Picking up tree leaves BY HAND: A study in excellence
I have taken a hiatus from blogging for the last couple of weeks or so, partly because my wife and I took a week of vacation. It was our first big trip in quite a while, and so we chose to go to the country of Belize.
Needless to say, it’s a beautiful country — it pretty much stays between 75 and 85 degrees Fahrenheit at all times year round. We were “wowed” by not only the beautiful beaches and fascinating nearby jungle, but also by the tremendous hospitality and attitude of service of the local Belizean people.
There were many manifestations of this throughout our trip, but one sight in particular blew me away.
The resort we were staying at had fabulously well maintained grounds, and every morning as we walked to breakfast, we would see workers trimming the roses, sweeping the walkways, or working on the lawn. Usually the lawn work included the raking up of a few leaves that may have fallen over the past 24 hours or so. One morning, however, we saw a worker picking up a few leaves by hand over a decent-sized patch of grass. That really struck me as an incredible commitment to excellence. The leaves were not extensive and were largely buried down among the medium-length grass, and so the worker was pulling leaves out of the lawn without the aid of a rake, as we had seen workers use on other mornings.
It is true that a person’s choice of tools to solve a particular work or business problem does not necessarily determine that person’s level of commitment to excellent work, BUT it is true that a person’s work ethic and character are truly revealed when the tools and resources they might prefer are not at their disposal or are not easily utilized.
The worker we saw could have easily passed over the area, as the leaves were not visible from even just a few feet away. But he had a job to do and he was determined to do it, with no pride keeping him from pulling the leaves up out of the grass from his knees. There is a lot to be said for the internal drive demonstrated by that small act.
Keep an eye out for excellent performers around you– and model your approach after them.
Why Austin is #7 in “Online Giving”
An article came up a couple of months ago in the Austin Business Journal stating that the city was #7 in the nation in “Online Giving”.
In 2003 a study was released by The Chronicle of Philanthropy that showed Austin ranked 48th in giving of 50 largest cities in the country. However, Austin’s population puts it nationally as the 15th largest city. So if the city’s per-capita giving was “average”, you would expect their charitable giving rank to be similar to their population rank, but obviously that is not the case.
So after such a disappointing rank of overall giving, we now show up high in a list of cities participating in online giving. What gives? Why is this so? A few key points should be made here.
First of all, Austin ranks as #3 on Wired.com’s list of “Top 10 Tech Towns”. Obviously a town that is very comfortable with technology (and certainly Austin, which is the home of Dell’s world headquarters and countless other chip makers, software, and online businesses, would fit the bill) would be more likely to have a disproportionate amount of their giving online. Note also the overlap between the Wired.com list and the top 10 list in the article announcing online giving rankings — several cities appear on both top 10 lists – Seattle, and Cambridge (adjacent to and part of the Boston area), just to name a couple.
Secondly, the company that provided the information to the Austin Business Journal for their article mentioned above is Convio, Inc., a well-respected Austin-based software company that provides solutions for non-profit organizations for fundraising, online marketing, and donor tracking. According to the Austin Business Journal article mentioned above where Convio announced the results, “The rankings are based on the online donations Convio processed on behalf of thousands of nonprofits between January and August”. I think it is worth suggesting that Convio may have a disproportionate amount of non-profit customers in the Austin area, given that this is their home, and so this may skew the results somewhat. It must be mentioned, however, that it is encouraging to read in the article that Austin grew from a rank of #14 last year to #7 this year. This jump in rankings for Austin may be a result of the reality of the broader national economic downturn not affecting Texas, and especially not Austin, as badly as it has affected other cities, resulting in a more constant level of giving while more severely affected areas’ giving dropped. Evidence of the relatively good economic shape of Texas and Austin in particular is BusinessWeek’s reporting on October 23, 2009 that San Antonio and Austin were the 1st and 2nd strongest economies in the nation.
Finally, Austin is a very young city — according to Wikipedia, the city’s age makeup is such that over 93% of the population is under age 64, and over 76% is under age 45. Accordingly, one could make an assumption that the average household’s wealth is less given their early career and life stage that much of the city finds itself within. Therefore, charitable giving could be expected to be less common.
Interestingly, Austin ranks 3rd in the nation in volunteerism rates. So while Austin’s wallets may not be as open (or as large) as much of the country, people appear very willing to give their time. (Click here to see more information about volunteerism in Texas).
I predict that as (and if) the population in Austin ages over time, we will see the increased levels of wealth that tends to come with age in a highly-educated city and an increased level of giving. In fact, there has recently been a push locally in Austin for people to give more in general and also to also give locally. “I Live Here, I Give Here” is an organization that was created in recent years to tackle the issue of low rates of giving in the area, and they mention the problem right on their front page. Their mission, as stated online on the day of my writing this blog, in fact, is “to deepen and expand the culture of personal philanthropy in our community by inspiring Central Texans to give more and more Central Texans to give”.
