd have done it in a heartbeat. But we were looking at shaving off only about a point or a point and a quarter.
If you are making extra payments you should probably add a little extra every month as opposed to making a 13th payment at the end of the year.

[midwinter]

If you are making extra payments you should probably add a little extra every month as opposed to making a 13th payment at the end of the year.

We pay bi-weekly but make 3 payments in May and November, so it's not quite a 13th at the end of the year. But yeah, we should pay a little extra each month. I'll look into that.

[MarcUK]

you guys all have too much money! - Anyone willing to give me a backhander so I can go off to university and get a proper education in cosmology or suchlike? :lol:

[trailmaster308]

The wife and I have been blessed with being able to pay our house off this year. I am 30. Every penny I make either goes into my 401(k), Vanguard MF, or my MM.

Currently, I am building up my Money Market accounts b/c the stock market scares me. At least I am getting a steady 5.25% APY on my cash accounts.

I like this thread. I think we should start a PF thread to swap money making/saving ideas.

[SpamSandwich]

The wife and I have been blessed with being able to pay our house off this year. I am 30. Every penny I make either goes into my 401(k), Vanguard MF, or my MM.

Currently, I am building up my Money Market accounts b/c the stock market scares me. At least I am getting a steady 5.25% APY on my cash accounts.

I like this thread. I think we should start a PF thread to swap money making/saving ideas.

Hear, hear. Melgross should have a thing or two to say about investing. ;)

BTW, how much did you pay for your house, and when did you buy it?

[trailmaster308]

Hear, hear. Melgross should have a thing or two to say about investing. ;)

BTW, how much did you pay for your house, and when did you buy it?

$242,000 about a year ago. (inheritance) Like I said, we are blessed in that our families have done well for themselves and have started giving gifts to us both at the end and beginning each year.

[SpamSandwich]

$242,000 about a year ago. (inheritance) Like I said, we are blessed in that our families have done well for themselves and have started giving gifts to us both at the end and beginning each year.

Great start to your future in real estate... :D

[mydo]

What do extra payments do? Get you done faster?


On a fixed rate loan making extra payments is roughly equivalent to putting your money into a savings account that pays the same rate as your loan. For anyone with a low rate loan you're better off making "exrta payments" to your retirement. You'll earn more in the long run.

[trick fall]

Amortize those extra payments over twelve months and it should reduce your principal more quickly.

[mydo]

Or put it into something that earns at a higher rate than your loan charges and your make money more quickly.