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Budgeting, Celebrities and Money, Real Estate, Saving, Wealth

Less Home, More Wealth

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You’ve got to work to succeed. – Owner of a Lonely Heart Song and Lyrics by Yes

If you crisscross the country, you will see home prices are highly inflated. Homes values have gone up, but so too have prices.

I look to my left and to my right, but I don’t really see any new starter homes being built.

How is a family just starting out supposed to find affordable housing without any affordable homes?

You need to keep your fixed expenses low, so that you can keep more of your money in your pocket.

Remember the future is more expensive. Things do not go down in price. Prices go up.

I urge you to reconsider purchasing anything that will mean paying a high fixed amount over a long period of time such as a mortgage.

High fixed expenses can cause folks to go bankrupt.

If you do an online search, you can lookup bankrupt celebrities and see my point.

When going through their financial records and bank statements you see the glaring red flags right off the bat.

Here is a typical list of items I see when high profile people file for bankruptcy:

  • The newest or latest Range Rover
  • Large wardrobes and expensive designer suits or furniture
  • Huge credit card bills
  • Expensive foreign car leases
  • Tax liens
  • Medical debt
  • Back mortgage payments
  • Multiple child support or alimony payments
  • Back taxes owed to Uncle Sam

There is one-line item I would like to pull out in particular and that is the mortgage payment.

Let’s say hypothetically speaking, one was to bring in $70,000 a year, but was once pulling in $520,000. That’s a pretty huge drop in income right there. Would signify some belt tightening needs to be done right?

Nope.

Instead folks were continuing to live in the same neighborhood and even in the same house. In addition, driving fancy cars, and pretty much were living as if there had been no drop in income.

That is no way to do your finances.

You have to respect money. You cannot spend before you earn. As the song goes in the lyrics stated above, you’ve got to work to succeed.

You can’t continue to have the trappings of success, if you truly can’t afford them.

So, let’s discuss buying less home in order to be wealthier.

HOME PRICES ARE THROUGH THE ROOF

According to Zillow.com, the median home price in Washington DC is $575, 800.

If you have a 5% interest rate and a 30-year mortgage, that means you will owe $3,091 a month. And that’s just for the bricks! You have not paid property taxes, closing costs, home warranty, or utilities.

Adding in homeowner’s insurance and property tax, you are looking at $3,419 a month.

The Mortgage affordability rule states you should spend no more than 36 percent of your gross income on all your total debt, and this includes mortgages.

Based on the numbers, to purchase a home at this price point, you would need to bring in over $12k a month. That’s $150k a year. And this amount includes no down payment no debt except a mortgage.

Who doesn’t have a car payment these days? However, make anything less than that and its sorry game over.

Let’s not forget that this is for a property in Washington DC. There are tons of other metropolitan areas where to pay to play is even more egregious.

What a home in swanky parts of New York, California, Connecticut, Florida, Colorado, or Texas? Well, it’ll cost you.

Homes in gated communities can be well into the seven figure range.

If we take three times $575,800, that gives us $1,727,400. A $1.7M home will cost you approximately $10k per month, which is $120k a year and $10k of that goes just to property taxes.

In a decade you would have paid $120k for property taxes, just for you to sit on your couch in your living room .

That means a $3.5M home would cost the homeowner $250k over 10 years.

That’s right. A quarter of a mil. Just because the house is standing.

PROPERTY TAXES ARE FOREVER

Oh and by the way, did I mention that property taxes are forever?

You don’t ever stop paying it.

That means you will always have some cost associated with owning a home, even if everything inside of it and the dwelling itself is paid for.

Wishing you could buy a manse like Hova and Beyoncé. Well, be prepared to shell out big bucks cause the property bill alone is massive.

It was reported they bought an $88M mansion in California. A pricey piece of property indeed. A ritzy neighborhood for sure and a jaw-dropping beauty of a home.

In sunny California, the property tax rate is composed of three types of levies: general tax levy, voter approved bond indebtedness repayment, and special district assessments. The general tax levy was frozen by Proposition 13 at 1 percent of assessed property value.

According to Joel Fox of The Sacramento Bee, “Taxes haven’t exactly disappeared under Proposition 13. Property tax revenue is up 1,000% since 1978 and is growing faster than personal income. However, individual taxpayers are protected by Prop. 13, locking in property taxes when they buy their home and limiting future increases.

So, let’s get down to the bottom-line. Property taxes on an $88 million-dollar home at 1% is $880,000 dollars! That is for one year. I shudder to think about the cost of upkeep.

Although, this is obviously not what the average American homeowner is paying in property taxes, it does illustrate that paying these taxes can be mighty expensive. Especially, if you are living on a fixed income, which many Americans one day likely will be.

HOW MUCH CAN YOU SAVE

What can you do instead of buying a huge property?

Glad you asked.

You can buy less home and save money.

This will effectively allow you to increase the amount of money you save.

For example, just buying a property that is $100,000 cheaper could allow you to save $584 a month in mortgage payments and property taxes.

Investing that $584 over 30 years at an 8% rate of return could net you $877,423.

You would be giving up close to $900k in wealth to live in a neighborhood that ends in the name of Hills instead of Heights.

Basically, you could save a small fortune.

HOW MUCH GREENBACKS MAGNET SAVES

I decided to buy a smaller home than most friends and family members I know.

In one case, I paid $500k less than my peers or their families. In another, I paid less than $700k!

Just figured less home would mean less to do for maintenance, lower utilities, and more freedom because less time is needed to manage my household.

I was right.

It is way less stress to care for a smaller versus a larger home.

You have less stuff because you have less space.