Surely there are signs of hope, and people working on expanding the population’s understanding of non-profit work and the need for financial contributions. Hopefully this will start a trend in the city that is not just reflective of our high rank in the “online giving” category, but in our giving overall.
Mandatory sick days for swine flu?? Really??
As cool of an idea as mandatory sick days for flu patients sounds, is it really such a good idea?
In a Portfolio.com article by Brett Chase, this is explained in summary form: (I am quoting his article verbatim right here in italics below. The original article page can be found here.)
As employers scramble to figure out how they’ll cover the loss of employees to swine flu, a Washington lawmaker wants to guarantee workers have enough sick time.
Representative George Miller, a California Democrat, says employers who send their workers home need to pay those people up to five days of sick leave. People who live paycheck to paycheck, can’t afford to be off work without pay, he says. Miller, who chairs the House Education and Labor Committee, says he’ll hold a hearing on his bill Nov. 16.
Miller’s proposal sounds reasonable. Most big employers provide sick leave and no one wants to infect the entire workplace, right? The Centers for Disease Control says a sick employee will infect one in 10 fellow workers, the New York Times reports.
But the Times cites another interesting figure from the Bureau of Labor Statistics: Almost 40 percent of private-sector workers have no paid sick days. Among the bottom quartile of wage earners: 63 percent do not get paid sick leave.
That’s a lot of people with an incentive to go to work sick.
Here’s my question — when he says that “the Times cites another interesting figure from the Bureau of Labor Statistics: Almost 40 percent of private-sector workers have no paid sick days. Among the bottom quartile of wage earners: 63 percent do not get paid sick leave.”, does this statistic take into account the companies that have blended sick days and vacation days into personal days, or in some places better known as “paid time off” or PTO? The trend to combine these two types of time off into PTO is well-known and has been going on for years now. And typically, if a company offers any time off whatsoever, even if just referred to as “vacation” days, they typically will allow use of that for sickness.
So, putting in legislation that creates a temporary requirement related to swine flu is a bit dangerous. It makes a lot of assumptions about the 40% statistic mentioned in the article. And even if the statistics are completely accurate and not at all misleading, what does that mean for the 60% of workers who already receive sick days? Do they get 5 more? It is very difficult for companies to control and predict costs when legislation can pop up and suddenly add a new requirement on them based on any given “problem of the year”. Much has been said about the lack of “time-off” laws in the U.S. unlike other countries such as France. I would support some type of national requirement, but a very minimal one (such as 5 business days a year after 1 year of continuous employment) and not dicing up a minimum number of sick days, a minimum number of vacation days, etc. The problem of course with beginning to regulate time off is that it could become a slippery slope towards more unpredictable legislation.
If the couple in the photo shown at the top feels like they can kiss through a mask and not spread their illness, and if that belief is fairly representative of the population, then maybe we should simply create legislation mandating that those who show signs of illness wear blue surgical masks at their workplace all day 
Price protection for home sellers?
Ugh- just what we need, insurance to protect us against yet another thing that we could “self-insure” against if we wanted to do so. See what I’m talking about by reading this article in the NY Times.
This product, for a percentage point or two of the value of the home when purchased, will insure you against loss of value.
The companies offering this product, I would guess, are betting the success of this product on a couple of strategic assumptions:
1. It assumes that there is a decent chance that a home buyer is only considering staying in their home a short period of time, probably 5 years or less, before moving to a different city, a different place in their city, or to a larger home. If someone plans to move in just a few short years, they may be more likely to purchase this insurance to protect the potential “down side” they would experience if their local housing market tanked and their house plummeted in value right as they were needing to sell it. Rather than having to come up with funds out of pocket, this insurance plan would provide for them.
2. The plans are catering to buyers with little down payment. While most home buyers with substantial down payments would never dream of buying home value insurance, individuals with little or no down payment often understand the risk they are taking and would like to have a way to mitigate that risk. They don’t want to find themselves in the same situation as their old neighbor, or as their near-bankrupt relatives who paid dearly to sell a depreciated house they couldn’t afford due a simultaneous drop in the housing market and loss of their own job and income.
While home value insurance may be helpful for some, if you buy a home you plan to live in for a while– and if you buy it with a decent down payment, there’s no need for these products and it adds yet more costs related to the home purchase transaction. Ironically, one of the major arguments to staying in a house for a while before selling is that the real estate transaction cost incurred when you sell makes up a smaller percentage of your home’s equity than it would over a longer period of time. And yet this product, which itself aims to protect your equity position in your home, just adds to that cost burden.
