Archives For Investing

Top 5 Mortgage Mistakes

Corey —  April 19, 2012

As someone who is looking forward to purchasing a condo next year, I have been doing a crazy amount of research on mortgages.  Honestly, I keep stumbling upon mistakes that people have made with mortgages.  Since I don’t want to be someone who makes a mistake with their mortgage, I’m planning on soaking in all useful advice and attempting to make the wisest decisions I can going forward!

So, what are the worst mortgage mistakes one can make?  Well, I’ve compiled the top five mortgage mistakes and hopefully you can learn from what other people have done wrong and not make the same mistake!

1- Taking out an adjustable rate mortgage

Can someone say 2008?!  This is what caused our most recent recession among some other things.  An adjustable rate mortgage plays into the greedy side of Americans and allows you to buy a bigger house than you can afford.  The first few years, you’ll have a really low interest rate but then this rate ends up shooting up over time.  The problem with this is that you’ll end up drowning in interest payments and more than likely lose your home!  Talk about humiliating…

2- Settling for a reverse mortgage

For the crowd of age 62 and older, a reverse mortgage may seem inviting but it’s designed to bite you in the butt.  What a reverse mortgage does is provides a stream of income by pulling out funds from your home equity.  This can be paid out through an annuity or monthly payments.  It’s up to you what poison you pick because either way, you’ll be faced with hefty fees and you will slowly lose ownership over your home and have to hand it all over back to the bank.  Does not sound like fun to me!

3- Skipping the down payment

If there is one thing you need to remember from this article, it’s that you NEED to put down a down payment!  Why you ask?  It’s not unusual to find yourself upside down with your mortgage if you don’t.  You can end up owing more money than your home is worth.  At this point, it’s flat out painful.  You want to avoid this situation.

4- Can anyone say exotic mortgages?

I bet you’ve never heard of these bad boys.  Exotic mortgages may sound enticing but they are dangerous financial vehicles!  Instead of building up your equity, exotic mortgages produce negative equity.  Yes, you’re naming your payment price, but at some point, all the debt you took out for your mortgage is going to come due.  As the years go on, you are increasing the amount you owe.  It’s counter-intuitive and I advise that you avoid this at all costs.  Owning a home is not worth this risk!

5- Liar, liar, pants on fire: liar loans

Liar loans make me sick just thinking about them.  Not only are they irresponsible to take out but they can ruin your financial life.  At the core of a liar loan is that you don’t need to produce any verifiable documentation in terms of income and job stability.  In theory, people can lie on these loans and the bank will just assume you’re telling the truth.  Because you lied on your income statement, you will soon find yourself not being able to make the monthly payments.

Don’t fall for these mistakes!

In conclusion, don’t fall for these bad decisions.  While they may seem cool and unique, they are designed for your failure.  There is something to be said about ethical mortgages and choosing responsibility over showing off a big house.  At the end of the day, you should only be buying enough house for your needs.  It’s anti-American to do that but times are changing!

S&P 500 Soars After Earthquake!       This just in… today’s earthquake in Mineral, VA that prompted the evacuation of several buildings in Washington caused the stock market to soar. Stocks edged a full 1.23% higher before closing for the day after the temblor* hit the East Coast. In other news, butter production in Bangladesh was up 0.615% on August 23, 2010.

       And that’s why financial reporting is completely ridiculous… All the financial reporting that talks about stock market movements should come with a required phrase – “We think that the stock market…”. It’s amusing how we try to peg exactly what caused the market movements and why. The truth is these are only guesses.

       But seriously, the stock market really did go up after everyone in Washington had to leave their offices. Coincidence? I think not.

* Note: I picked this up from NPR. Gotta love thesauri…

A Reasonable Question about Gold

Corey —  August 15, 2011

Gold Bars by Mark Herpel on Flickr       On Friday, Free Money Finance posted a link to Sound Mind Investing’s new and free ebook about investing in gold. You can sign up to get the ebook here if you’re interested. I’ve been reading about this issue of gold, inflation, and the declining dollar for a bit now so I thought I’d check it out.