Either you throw out and donate crap or get creative in storing it. I prefer to come up with less storage solutions and just stop buying stuff.

It has paid off handsomely.

I gave my savings amount in a post I did called How Millennial Money inspired me to save $13,333.06 a year. Well, now I’m giving you the visuals. I highlighted in red what I’m saving now.

GBM savings growth chart 

After, I started ramping up my savings it just took off. I am on track to save 1,000% more income than I did in 2015. Not too shabby.

I say buy less home, build more wealth.

Careers, Celebrities and Money, Credit Cards, Financial Freedom, Financial Independence, Investing, Real Estate, Saving, Self-Made Millionaires, Wealth

How Arnold Schwarzenegger Totally Recalls making $20 million-dollar paychecks

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Strength does not come from winning. Your struggles develop your strengths. When you go through hardships and decide not to surrender, that is strength. – Arnold Schwarzenegger

Arnold Schwarzenegger is one of the biggest movies stars in the world. His iconic roles in The Terminator, Predator, Total Recall, and True Lies are just some of his hit Hollywood blockbuster movies. During the 80’s and 90’s he raked in big bucks at the box office and cashed in big paychecks at the bank as a result.

In my quest to study the self-made, I decided to read up on the “Governator” himself, Arnold Schwarzenegger.

I actually mentioned Arnold in a couple posts I wrote, Forget casinos, bet on yourself and Money Lessons I learned from Jay Leno.  Now, I am going to talk about how he became self-made.

Arnold wrote his autobiography, written in 2012, entitled, “Total Recall: My Unbelievably True Life Story.” Clocking in at 656 pages long, it is a massive read. I actually completed this undertaking last December 2017. It took me 3 weeks to finish reading from cover to cover. In the book, Mr. Schwarzenegger actually lists his paychecks for his hit films. At one point, he was making $20 million per film.

How did he do it? There is only one word to describe it: unbelievably.

Here is his story.

ALL GREAT STORIES HAVE GREAT BEGINNINGS

The mind is the limit. As long as the mind can envision the fact that you can do something, you can do it, as long as you really believe 100 percent. – Arnold Schwarzenegger

Arnold Alois Schwarzenegger was born on July 30, 1947, in Thal, Styria, Austria. His father, Gustav Schwarzenegger, served in World War II. Arnold’s mother, Aurelia, was working at a local shop when she spotted his father in uniform. That was all it took for her to fall for him as she loved a man in uniform. I must admit, so did I.

His parents married on October 20, 1945. His mother was 15 years younger than his father as she was 23. They were strict disciplinarians. Arnold said in Austria the rod was not spared if a child was disobedient. In the book, he said his father would make him and his brother earn their breakfast by doing pushups or sit-ups.  His father believed that the way to fix any problem was through discipline.

YOUNG EXUBERANCE

Arnold was an average student but, was popular and well-liked for his boundless energy, humor, and cheerfulness. He started playing sports and picked up his first barbell at age 14. He decided that bodybuilding would be his career. His deep interest in the sport took up almost all his spare time. At one point, he even broke into the local gym when it was closed and began to lift weights for a couple hours just to get in his workout.

Money was tight growing up. There was no inside plumbing or bathroom. They fetched water to bathe from a local well and one of the highlights of his youth was getting a refrigerator, where he said they would marvel at the opening and closing of the fridge door. When going shopping his mother only used cash and never bought anything other than the essentials.

Austrians believed in conformity and were not allowed to be individuals. However, Arnold had different plans. He was considered a rebel because he wanted to move to America and be rich. He stated he wanted to be somebody. Due to his rebellious tendencies and other issues, Arnold was never close to his father as his favorite was Arnold’s brother. However, he had a close relationship with his mother until her death.

A chance meeting at his bodybuilding coaches house would change his life. Arnold, in 1966, met bodybuilder and movie star Reg Park, his idol, and he went on to become his mentor. Schwarzenegger decided he would not only be a body builder, but also a movie star, just like Reg Park.

BARBELLS AND COMPETITIONS

Training gives us an outlet for suppressed energies created by stress and thus tones the spirit just as exercise conditions the body. – Arnold Schwarzenegger 

Arnold would work out almost every day. Lifting weights became an obsession. He would break into the gym on weekends when it was closed and work out.

He couldn’t stand to miss a workout. Arnold has said he couldn’t even look himself in the mirror, if he missed a workout. That is dedication. This was 1961. By 1965, all Austrian males, at the age of 18, are required to fulfill one year of military service, but Arnold had other plans.

AWOL BODYBUILDER

While in basic training, Arnold learned he was able to eat meat every day. Growing up, his mother had a garden where she would grow vegetables so she could feed her family on a tight budget. They rarely ate meat. Once he was able to get protein on the daily, he was constantly growing out of his uniforms. He went up a size every month and required a new uniform several times.

During his service, he learned basic tank mechanics, almost wreaked one by not putting it in park, and learned to ride a motorcycle. He said those skills would later serve him well while doing the Terminator and other films. Arnold learned to become pretty fearless. He was scared, but he would push ahead anyway.

During his time in the military, a Junior Mr. Europe Contest came up. He went AWOL and served a week in military prison because he chose to attend. But Arnold won that title.

He later received a job offer to work and train in a gym as a bodybuilder. He used this information and his past transgressions to convince the military to release him and he received an honorable discharge. That competition in Europe made him famous and the Mr. Universe title was his ticket to America-the land of opportunity, where he felt he could become rich.

