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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!

Entrepreneurship, Financial Freedom, Financial Independence, Investing, Self-Made Millionaires, Wealth

How Benjamin Franklin used 13 virtues to get rich

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“Tell me and I forget. Teach me and I remember. Involve me and I learn.” – Benjamin Franklin 

Benjamin Franklin is not only one of America’s founding fathers (known as one of the signatories the Declaration of Independence), but also its first millionaire.

He did this by investing in what he knew. That is how he built his fortune.

You can do the same to build yours.

I listen to what people have to say, but I always make my own decisions.

I research any industry I want to know and then focus on investing in what I know. I try to put my money where my values are.

I prefer consumer staples such as food, beverage, toothpaste, cleaning supplies, tissue, and other household items.

Companies like Proctor & Gamble, Colgate-Palmolive, Kimberly-Clark. Clorox, and PepsiCo.

You can find many of these companies included in many mutual funds such as any 500 index fund like the Standard & Poor’s 500 Index (S&P 500 index), the Vanguard 500 Index Fund Investor Shares (VFINX), the Fidelity Spartan 500 Index Investor Shares (FUSEX), the Schwab S&P 500 Index Fund (SWPPX) or the   T. Rowe Price Equity Index 500 Fund (PREIX).

I figured a good way to start my wealth journey was to learn about those that became wealthy.

Benjamin Franklin also created a list of 13 virtues to develop his character. This lets me know that your character is your destiny.

Here I provide you with his checklist. See which ones you can try to emulate to help you on your road to wealth accumulation.

THE 13 VIRTUES OF BENJAMIN FRANKLIN

In 1758, Benjamin Franklin published his essay The Way to Wealth.

Although, it was written 260 years ago, the advice still is holds up, even to this day.

Below is a copy of his checklist.

SPOTLIGHT ON FRUGALITY

My personal favorite is frugality because it includes all the other virtues.

Frugality is basically the will to spend money on what is important and avoiding spending on what is not.

Frugal is not being merely cheap or miserly like Ebenezer Scrooge.  See my post on Money Lessons I Learned from Scrooge McDuck. It is about saving money on things you do not really need.

Saving money allows you to put that money to work for you.

Imagine every dollar is a little soldier. What do soldiers do? They fight.

You have to fight for your money because everyone is trying to part it from you. Don’t let them.

Invest that money and each dollar (soldier) fights for you everyday 365/24/7. Even while you sleep.

FOCUS ON FRUGALITY

In this world, you’re on your own. Benjamin Franklin knew that. So, he set out to start a business in a field he knew. He was a printing apprentice and started a printing shop. He became an expert at that one thing and did it so well that people paid him for it.

He then reinvested the profits back into his business.

That is how he grew rich.

He knew to become wealthy, he had to ignore the charlatans or hype. He had to focus on himself and his spending habits.

And that is what you must do. Ignore the hype. Forget what everyone else says or thinks. Trust your gut.

FORGET THE FANCY SET OF WHEELS

You do not need a fancy car to make you happy. Ride a bike and get some exercise. Better yet, buy an inexpensive, older Chevy where the bumper looks like it will fall off any second.

Then people will be less likely to ask you for money, if they see you riding around in a clunker because they will think your broke, but it couldn’t be further from the truth.

It’s not that you do not like nice cars or can’t necessarily afford one. It’s that you choose not to spend your money on it. Sounds pretty good right?

And watch out for the hangers on. They tend to come around when your last name is followed by an M.D. or Esquire.

FORGET THE BIG HOUSE

You do not need a mansion to live in. You know what that does? It just causes you to spend more money to heat, cool, maintain, and furnish it.

You fill the home up with stuff. No one likes an empty corner. Every inch is piled high with stuff.

How is that stuff paid for? Usually with credit.

What happens if you need that money? For instance, homes need maintenance.

Do you know what the repair bill is for a roof on a mansion? Well, you don’t want to know. One thing we do know for sure is that it costs more than what you would spend on a smaller house.

What about PMI? Private mortgage insurance is what you must pay if you put down less than a 20% down payment. And folks, that money is on top of the insurance and a monthly mortgage payment. We aren’t talking chicken feed here. It can be hundreds of dollars per month!