       After reading it, I headed back to FMF’s site to leave a comment and was pleased to find an insightful comment from Rick Francis who writes at Pondering Money. Rick’s question was this: If you believe that the dollar will weaken, political gridlock will continue, and that these are bad things, why not hedge against inflation with something that hasn’t had a “meteoric” (as SMI puts it) price increase? And while you’re at it, why not choose a commodity that actually has practical uses like oil, real estate, or food? (Or if you’re really worried, shotgun shells and bottled water…my words, not Rick’s.)

       Take, for example, copper. Copper has a large number of practical applications while gold has only a limited few. Now I’m not saying copper is the right choice. I’m just giving you an example. Oil could be another good example.

       Here’s another one: real estate. Or even better, how about real estate with a commodity on it – land with standing timber. Again, I’m not saying these are the ideal alternatives for gold. Rather, I’m simply trying to make the point that there are some other commodities that you can make a better case for investing in than gold. So don’t try to take me to task for a possibly poor choice of replacements. The question still stands: can we find no better, more useful, more reasonably priced commodity to use as a hedge against inflation than gold?

Is Renting Throwing Away Money?

Corey —  December 20, 2010

Rent or Buy - Your Choice!       I recently had a friend comment that renting is “throwing away money”. This is a common misconception because home ownership has been touted as the best path to building wealth and a great decision for everyone. But the truth is that renting isn’t really as bad as some would have you think. In fact, it can be the best choice for many people – it all depends on your situation.

       But specifically, I want to look at the idea that paying rent is just throwing away money. The unspoken assumption in that idea is that once you buy a home you’re no longer throwing away money. This simply isn’t true. Here are five ways you throw away money when you buy a home.

1. Mortgage Interest

       Assuming you get a mortgage when you buy a house, like most everybody does, you’re going to have mortgage payments to make. Part of those payments will go toward the principal (what you paid for the house minus your down payment) and part will go toward interest.

       The part of your mortgage payment that goes toward interest is just as much “throwing away money” as rent payments are. It’s money you’ll never get back and does nothing to improve your net worth. And on an average 30 year mortgage, it’s going to take you about 16 years before you’re paying more toward your principal than you are toward interest.

       Granted, this isn’t as big of an issue later in your mortgage and it doesn’t matter at all once it’s paid off. But don’t underestimate just how much money you’re going to be throwing away on mortgage interest – especially at the beginning.

       And while we’re on the topic of mortgage interest, let me just add that the mortgage interest tax deduction isn’t as good as you think

2. Homeowner’s Insurance

       Homeowner’s insurance can cost anywhere from about $600 a year to $1,200 a year or more. By comparison, my renter’s insurance policy costs about $110 per year and it’s some pretty good coverage. So you’re looking at an additional $500 to $1,100 or more in insurance premiums because you’re covering the entire value of the home. (Renter’s insurance is mostly just for liability and contents of the home.)

       Part of the money that’s “thrown away” in rent goes toward the insurance coverage the landlord buys for the home. So make sure you take this into account when comparing the difference between renting and owning.

3. Property Taxes

       Own a home? Be ready for your property taxes, which can be anywhere from 0.25% of the value of your home up to 3% or more. The national average was around 1% the last time I looked. So for a $150,000 to $200,000 home, you’re talking $1,500 to $2,000 a year in property taxes.

       Renters don’t pay separate property taxes on the home they’re renting. Those taxes come out of the rent they pay, but renters never see a separate bill for property taxes owed.

       And no, you can’t refuse to pay your property taxes. Do so and you can say goodbye to your home.

4. Home Maintenance and Repairs

       As a homeowner, you’re completely responsible for all maintenance and repairs on your home. These costs are going to vary quite a bit based on each situation, but I’d say a reasonable estimate would be about 1-2% of your home’s value each year. So for our $150,000 to $200,000 home, we’re talking about another $1,500 to $4,000 a year in costs. Maybe you could get away with less, but you’re looking at a minimum of $500 to $1,000 per year.