CALIFORNIA BOUND AND HOLLYWOOD DREAMS

Arnold was happy to leave Austria as he had been telling people for many years as a kid he was going to America, but no one believed in his dreams. But the day came in October of 1968, when he was headed to California to train at the infamous Gold’s Gym in Venice, Los Angeles. He could barely speak English, but at the age of 21, was going to America to live and work.

Arnold was able to get a role in a film in 1969, “”Hercules in New York”, which paid him $12,000. He continued to train from 1970-1974 non-stop. In 1970, he won his first of seven, Mr. Olympia titles.

EDUCATION IS JUST AS IMPORTANT AS PHYSICAL FITNESS

In the 1970s, Arnold is enrolled in college throughout the decade. He bounced around to several taking math, English, science, and eventually earned his bachelor’s degree from the University of Wisconsin-Superior in 1979. It took about 10 years, but finally he had his college degree.

He also stated in the book he would write down his goals on an index card at the start of every new year.

At one time in his life, he met Pope John Paul II in 1983, they talked about workouts. The pope rose daily at 5 a.m. in order to stick to his regimen. It was something like 300 push-ups. If he could do it, this book says, you can do it, too. This is where I got the idea to start my daily fitness routine. I, personally, like boxing.

ALL ROADS LEAD TO HOLLYWOOD

All roads not only lead to Rome, but in Arnold’s case also to Hollywood, California.

OLYMPIC CHAMPION

Arnold also competed in the Olympics and won the title of Mr. Olympia 3 times. After the 1971-74 competitions, in 1975, filmmakers convinced him to do the bodybuilding film Pumping Iron.

SAVING MONEY AND INVESTING

The worst thing I can be is the same as everybody else. I hate that. – Arnold Schwarzenegger 

Arnold is big into frugality. He saved every dime he could from any winnings he made while competing. When he first got to America, he had $27,000. That is the equivalent of $173,000 (adjusted for inflation) in 2017. His motto was turn every dollar into two.

Arnold invested his money in real estate. He researched for 3 years and worked with an agent before finally setting his sights on putting a down payment on his four-unit apartment building at the cost of $214,000. Then he sold the building the next year for $360,000. Then immediately put his profits into a new 12 unit building. He did this to avoid the huge tax bills of his profits.

The Los Angeles real estate market was booming. You could make $100k profit in just a year or two.

Arnold then bought a 36 unit building, followed by a 100 unit building. Within about 10 years, Arnold Schwarzenegger was a real estate tycoon and millionaire.

This was close to 7-8 years before he would become a bankable Hollywood action star. He was able to be pickier and choose plum movie roles because he did not have to take any role that came his way. He always believed in going to the top. Go where its empty and you can chart your own path. He aimed to be the leading man.

CONAN

“The idea is not to live forever, it is to create something that will.” ― Andy Warhol.

After small roles in various film and television, he was offered the lead in his breakthrough film role of Conan the Barbarian in 1982. The movie was a hit.

Love the painted look.

Then he starred in the sequel, Conan the Destroyer, in 1984.

For me life is continuously being hungry. The meaning of life is not simply to exist, to survive, but to move ahead, to go up, to achieve, to conquer. – Arnold Schwarzenegger 

Arnold got to meet and work with lots of people. He feels that building relationships is key to having a successful, happy, and fulfilled life. Some of those people include, Linda Hamilton, Sharon Stone, Michael Ironside, Vanessa Williams, and the late Andy Warhol.

THE TERMINATOR

I’ll be back. – Arnold’s famous line as The Terminator

Arnold was offered a role in a film where there is a futuristic war between man and machines. At the meeting, with Gale Anne Hurd (The Walking Dead) and James Cameron (Avatar), he was convinced that the role of the T1 was pivotal, if the film was to be a success.

He was right. Listen to Ah-nuld! I just watched the film a few weeks ago. It still holds up.

Here’s one of my favorite scenes from the film; it’s Kyle Reese, played by actor Michael Biehn. He did an incredible job as he also did in the film Aliens.

Arnold Money Lesson: When Arnold met his future wife, Maria Shriver, he accidentally left his wallet at home. She had to write him a check for $70, to pay his train ticket home. He paid her back and wrote her a thank you note. In addition, he learned a valuable lesson. Always have cash. From that moment on, he would carry $1000 cash and a high or no limit credit card. He learned the motto of this blog, that cash is king.

He then decided to do a film by new first time director, Jim Cameron, called The Terminator.  It went on to gross $80 million and Arnold was officially a bonafide movie star.

Fun Fact: Arnold likes to tell jokes. He decided early on that his films should include quips that are memorable one-liners and catchphrases.  Like this, “Hasta la vista, baby” — Terminator 2: Judgment Day.

I actually heard that same phrase in a Jody Whatley song Looking For A New Love from her self-titled 1987 album. That was 4 years before T2.

HOLLYWOOD MAKING IT RAIN DOWN ON ARNOLD

“Money doesn’t make you happy. I now have $50 million, but I was just as happy when I had $48 million.” – Arnold Schwarzenegger

From there it just keeps getting better. He’s a hit factory and the paychecks got bigger and bigger. Arnold made $250,000 for Conan and $360,000 for Conan 2. Then took a pay cut for The Terminator, at $75,000.  Arnold earned $1.5 million for 1985’s Commando, $3 million for 1987’s Predator and $8 million for 1988’s Red Heat. Bang, bang, bang! That’s all money in the bank.

He hit the deca-million ($10 million USD) paycheck mark with Total Recall in 1990. Then made $15 million for Terminator 2 and True Lies. Arnold eventually hit a $20 million-dollar payday in 1996 with Eraser. Yes, that’s US Dollars!