What about property taxes? It can add hundreds or thousands to a monthly mortgage payment. That’s money that’s not working for you in the bank.

You want to be investment rich, not house poor.

Every dollar that goes toward the house, can’t be working for you in an investment account.

I know they say the value of the home will go up and your equity will increase as you are making the house payments. However, let’s not forget the 2008 housing bubble.

When that bubble burst, so did most folks equity. Foreclosure notices were going out in the mail all over the country. Many lost homes. And many have still not recovered.

FORGET THE DESIGNER CLOTHES

You know those people who say dress to impress. Well, that’s fine and dandy, if you can afford it. However, if you can’t swing it, then walk by the $400 clothing rack and head to the sales rack in the back. Forget sartorial superiority. Who wants to be the best-dressed poor person?

I now see more people walking around with designer purses today than I have seen at any other time I can remember. Who’s paying for it? Mr. credit card, that’s who.

I see people opening up store cards all the time.

They have so many different color credit cards in their wallet it looks like a skittles bag exploded.

Places are handing out applications for credit cards every, single day.

You must resist. Resist the urge to spend. Credit is seductive. The temptation is too great.

So you must decide, what is more important. Buying a designer’s clothing and paying for their summer home or funding your own future.

FORGET THE EXPENSIVE WATCHES AND JEWELRY

I read about an NBA player who had bought dozens of watches. And not just any watches, but Rolexes!

Just because. Well, hey, you know bosses got to be on time.

Do you know what those things retail for? Well, last time I checked, it could be anywhere from $2500 to $40,000 and up.

The guy could have started a college fund. He could have funded an entire small city of kids $1k college scholarships.

Who needs 30 watches? Someone who wants to know the exact moment they went bankrupt I guess.

FORGET THE EXOTIC VACATIONS

So you want to travel. That’s great. But unless you can afford it or do it on someone else’s dime (like for work).

You may just have to watch the latest episodes of House Hunter or any show on the travel channel.

I once read it is a great thing to go travel and see the world as it is a great education, it will only cost you: $25,000.

I think I’ll just read a good book on world travels instead and invest that money until it earns enough interest that I can pay for the trip with cash.

Here are some of my suggestions on traveling when your travel budget is on life support.

You want to see the northern lights in Iceland? See it on a YouTube video.

You want to go skiing in Switzerland, Aspen, France or Vail? Watch a travel show until you can afford it.

You want shopping sprees in Milan, Paris, Rome, New York’s Fifth Ave, or Rodeo Drive?  Focus on buying things that will appreciate in value. Clothes, once purchased, is money that’s burnt.

I know you watch the television shows and see all the families going to Disneyland or Hawaii. However, what they don’t tell you is how much it costs to go to these places. Lots of times the studio or the network is picking up the tab.

They do it for ratings. Because who wants to watch a show about people sitting on couches all day. They want to see the lifestyles of the rich not the broke and unknown. I say just stop watching those shows.

Focus your attention on earning and working. If your head is down working, you never can look up and notice what everyone else around you are doing.

FORGET FOMO (fear of missing out). It’s a myth.

I know plenty of people that go out, spend money, buy nice cars, big homes, fly to the islands, and go to lots of parties.

However, they are not the boss. They work a 9-to-5 just like everybody else. One missed check could cause havoc on their already precarious finances.

Many people are one paycheck away from being on the sidewalk.

Don’t be like them.

Practice the 13 virtues. Be frugal. Then you can live like no one else because you will actually be rich instead of acting like you are.

FORGET PRETENDING TO HAVE MONEY

Forget pretending to be rich. The only time bluffing works when it comes to money is at the poker table.

And you know what happens when the hand is over, the bluffing stops there.

So leave the bluffing at the table and check it at the door.

Remember that scene in the comedy movie Back to School with Rodney Dangerfield. He was a wealthy guy named Thornton Melon, but always said to his son: A man without an education is nothing.

There was one scene in the film where he was talking in class about being in business and all the things a businessman is doing to make it in the real-world.

The teacher disagrees with his assessment, even though he was coming from a place of information.

When the professor asks where to build the business after scolding Melon he replies, “How about fantasyland.”

When it comes to your money you cannot afford to live in a fantasy. You have to keep your feet planted firmly on the ground and your actions based in reality.

Earn money, save it, invest it, and get rich slow.