       Renters? Yeah, they don’t have to deal with these costs. They’re the responsibility of the landlord. And while you could have a landlord that doesn’t take care of the property, it’s pretty easy to move somewhere else. Which brings me to…

5. Higher Costs for Moving

       Moving tends to be much more of a hassle for homeowners than renters. It can take some time to sell a home – time you may or may not have before you need to move or start paying on your next mortgage. On top of that, you’ve got costs associated with selling that come out of your final price (commissions, inspections, and sometimes closing costs if you’re in a real hurry). Some of these costs can be reduced by doing it yourself (for sell by owner) but then you’re looking at more time and effort on your part (and you’ll still want to get a real estate attorney).

       Renters have it pretty easy here. Assuming you’re at the end of your lease, it’s no big deal to find another place and move. And if you’re not at the end of your lease, it’s probably going to cost you less to break the lease than it would cost a homeowner to sell their house.

Repeat after me: “Renting is not always throwing away money.”

       It should be clear that there are plenty of ways to throw away money if you own a home – enough ways to make it worse than renting. That’s the case for me, at least, and that’s why I plan to rent for quite a while longer. I’d need a phenomenal deal to make buying a better choice than renting at this point. And it may be the case for you as well. The least you could do is take some time to play with a rent vs. buy calculator and see how the numbers work out for you.

       I should add that I didn’t even discuss the fact that many people tend to overbuy when they become homeowners. And did I mention the desire to remodel, upgrade, paint, redecorate, landscape, and on and on and on? Home ownership isn’t quite the great financial asset many make it out to be.

(photo credit: Phil Sexton on Flickr)

This post was included in the Carnival of Personal Finance.

This post was included in the Festival of Frugality.

Investing Is Not About Beliefs

Corey —  October 13, 2010

Scratching Head       In all my reading about investing (especially online), I’ve noticed a disturbing trend. People tend to talk about investing in terms of their beliefs. One might say, “I don’t believe people can’t beat the market. You can find good stocks by using your brain and analyzing information. I believe in active investing.” Another says, “I don’t believe anyone can beat the market. Most professional fund managers can’t do it consistently, and you probably can’t either. I believe in passive investing.” Still others say, “Market timing doesn’t work. It’s like predicting the future. I don’t believe in trying to time the market.” While some argue, “You CAN time the market if you know how. I believe it is possible to miss the bad days and save yourself a lot of money. I believe in market timing.

What’s Missing?

       You know what’s missing in most of these “belief” statements? Data. Facts. Testable, verifiable information. Knowledge. You don’t often hear people say “I know active investing works.” unless they’re talking about anecdotal evidence. And sadly, you don’t often hear people say “I know passive investing works.” They believe it because someone else believes it. Or because someone else told them to believe it. Or because it just “makes sense”. (This is true of any investment philosophy…)

Check Your Facts

       The thing is we have data, albeit historical data, but data nonetheless. We can’t guarantee that the future will look like the past, but we can learn some valuable lessons from it. We can learn that it is absolutely true that most people don’t beat an appropriate market benchmark consistently. (And when I say most people I mean 90%+ and by consistently I mean at least 10+ years in a row.) And we can verify data about market timing by looking at the results of those who try it.

       Then we get into the dangerous area of trying to predict the future. We make conjectures about what we think may or may not happen in the future. Then we build up our investment philosophy around that. Too often, we build it only on those conjectures and ignore all the data. And that’s the problem I’m seeing.

Belief or Reality?

       I’m not going to get into the details of what we think we know and don’t know. I simply want to ask you to think the next time you talk about your investing “beliefs”. Are you basing your beliefs on facts, data, and information you can test? Or are you basing it completely on feelings, conjectures, and guesses about the future or what makes sense to you?