Source: themovietimes.com

He is estimated to have a net worth around $400 million dollars.

And there you have it.

At the end of the book, he also listed Arnold’s Rules for Success.

Here is Arnold talking Life’s 6 Rules during the Governor’s 2009 USC Commencement Address. He said be unique, be a maverick. Maybe even an outlier?

How being an outlier can make you rich

So let’s recap…

  • Start with a dream
  • Write it down
  • Say out loud what you want to do or be
  • Work hard
  • Break the rules, not the law
  • Don’t be afraid to fail
  • Exercise
  • Weight lifting builds muscles and confidence
  • Trust yourself
  • Ignore the naysayers
  • Save and invest
  • Real estate can make you a fortune
  • Financial independence equals freedom
  • Give something back
  • Turn every dollar into two
Banking, Bankruptcy, Budgeting, Credit Cards, Real Estate

From debt-free to owing $1 million in mortgage debt

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“Don’t tell me where your priorities are. Show me where you spend your money and I’ll tell you what they are.” —James W. Frick

It seems like only in America can a family go from debt-free to being $1 million dollars in debt in a decade.

And yes, you read that right. A couple got into $1 million of debt in 10 years!

As unbelievable as that sounds, it is very possible. If you don’t believe me then see my post called Meet an orthodontist with $1 million in student loan debt.

Although, student loans are a different financial beast, mortgage debt can be just as damaging to a family’s finances because, like student loans, bankruptcy does not absolve you from the debt. You still owe the money.

I read this article in the Washington Post several years ago entitled, “Swamped by an underwater home.”  The Boatengs had no debt in 1997 and by 2006 owed over $951,000. By 2013, their debt had gone up to $1,011,176.

When this article was published in 2015, the Boatengs had not made a mortgage payment in 6 years. It took them 10 years to go from $0 in debt to $1 million in debt. This is crippling debt. Most families in the United States will not come anywhere near this amount of debt in a lifetime, but this couple did in less than a decade. Here is their story.

HOW TO GO FROM DEBT FREE TO OWING $1M IN 10 YEARS

Comfort and Kofi Boateng won a visa lottery to come to America from Ghana in 1997. Their odyssey would not take them to where they truly wanted to be like Homer’s, but just the opposite. Instead of the American Dream they would be ensnared in an American Nightmare.

In the Ghandian culture, people pay cash for their assets including their homes. In Ghana, Comfort graduated with a degree in computer science at the University of Science and Technology in Kumasi and his wife, Kofi, received an associate’s degree.

The couple married in 1989, he was 30 and she was 26.

Wanting more opportunities, they applied online for a lottery administered by the State Department to receive a U.S. permanent resident card. If this was football, this would be considered a Hail Mary.

The reason for this is that the odds of getting chosen were slim. Per federal data, less than 5 percent of the 1 million immigrants granted permanent residency enter the United States through the lottery. But, this family beat those odds.

In July 1997, Comfort was on his way to American in a plane headed for Maryland.

On May 5, 2000, they bought their first home, a three-bedroom townhouse for $128,900 in Germantown, MD. This was after renting for several years and taking 2 of those 3 years to save for a down payment.

Even though his wife admitted she didn’t know anything about loans and houses, she was now a homeowner.

For me, this is a red flag. If you do not know about loans or homes, then why buy a home with a loan? This is a double whammy. At this point, I would urge anyone to learn about these things before doing anything else.

FROM $128,900 IN MORTGAGE DEBT TO $223,900 IN FOUR YEARS

In 2003, the Boatengs become American citizens. Comfort’s mother gets a green card to come live with them and this eliminates $300 in weekly child-care costs as they now have three children.

The Boatengs refinance their Germantown home several times to pay for home improvements and consolidate other debt. They cash out $95,000. They now owe $223,900 in mortgage debt.

Ultimately, with 6 people now living in the home, they decide they need a bigger house.

The townhouse, thanks to the booming housing market before the 2008-2009 stock market crash, their home is now worth $355,000 within only 3 years.

FROM $223,900 IN MORTGAGE DEBT TO $838,583 IN 1 YEAR

The Boatengs decided to move to from Germantown to Bowie, which is in Prince George’s county Maryland.

A home is found in a subdivision with manicured lawns, European cars, and intercom systems in a place called: Fairwood.

The neighborhood has a lot that Comfort likes because it reminds him of his dormitory back in Ghana.

At this point, he is already emotionally attached, which is a major no-no when it comes to money.

The family decides to build a house for over $600,000!

They think it will be a good investment. Their thinking was it is likely to go up in value like their Germantown home and could use the equity (more cash outs) to pay for the kid’s college educations.

I now have to call a time out! Flag on the play. I am shocked that this couple did not see the RED FLAGS here! How are you going to afford this? His wife is working as a secretary making $30,000 and he as an IT specialist making $80,000-$100,000.

They do not have the money to pay for this. This is the part in game where they are supposed to forfeit.

Alas, they continue to roll the dice with their finances. Little do they know the house is about to win.

Their real estate agent assures them it is affordable, if the refinance (yet again) the mortgage on the Germantown house — which they were going to keep (this just makes no sense, now they are going to be landlords!!!) — and cashing out the $60,000 in equity. That money will be the down payment for the Fairwood house.

Bad, bad, bad idea. They are now taking advice from a realtor.

Let me tell you something. This person is not their financial advisor, CPA, attorney, business manager, or anything. He owes this family nothing. They have signed no documents to act as a fiduciary. They are not working is this family’s best interest.

Think of it like this. A baker likes to bake. If you ask the baker, if you should buy a cake, the answer is going to be yes. A barber likes to cut. Same rules apply, if you ask a barber, if you need a haircut.

