A debt perspective

[redpoint5]

Originally Posted by oil pan 4

See if you a 30 year mortgage is worth it do the math. Chances are at loan maturity even with 6% interest over 30 years you are paying for the sale price twice, if you don't ever refinance.

Then you sell it you might break even. If you cash out the government takes half of any amount you don't put it into another house with in I believe 3 to 6 months.

The math is quite easy, and on average, the math says people are usually better off buying a house if they will live in the same place for 5 or more years.

BTW- Old Mech has it right about no tax on the appreciated value of the home. As long as it's considered your primary residence, and you have owned it for 2+ years, you pay no tax.

I just sold a 4-plex in Oklahoma that was my friend's primary residence (4-plex is considered a primary residence, while anything over 4 units is considered investment property and taxed at a higher rate), and I was a 50% stakeholder. No tax since it was his primary residence.

Originally Posted by rmay635703

My grandmother only had a shoebox of receipts after paying for a house her whole life, the house was condemned and the county repo'd it.

In terms of renting it depends, I rented a studio apartment for $240 a month all utilities included for many years.

And "owning" a real house just gives you the ability to pay $200+ a month in property tax, I do not see this really as being any different than renting, at least if you are intelligent enough to rent the right size at the right price.

Land and houses are setup as pure liabilities in this country, beyond enjoyment there really is no justification for any of it.

Anecdotes are pointless because anyone can come up with a story of a renter getting screwed, or a landowner going underwater, literally or figuratively.

My anecdote is that I lived in a Subaru Legacy for close to 2 years and banked 95% of my net pay. After that, I moved in with a friend for 6 years and paid $400/mo all inclusive. This allowed me to put 20% down on a 4-bed house at the age of 30, pay for a wedding, ring, and wife; pay off her school debt, pay off her CC debt, own my vehicles outright, and now pay $10k every 4 months to put her through medical school... and loan $50k to a friend.

By purchasing a 4 bedroom house as a single guy, I was able to charge $500 per room and have the tenants more than pay the mortgage, insurance, and property taxes.

What I'm saying is that paying to utilize assets (renting) rarely is as profitable as owning the assets. Renting is usually cheaper than paying a mortgage only because people rent smaller places than they purchase. Compare a rental of equal size and quality to paying a mortgage on something similar, and you will see it's cheaper to take the mortgage.

Lastly, fixed-rate mortgage debt is a good way to hedge against inflation. As cash devalues over time, the fixed monthly payment remains the same. In real terms, the payment amount reduces over time while the property value tracks (keeps up with) inflation.

The only way to reduce national debt is to reign in spending, increase taxes, or devalue the debt through inflation. Considering China owns much of our debt, which method do you think we'll be utilizing the most? If you think inflation, then hedging against it is a wise decision.

[Vman455]

Originally Posted by redpoint5

The only way to reduce national debt is to reign in spending, increase taxes, or devalue the debt through inflation. Considering China owns much of our debt, which method do you think we'll be utilizing the most? If you think inflation, then hedging against it is a wise decision.

I think it should be pointed out for clarification that the majority of our debt is not held by foreign creditors, and of the part that is, China is not our largest foreign creditor (that would be Japan).

[redpoint5]

Originally Posted by Vman455

I think it should be pointed out for clarification that the majority of our debt is not held by foreign creditors, and of the part that is, China is not our largest foreign creditor (that would be Japan).

Good point.

The issue remains that increasing taxes and decreasing government entitlements (fiscal policy) is political suicide (nobody wants to pay more to get less). For that reason, inflation is the most likely method of "paying" off the national debt.

Inflation (monetary policy) is a hidden tax levied on anyone that owns dollars, or U.S. debt.

People don't riot when they are taxed via monetary policy, but they sure will if they are taxed through fiscal policy, even though the effect is largely the same.

Most people in the U.S. don't understand basic economics, yet have strong opinions about the subject while their political preferences underscore their lack of understanding.

[jamesqf]

Originally Posted by rmay635703

In terms of renting it depends, I rented a studio apartment for $240 a month all utilities included for many years.

Which meant - duh! - that you lived in a studio apartment all those years. Which may be your choice of living arrangement, but isn't for everyone.