Photo Credit: (SAN_DRINO on Flickr)

Ruffling a Few Primerica Feathers

Corey —  September 8, 2010

Sparrow with Its Feathers Ruffled by bterrycompton on Flickr       Last week I wrote about why I hate MLMs (multi-level marketing companies). It seems I’ve ruffled a few Primerica feathers with my comment on the company. I received two emails from Primerica agents last week – one who I know has been reading for a while and another I’ve never heard from before.

       Both emails essentially said that I don’t understand what Primerica stands for or the value of “network marketing”. (By the way, that’s just another name for multi-level marketing. You get your family, friends, and neighbors to buy from you and recruit them to work under you. Then they do the same and so on. You can make a little money selling products directly, but the big bucks come after you’ve developed a huge down-line or “organization” as Primerica calls it.)

       Now I don’t want to end up in a saga like Lazy Man and Money’s with MonaVie where people start threatening to kill me or blackmail me because of my opinions. But I do want you all to be aware of the truth about Primerica before working with them. My concerns about Primerica can also be applied to many other brokerage companies and insurance companies, but Primerica seems a little more dangerous to me because of the focus on recruiting you for their business opportunity and not just selling you their financial products.

       So I thought it might be worthwhile to do a bit more digging to see what I can learn about Primerica – their products, their “business opportunity”, their training, and so on. Since I’ve been trained in financial planning and have experience in the industry, I can cut through the jargon for you and plainly explain what’s going on.

       Unless you all have objections, I’ll begin writing some posts where I look at the different aspects of Primerica and help you understand what you need to know about the company. Here’s how you can help.

       If you’ve had an experience/encounter with Primerica, please share your story in the comments or contact me directly. This includes learning about the “business opportunity”, meeting with a friend of yours who started working for Primerica, or any other experience you’ve had with the company. I only have one limited experience with Primerica, and finding accurate and comprehensive information online about the company can be difficult.

       Also, if you’ve got some questions about Primerica that you need answered now, please feel free to leave a comment or contact me. I may use your question as the subject of a post, or I might just write you back with an answer/analysis.

       My goal is to give you the most honest, objective, and accurate information I can about Primerica, its products, and its business opportunity. My hope is that this information will help you make a good, informed decision so you won’t waste your money or your time. Until I have more information on here, I can only advise you to question everything. Thanks for helping me as I try to help you!

       I pulled this out of our mail the other day:

PA Lottery Coupons

       Seriously? Someone at the Pennsylvania Lottery must be playing a joke. Big Savings? Let me get this straight. You’re going to use a coupon to buy a lottery ticket, and that’s going to bring you big savings? Let’s think about this just a bit.

What Are Your Chances of Winning?

       Let’s use the September coupon for our example. This coupon gives you one $2 Mega Millions with MegaPlier ticket for free if you buy one $2 Powerball with Power Play ticket. Basically, this is just one set of numbers because a regular ticket costs $1 for one play and the Power Play (or MegaPlier) doubles the cost of the ticket.

       The Pennsylvania Lottery’s website says your overall chances of winning a prize with a Powerball ticket are 1 in 35.11.

       We can figure out your chances for winning any of the specific prizes with some simple math. If your chances of winning a prize are 1 in 35.11, that means you have a 2.8482% chance ((1/35.11)*100) of winning every time you play Powerball. (Not very good, huh?) Basically, you can only expect to win something once out of every 35 tickets you buy. But that doesn’t tell us how much the ticket is really worth because your prize can range from $3 to $14,000,000 (or $6 to $14,000,000 if you buy the Power Play option) given the current jackpot. To figure out the value of your ticket, we’ll need to do a little more math.

What’s Your Ticket Really Worth?

       By using the odds given for each specific prize level, we can figure out the average prize for a winning ticket. Overall, you have a 2.8482% chance to win on any given ticket. You can use the same process to figure out your chances of winning a given prize. For example, the Pennsylvania Lottery website says you have a 1 in 61.73 chance of winning the lowest prize of $3. That’s a 1.61996% chance ((1/61.73)*100) of winning $3 on any given ticket. Since you have a 2.8482% chance of winning any prize, you’d expect a little more than half of your winning tickets to have a $3 prize. (The math is simple: 1.61996/2.8482 = 0.568766 * 100 = 56.8766%.)