However, I digress. Let’s get back to the story.

The Boatengs receive a loan from Lehman Brothers.

I’ll offer you a little background on the Lehman Brothers. It was founded in 1850. This bank was the fourth-largest in America and was not only one of the biggest subprime mortgage lenders (that helped cause the 2008-2009 housing crash), but also became the biggest bankruptcy in American history with $600 billion in debt. It had been in business for 158 years.

Due to their income, they could only qualify for an interest-only, adjustable rate mortgage. This is the worst type of loan there is. Do not ever take out an interest-only loan.

He has a great credit score of 748, which is how they got they loan. However, credit scores only mean you are great at managing debt. Nothing more. It does not necessarily mean you have any wealth.

For the first five years, they only make interest payments, then afterwards they would be required to pay more. How much more? Nobody knows. That is why these loans are so dangerous.

The Boatengs borrow $493,600 from Lehman Brothers, at an initial loan rate of 6.1 percent. In five years, it would reset to at least 8.3 percent. Their payments go from $3,662 up to $4,336. Thinking they would be able to refinance in the future to get a better rate. This day would not come.

He would then lose his job while the home was being built.

This is the part of the story where I am like. It’s all over. The house of cards has come crashing down. The jig is up. No more easy credit access. The bill has come due. There is no free lunch. It’s over.

And what happens next?

They admit to being emotionally attached, do not tell the lender of his job loss, decide not to walk away from the $20,000 deposit and not back out of the deal.

The Boatengs get a second loan to complete the financing through their broker’s company, a 30-year fixed-rate mortgage of $61,700 at 8.5 percent. The couple paid $29,000 in closing costs and put down a total of $73,000 in cash at the closing. They move in on November 25, 2005.

They now owe $838,583. Comfort has no job or any income and the couple are drowning in debt.

FROM $838,583 IN MORTGAGE DEBT TO $951,176 OF DEBT IN LESS THAN 1 YEAR

The couple is tapped out. They have no money to furnish the home. The first payment is due on January 1, 2006.

The payment on both homes (they still own the one in Germantown) is $5,550 a month!

Shut the front door! No, I mean literally. Shut the door to that place and give the keys back to the bank. Sell it and walk away. From both properties, in my opinion. You owe the bank everything you have.

The tenant in Germantown couldn’t pay. The housing market crashed, now being underwater, they couldn’t sell.

What did they decide to do? Take out more debt. Kofi started selling Mary Kay and took out $15,000 in personal loans with Bank of America. Then another $20,00 for her Mary Kay business with a 15 percent interest rate over 10 years. She didn’t see the risk because she thought she could earn $7,000 a month with Mary Kay.

Hold the phone. What happened to being cash heavy when starting businesses? Or starting them with your savings. Businesses need capital. Why not start small and see if a business works out? Then expand. She is putting the carriage before the horse here. There is no guarantee of making $7,000!

The Boatengs now owe $951,176.

FROM $951,176 TO $1,011,176 OF DEBT IN 6 YEARS

They decide to consolidate again. Howvever, consolidation only works when you pay off what you owe.

The couple took out a $620,000 refinancing loan from Countrywide Home Loans. It was again an interest-only subprime loan, carrying a 6.29 percent interest rate and adjusting in two years (even sooner this time) instead of five. Their payment on the Fairwood house would rise to about $5,230 by November 2008. That is $62,760 a year, after tax income!

They were unable to pay the $5,000 monthly payment and tried to modify their mortgage, but were able to get relief. They owed to much to qualify for HAMP. Ain’t that a kick in the head.

The Boatengs made their last Fairwood mortgage payment on Sept. 18, 2008. They are now in default and can be foreclosed on at any time. This means not only losing their home, but any money they put into it.

By November 2011, their payments were set to go up to $6,000. The bank valued the house at $378,216. That is $238,839 less than what they paid.

During this time, his wife went back to school in 2003 and graduated in 2009. She owed $90,000 in student loan debt. She lost her job and unemployment ran out after eight months.

Comfort was mostly unemployed or not working full-time from 2005-2010.

In 2014, the family was notified by Nationstar Mortgage, their new lender, that late payments dating back from 2008 were due now: $318,611.97.

Comfort’s mother passed away in 2014 and he was still looking for full-time work.

He became so frustrated he thought: Why stay in America? Why not just go back to his country and find a job there?

Like me, their housing counselor noticed that their downfall began with the idea of buying a second home for more than $600,000!

The couple owed $$ 1,011,176.

That was 2014.

FROM $1,011,176 TO $1,371, 813 OF DEBT 

By 2015, they owed $257,776 on the Germantown house, $969,037 owed on the Fairwood house, $55,000 in personal loans and still have the student loan debt (which is not dischargeable in bankruptcy). The couple who had never owned a credit card before moving to the United States now owe more than $1.3 million.

They currently earn about $100,000 a year.

It does not take a rocket scientist to know that they do not make enough to pay off these debts. They owe more than 10 times their gross income (what they make). And more than 19 times their net income (what they take home).

The interest on that type of debt is mind numbing. We are talking more than $50,000 a year in interest alone. That debt is likely to balloon to $2 million in another a decade. This will be during their golden years. They are building no wealth.

The reasoning for taking on so much debt was that the couple stated they saw that was how everything was done in America. You had to borrow to get ahead. Everything involved debt.

I want anyone out here reading this to take this away from this cautionary tale: Stay away from debt.

Don’t borrow more than you could ever afford to repay.

Do not borrow one million dollars, if you do not have $10 million in the bank.