[Fat Charlie]

Originally Posted by redpoint5

What I'm saying is that paying to utilize assets (renting) rarely is as profitable as owning the assets. Renting is usually cheaper than paying a mortgage only because people rent smaller places than they purchase. Compare a rental of equal size and quality to paying a mortgage on something similar, and you will see it's cheaper to take the mortgage.

Yep, you're either paying your own mortgage or your landlord's. Looking back at our first apartment, it sure seemed cheap at $400 a month. Two rooms on the second floor with a blinking yellow traffic light shining into our window because the fire station was across the street, a little closer than the laundromat. On Sundays, the church on the other side of the wall woke us up with its bells. The whole place was smaller than the living room I'm sitting in right now.

But it cost a third of what I'm paying now and I wasn't buried in debt. Man, those were the days!

[freebeard]

At one point my entire possessions fit in a 9x14' bedroom. I saved enough to buy a 64 VW Notchback and move out of town. Which is all anecdotal. The 2008 stock market crash didn't affect me (maybe my prospects going forward).

For understanding of debt and economics I rely on Max Keiser's Keiser Report. What we find in Episode 903 is that Saudi Arabia is threatening to dump a trillion dollars in US bonds if the true perpetraitors of 9/11 are named. Their response? The bond market is starving—bring it on.

[darcane]

Originally Posted by redpoint5

My anecdote is that I lived in a Subaru Legacy for close to 2 years and banked 95% of my net pay. After that, I moved in with a friend for 6 years and paid $400/mo all inclusive. This allowed me to put 20% down on a 4-bed house at the age of 30, pay for a wedding, ring, and wife; pay off her school debt, pay off her CC debt, own my vehicles outright, and now pay $10k every 4 months to put her through medical school... and loan $50k to a friend.

One problem with our housing market over the last... 15 years or so is that your experience is the exception, not the rule. You saved up to put 20% down and almost nobody does that on their first home.

When debt is cheap and easy to obtain, people try to take on way more debt than they should. This drives up demand for houses and inflates home prices. Add in a large dose of fraud and sketchy loans to get even more people into big loans and the housing bubble is further inflated.

...until it pops.

And now that I'm in the process of buying a new house, I was quite surprised at the loans offered to me. 0-3.5% down loans are again available...

[oil pan 4]

Originally Posted by darcane

When debt is cheap and easy to obtain, people try to take on way more debt than they should. This drives up demand for houses and inflates home prices. Add in a large dose of fraud and sketchy loans to get even more people into big loans and the housing bubble is further inflated.

...until it pops.

You mean exactly like how its starting to happen all over again?

[sid]

Next month I celebrate my 30 year anniversary of being debt free. I decided back in college that I would own my own home and be debt free by age 30, and I accomplished it with a couple months to spare. I still feel that was the best financial decision I have ever made in my life.

The weird thing is, back then, I was ridiculed by almost everyone for doing this. Everyone was telling me how I should have kept the debt and invested the money instead. Many of those same people have lost their jobs, a lot of their savings, and some their homes over this past 30 years. Many of my neighbors and friends are now aggressively trying to get rid of their debt after seeing how well I have made out.

[redpoint5]

Originally Posted by sid

Everyone was telling me how I should have kept the debt and invested the money instead. Many of those same people have lost their jobs, a lot of their savings, and some their homes over this past 30 years. Many of my neighbors and friends are now aggressively trying to get rid of their debt after seeing how well I have made out.

Different strategies are needed for different personalities. The debt-free Dave Ramsey approach is among the most conservative, and probably works for a larger portion of the population. However, personality types like mine feel bad to spend money unnecessarily, and can profit by utilizing credit.

I have a coworker that utilizes an extreme form of credit utilization known as "app-o-rama". He exploits the fact that it takes a few days for a credit pull to show up on his credit report, and applies for many zero-interest and rewards credit cards all at once. He is approved for most of them and then has access to a large amount of credit, which he has methods of liquidating. He then puts the cash in conservative and insured investment vehicles. At the end of the year, he pays off all of the cards, pockets the interest and rewards, and then repeats the process.

He has paid for his wedding in Hawaii, a cruise, among other things by careful exploitation of credit.