       Continuing this process for each prize level, we can figure out your chances of winning a specific prize any time you have a winning ticket. This table shows those chances for a regular Powerball winning ticket.

Match Prize Chance of Winning This Prize on a Winning Ticket
5 Numbers + Powerball Jackpot (currently $14,000,000) 0.000018%
5 Numbers $200,000 0.0006833%
4 Numbers + Powerball $10,000 0.0048552%
4 Numbers $100 0.1845%
3 Numbers + Powerball $100 0.2573%
3 Numbers $7 9.7787%
2 Numbers + Powerball $7 4.4604%
1 Number + Powerball $4 28.4363%
Powerball Only $3 56.8772%

       Now we can figure out the value of a winning ticket simply by multiplying the prize by your chance of getting that prize on any given winner. Doing that tells us that the average winning ticket for regular Powerball is worth $7.65 ($8.65 – $1.00 for playing). Adding the Power Play to the mix changes the prize values, so the average winning ticket for Powerball plus Power Play is worth $24.04 ($26.04 – $2 for playing). (And technically, it would be worth a little less than that because there’s always the chance you might have to split the jackpot with someone else. But I don’t feel like finding the stats on that or doing the math.)

       That leads us to the next question. If the average winning ticket is worth $7.65 (or $24.04 for Power Play), then what is the average ticket worth? You only have a 2.8482% chance of winning that $7.65 (or $24.04). We need to take into account the cost of your losing tickets, which you’ll have 97.1518% of the time. Remember, you have to buy 35.11 tickets before you can expect to have a winning ticket (based on the odds). That leaves you with 34.11 losing tickets. If you’re playing regular Powerball, you’ll need to spend (that is, lose) $34.11 to win $7.65. If you’re playing Powerball with Power Play, you’re looking at a cost of $68.22 to win $24.04.

       Our last bit of math will tell us the average value of any given ticket. Let’s check regular Powerball first. On average, you’ll spend $34.11 to win $7.65 leaving you with an overall loss of $26.46. Divide that by the total number of tickets you had to buy (35.11) and you’ll find that the average regular Powerball ticket is worth -$0.75. To put it another way, instead of buying a $1 Powerball ticket you might as well throw three quarters in the trash. (Oh wait, I forgot…the Pennsylvania lottery benefits older residents – every day. So maybe you should just donate the three quarters instead.)

       What about Powerball plus Power Play? It certainly looks like a more attractive value proposition at first glance since the average winning ticket is worth so much more. On average, you’ll spend $68.22 to win $24.04 leaving you with an overall loss of $44.18. So that means the average Powerball plus Power Play ticket is worth -$1.26. This time, instead of donating three quarters rather than buy a Powerball plus Power Play ticket you should donate five quarters! In terms of absolute dollars, you lose more with Power Play but the % loss is better than regular Powerball. (In regular Powerball, you lose 75% of your money forever. With Power Play, it’s “only” 63%. Granted, it starts looking a little better when the jackpot is very large, but your chances of splitting the prize increase as more people buy tickets. This means the lottery is always going to be a losing bet.)

       Let’s put this all into a little perspective. Buying a Powerball lottery ticket would be the equivalent of getting a $10,000 gift, going out into your back yard, and then proceeding to burn $7,500 of it for “fun”. Big Fun – according to the Pennsylvania Lottery.

You Want Big Savings? I’ll Show You Big Savings.

       I’m not going to take the time to prove that the lottery (in any form) is a waste of your money. You can simply look at the July 2009 – June 2010 annual income and expense report from the Pennsylvania Lottery to see that they only end up paying out about 61% of their total sales to winners. Talk about a great business! I’d take a 30% net profit margin any day. (The other 9% goes to other expenses.)

       Looking at those numbers from the other end, we see that lottery players as a whole are buying something with a guaranteed return of -39%! You want big savings? Here’s a thought. Stop paying the poor people’s tax.

Don’t play the lottery!