You should have 10 times more in the bank than you owe, not owe 10 times more than you make.

That way if the bill comes due, you can pay it off in full.

At this point, borrowing money is strategic and not the only option.

Matter of fact, just pay of all your debt ASAP and owe no one a penny. NOT ONE RED CENT!

Financial Freedom, Financial Independence, Investing, Real Estate, Saving, Wealth

How not to be house rich, cash poor

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“If we command our wealth, we shall be rich and free. If our wealth commands us, we are poor indeed.” —Edmund Burke

I remember watching an episode of Property Brothers and they were telling this couple that you do not want to spend too much or overspend on a home and end up being house rich and cash poor.

They instead wanted the couple to buy a fixer-upper, do some sweat equity, renovate the home, and put that money into their pockets.

Basically, when you buy a turn-key home, the work has already been done and you are paying the homeowners for the money they put into the home on renovations.

However, then you buy the house at a markup.

This is due to the fact that they may pay $20,000 for renovations and then the property may increase in value by $40,000 or double what they paid. Thus, allowing them to increase the purchase price of the property, ergo you pay them to renovate.

That’s pretty steep for move-in-ready.

If you do the work yourself, you get to keep the value that the home increases by.

This means buying a fixer-upper for $300,000 and putting in $20,000 for renovations will push the home value to $340,000 and let you keep the $20k in equity for yourself instead of putting it in someone else’s pocket.

If you read my last post, Save $10,000 by Avoiding PMI, then you know I am all about saving that paper.

So, let me show you how not to be cash poor, but house rich.

WHAT DOES HOUSE RICH, CASH POOR MEAN?

According to Investopedia, “house poor is a situation that describes a person who spends a large proportion of his or her total income on home ownership, including mortgage payments, property taxes, maintenance and utilities.”

Basically, you are paying more for your home than you can afford or simply buying too much home.

If you have to pay more than 40% of your income for your dwelling, then you will become cash poor.

Matter of fact, if the value of your home decreases, you can be both house and cash poor.

When you are house rich that means all your money or wealth is tied up in your home. The home equity may be something like $150,000, but you only have $1,500 in the bank. That is not even enough to cover one month’s mortgage payment!

https://twitter.com/AP_Lifestyles/status/1051911392704499713

In order to shift this, you would want $40,000 in the bank, and to owe less than $150k on your home. That $40k would be enough to pay one year’s worth of expenses including mortgage payments ($1,600 x 12 = $19,200).

You would need a fixed rate mortgage to help you do this.

STAY AWAY FROM VARIABLE RATE LOANS

The ARM, or “adjustable rate mortgage” loan is too dangerous. Any loan product that can change at the drop of a hat and without a moment’s notice is too risky.

Let’s think about this for a second. Why is anything at a drop of a hat so bad? Well, did you ever see the movie Tombstone?

The idiom is likely to have come from the Old West, when duels would begin with a signal consisting of a man grabbing his hat and thrusting it toward the ground, before weapons are drawn.

Is this any way you want any part of your life to be lived?! Absolutely, not.

Entertaining in the movies sure, but not for real life.

This type of trickery should be left out of the equation.

First, lenders approve you for wayyy too much. Second, they tell you it’s okay to only pay the interest when it’s really not. As you cannot get out of debt, without paying off the principal of a loan.

And going for the trifecta of trickery, the third thing lenders do, and this is the hat trick, your mortgage payments jump so high Bryce Harper couldn’t catch it!

Your mortgage payments spikes upward too sharply for most folks to keep up.

A reasonable $1,600 mortgage payment could reset and go up to $2,400 in a single month!

That’s no joke.

I had a conversation with someone this actually happened to. Shocks like this are hard for most people to fathom and continue to live comfortably.

A fixed rate loan allows you to plan the monthly budget in advance.

When you how much you monthly nut has to cover, you are just better off.

HOW TO BE CASH RICH

Buying a home for less than you can afford is a start.

If you are approved for $400,000, then slash this amount by 25%. This equals $400k x 0.25 = $100,000!

You heard me. Then bank says $400k, and then you say:  I’ll go $300k.

In one fell swoop, you both cut the amount of home you buy and monthly payment by 25%

You then take that $100,000 and over the course of the 15, 20, or 30 years you are paying your mortgage, you put this same amount into mutual funds.

You could do the S&P 500 index. Do whatever you want.

The goals are to simultaneously invest that money and pay down your mortgage.

For instance, that $100k over 30 years translates to investing $277 per month for 360 months. That would allow you to save anywhere from $500,000 to over $1 million depending on your rate of return through compound interest.

That means over a 30 year time period you have paid off a worth an estimated $300,000 or possibly more as home value may increase during this time and have an additional $800,000 in investments.

You would have a net worth of $1.1 million and would put you in the top 10% of wealthy households in America. See my post; Join the top 10% club for more on this.

WORDS OF WISDOM

A few words of wisdom to follow:

  • Buy less home than you can afford
  • Spend no more than 25% of your income on the housing payment
  • Invest the difference of the savings you received from not paying the full amount approved for
  • Stick to a housing budget
  • Have a god size emergency fund of 8 months or more

It sounds so simple, but most folks are actually living beyond their means and buying my house than they can afford. I have actually seen people in their 50s signing up for 30 year mortgages! Holy crap! The odds of paying off this home are slim at that age.

If you can follow the advice I give above, you could find yourself at the top of the economic pyramid.

Don’t believe me? Read my post Join the top 5% club and find out!

Budgeting, Real Estate, Saving

Save $10,000 by avoiding Private Mortgage Insurance

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“A simple fact that is hard to learn is that the time to save money is when you have some.” —Joe Moore

Saving money is the cornerstone to building wealth.

Granted you have to have some to actually save some of it.

Regardless, the time to save is when you have it.

An ever better way to save money is to avoid doling it out in the first place. If you can slash or cut out expenses entirely, you can accumulate more wealth faster.

Buying a home is one of the reasons why people save money because buying one is expensive.

If you read my post, Home Buying:  Survival of the Fittest Wallet; then you understand what I mean about home buying.

Home Buying: Survival of the fittest wallet

Every dollar that you do not have to send out ultimately stays in your wallet.

A great way to save on money you spend on your home is to eliminate the cost of mortgage insurance, which is known as PMI.

What Is PMI?

Private mortgage insurance is something lenders use to protect their investment in your home. Until you own it or have put down a reasonable down payment, the bank wants to protect its property by making you pay insurance on it.

Most lenders require PMI if a homebuyer does not make a down payment of 20% of the home’s purchase price – or, in mortgage-speak, the mortgage’s loan-to-value (LTV). This LTV ratio is in excess of 80% (the higher the LTV ratio, the higher the risk profile of the mortgage).

Meaning if you owe anywhere above 80% of the home’s value, then you are considered risky and are a candidate for PMI.

For example, if you purchase a home for $250,000 and are unable to put down 20% ($250,000 x .20 = $50,000); thereby, owing more than $200,000 to the bank, then you would need PMI.

And unlike most types of insurance such as automotive or renter’s, the policy protects the lender’s investment in the home, not yours.

However, PMI makes it possible for people to become homeowners sooner because they can put down less than 20% such as 5% and still purchase a home.

FROM RENTER TO HOMEOWNER 

PMI allows borrowers to obtain financing if they can only afford (or prefer) to put down just 5% to 19.99% of the residence’s cost, but this ca be costly.

The home will now come with an additional monthly cost.

Borrowers have to pay their PMI until they have accumulated enough equity in the home that the lender no longer considers them high-risk.

Homebuyers who put down less than 20% of the sale price will have to pay PMI until the total equity of the home reaches 20%.

This means you have to pay 20% of your home’s value or have enough equity to build to that amount before PMI is no longer required. This can take years.

And your heirs also get nothing out of this.

Unlike most insurance policies, all proceeds go to the bank. The heirs get nada, zip, zero, nothing.

The lending institution is the beneficiary. PMI only helps the mortgage lender.

It is also not cancelled automatically.

You have to draft a letter to the lender explaining that the LTV of the home is now 80% or less. This usually requires getting an appraisal done. This could take months!

Or the other hand, if you wait until it automatically cancels, you would have to hit 22% equity. That is a full 2% higher than the 20% that is mandatory!

Meaning you essentially paid 2% more or $5,000 that was not even required!

Some lenders even request that you pay for a certain time period. So, if your home goes up in value and just absolutely skyrockets, you could zoom past the 20% minimum needed, but still be on the hook to pay.

How fair is that?

It’s like that scene out of Wedding Crashers, “I earned those miles.”

It would be not good at all. I earned those miles.

Now let’s talk the cost of PMI.

HOW MUCH IS PMI?

PMI acts just like the Red Hot Chili Pepper’s song Give it Away, in that you are giving this money away to insurance companies and that’s it.

PMI can cost on average between 0.05% and 1% of the entire loan amount annually. In some cases, maybe even more.

This means if you purchase a home for $250,000 and owe 1% annually for PMI, you will have to fork over $2500 per year. This equates to $208 monthly!

The more house you buy, the more the cost goes up.

If it takes 5 years to build up enough equity in the home to stop paying PMI on a $250k mortgage, that would mean paying $208 x 60 (months) = $12,480! And that money is burnt. You cannot get it back.

Did I also mention that as of 2018, PMI is no longer tax deductible?

That’s right. Insurance is just in case. And in this case, that is like throwing out two hundred dollar bills out your car window once a month!

So, you have to find a way to roll up those windows and plug that money leak.

HOW YOU CAN SAVE $10,000 BY AVOIDING PMI

You have to find a way to keep your money in your pocket and not the insurance companies.

Better yet, find a way to not only keep it, but make money with it.

Putting that $208 into stocks over the course of 10 years could net a return of over $37,000 with an 8% return!

If you can avoid PMI all together, you could save yourself over $10k!

For example, let’s say you have to pay $250 per months for 4 years, that is $250 x 48 (months) = $12,000.

In order to save $10,000, you would need to eliminate paying $208.33 a month for 4 years, that is $208.33 x 48 (months) = $10,000!

HOW TO AVOID PAYING PMI

There are a few ways to avoid paying PMI and they are the following:

  • Put down a 20% down payment.
  • Lender paid mortgage insurance (LMPI) where the cost of the PMI is included in the mortgage interest rate for the life of the loan.
  • Get a piggyback mortgage where a second mortgage or home equity loan is taken out at the same time as the first mortgage.
  • Find a lender willing to forgo PMI.

The last one is a little tricky.

There are not many places I could find that allowed this. However, there are some financial institutions that will offer a 100% conventional mortgage without PMI. You will just need to do an online search in your state.

So, there you have it.

I have showed you several ways to avoid PMI.

Now, I have saved you $10,000!

What is my fee for this service?

Only for you to share this with someone else.  And by doing so, help them save $10,000 as well.

She then takes a bow and says thank you for taking the time to read this post. I’ll be here all week!

Financial Freedom, Real Estate

American homes are now $1,100 per month storage units

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American homes are becoming expensive storage units.

A house is not a home unless it contains food and fire for the mind as well as the body. – Benjamin Franklin

According to Zillow, the median home price in the United States is $200,000 across the country.

According to CNBC, in other cities across America, the price of a home is even higher.

That’s not too bad.

However, considering that the median income is $50,000 buying a home can be tough.

That would mean to purchase a home, based on the median price, you would have to spend up to four times the average median income!

Um. Hold up. I do not want to be house rich, cash poor. So, I suggest that people wait to buy until you can afford a decent down payment.

Lately, I have heard a lot of stories from friends, colleagues, and acquaintances about their desire to purchase a home.

I am all for it. I want what they want. It’s the American Dream after all, isn’t it?

Not according to some.

There are quite a few financial experts and self-made millionaires that feel a home is a liability and not an asset.

Unfortunately, in many ways a home is a liability. Unless it gives you money, its taking it from you.

Let’s examine this further shall we.

HOME OR STORAGE UNIT

Times have changed.

I remember when one parent would work and the other would stay home and take care of home. One working parent was able to put food on the table and provide for a family of four or five.

You could come home after working your nine-to-five and enjoy spending time with your family. You could eat dinner together and just enjoy relaxing in your home.

There were less cars on the road as many families in the 1950’s had only one car. There were not four licensed drivers and three cars.

Then in the 1980’s we went to two cars. And families were still able to put food on the table and take a yearly vacation.

If you want to have some additional confirmation and perspective on how times have changed, watch the scene in the film Back to the Future where Marty (played by Michael J. Fox) from 1985 says we have two televisions and listen for the responses from his family from 1955.

That’s right. One home, one car, one television. Simple, right. The good old days.

Well, those days are long gone for most folks.

It now takes most families having two incomes. And that is just to make ends meet. Many Americans are now living check to check.

It is not uncommon today to have two working parents.

Not only that, but to have one parent working multiple jobs.

For some people, it has gotten so bad that they are practically (or literally for some folks in Silicon Valley) living in their cars.

People go out, earn the money, and then spend upwards of 50% of take home pay on housing.

And that is after taxes (net not gross).

With housing prices in cities going for $500,000 or more, most of your paycheck is gone.

And yes, homes are going for half a million in various parts of the country. That is fact, not fiction.

According to Zillow, the median list price in Washington, DC is $568,600.

According to CNBC, in other cities across America, the price of a home is even higher.

Now working adults have to move further away from their jobs to find affordable housing. As to earn a decent salary usually means longer commutes, when you work in the city.

I live in the Washington, DC Metropolitan area. It is not unusual for someone to regularly have a one-hour commute.

The DC area has the second-longest average commute with an average travel time of 46 minutes or just under 25 minutes per one-way commute.

Let’s do a little math.

You start your day at 5 am. Get to work by 8 am. Put in the customary 8 hours. Travel back home and get there by 6 pm. Eat dinner, hug the kids, watch the evening news, and get ready for bed at 9 pm. Get the standard 8 hours and then do it all over again until Friday at 5 pm.

If you calculate through all that time, you will see you only spent about 5 + 8 = 13 hours at home and eight of them while you were asleep!

Oh, and don’t forget the weekend trips to the wine bars, parties, and regular outings or errands. Yep, again that is all time spent away from home.

You are not really utilizing and enjoying this home you are working so hard for. It has become a pit stop on the way to the work, the grocery store, the dry cleaners, soccer practice, and the trips to the Caribbean.

Basically, your home is storing your stuff.

You are either gone, going away from home or asleep most of the time your there.

Mighty expensive digs to be fronting as your own personal hotel, if you ask me.

Now let’s look at the cost of buying and furnishing a home.

BUYING THE AMERICAN DREAM

Not so long ago, families bought starter homes with hopes of trading up later when finances permitted to get their dream home.

Now, I hear more folks buying the dream home as the starter home.

So, instead of buying a condo or townhouse, people are getting 5-bedroom single family homes as the forever home.

Well, guess what? Dreams costs…. A lot.

Not only are homebuyers ponying up bigger down payments and closing costs for this mini Mansion, but also have to furnish it.

Trips to Ikea and Pottery Barn are being replaced with expensive interior designers and Havertys.

Not to mention, the costly window treatments ($500 per window), replacing new carpets with newer carpets, custom chef’s kitchen, fancy gas range, custom back splash, French doors, custom king bed, home office with Vizio or MacBook laptop, and the pool furniture.

And don’t forget buying a state of the art sound system for the man cave.

After going through every room, you spend enough dough to put one kid through college furnishing your new home.

Let’s add it up.

Home purchase price: $400,000 (approved for this amount)

Living Room Furniture: $10,000

Dining Room Furniture: $5,000

Bed Room Furniture: $8,000

Man Cave: $3,000

Kitchen remodel: $9,000

Office Furniture: $3,000

And you budgeted $240,000 for the home and $15,000 for the furnishings. With a total of $255,000.

However, what was spend was this: $438,000

That’s a difference of $183,000!

You could buy another house for that amount. You could then keep one and rent out the other. Merely a suggestion.

STORAGE UNITS FOR $1,100 PER MONTH

You read that right.

That comes out to $13,200 per year.

You’re essentially paying the bank thousands of dollars annually for you to literally have a place to store your hat box.

If you invest money in the stock market over 30 years and get a 7% return, you could have over $600,000 squirreled away!

Forget what lenders say you can afford. Do what you know you can afford.

Don’t be led astray from your budget. Stick to it. This will help you prosper and thrive instead of just survive.

Moral of the story: Don’t let your dreams be bigger than your wallet.