It will be interesting to see how these products progress — will insurance regulators step in to regulate these products as what they are (insurance!), and what will be the opinion of personal financial coaches and advisors are on these products in the coming years…? Time will tell.
The most important screen on Facebook
1/25/2010 Update: Since this original post, Facebook has made a good deal of changes to its security settings. The New York Times wrote a great article on how to check the important Facebook security settings now. Click here to read their article.
Most people do not realize that by default, Facebook shows a decent amount of information to individuals who search for, and find your profile on Facebook. By default, this includes your profile picture, your friend list, links to add you as a friend or send a message, and pages of which you are a fan.
To change these settings, hover over the “Settings” label on right side of the blue banner at the top of the screen in Facebook, and choose “Privacy Settings” from the dropdown menu under settings. THEN click on “Search” to tweak search-related settings. That will take you to the screen as partially shown below, where you can make changes as you wish.
You can also limit your search visibility altogether with the dropdown field labeled accordingly.
Many people sign up on Facebook without realizing anyone visiting the website can search for them and see some information about them. The idea that all information in Facebook is visible only to your friends is not entirely accurate; some information is visible to non-”friends” who search for your proile, as controlled by the settings on this screen.
I hope this is helpful to those Facebook users out there, like me, who prefer for the site to be a private community for friends and doesn’t want most of their information publicly visible to individuals on the Internet who may find me.
More than 23 Google Android phones here, or in the works!
This posting is by way of follow-up to my recent post, “Real competition for the iPhone?”, which talked about the ‘Droid’ phone rumored to be released by Verizon very, very soon. Their device would be probably the most-hyped release of an Android phone yet.
But today I wanted to point out that popular technology site TechCrunch currently lists TWENTY-THREE, yes that’s 23 different phones either currently available, to be available soon, or rumored to be revealed soon, all which will operate on the Google Android operating system. Note also that all of the major carriers (T-Mobile, Sprint, Verizon, and AT&T) are represented by this list of phones, and some of them tied to multiple of these devices.
Imagine your choice of cell carrier and choosing between several phones, all which run the same applications! This is truly going to be a significant threat to Apple’s iPhone… and of course to AT&T which as you know is currently the only carrier which sells the iPhone. But you will also notice that at least one of these Android phones will work on the AT&T network as well.
Click here to read the TechCrunch article I reference here.
Netflix would never send a collections letter
Last week I received a collections letter; alarmed, I opened it and to my surprise it was from Blockbuster.
I have always been extremely careful to pay bills in full and on time, and I can only remember receiving one other true “collections letter” which was simply due to a mix-up over charges that was quickly remediated. So the receipt of this letter was so offensive that it tempts me to terminate my account with Blockbuster.
Blockbuster claimed I owed $16.23 on my account with them. Whether this was in late charges, or one of those fees related to “we guess you’re buying the movie since you didn’t return it promptly”, I’m not sure. Blockbuster’s payment terms have always been confusing to me. In fact, a couple of years ago shortly after implementation of Blockbuster’s current late fee policy, an employee even discouraged me from paying off a small balance during a visit to a store, saying instead “don’t worry about it, just pay next time you come in”.
What we see here, really, is a business model gone awry. It was widely reported last week that Blockbuster has recently announced they will be closing 960 stores; this move comes as no surprise to the industry as it simply proves what many have known for a while — that the bricks-and-mortar video rental business is in steep decline with heavy competition from mail-based and kiosk-based video rental companies. And this article pegs the market share of the various types of companies operating in the video rental space as follows: “[video rental kiosks] now comprise 19 percent of all video rentals nationwide, with subscription services such as Netflix accounting for 36 percent and brick-and-mortar stores like Blockbuster and Hollywood Video 45 percent”.
This would have been unthinkable several years ago, but the reality of CONVENIENCE and LOW COST demonstrated by Netflix and their sub-$10/month plans, along with the popular, $1 movie kiosk RedBox (owned by Coinstar, Inc.) has won out in the long run.
It is interesting how often the most convenient product also turns out to be the least expensive. Why? Because new products and services often make use of new or innovative technology (online movie selection in the case of NetFlix) or new distribution channels (online movie viewing for TiVo, NetFlix and others). As a result, they avoid “legacy costs” such as the pricy rental of a physical storefront, employees that may stand idle for 40% of the time when not helping customers, etc. Along with that, a savvy pricing and payment collections model (recurring, inexpensive credit card charges for Netflix, or the swiping of a credit card in a RedBox machine) ensures that customers will not be bothered with collection letters that accuse you of committing a financial sin due to a delay in returning a movie to that physical store much out of your way.
It should be obvious Blockbuster won no points whatsoever from me with their collection letter. If anything, they furthered my preference for the Netflix service we subscribe to as a family. Who wants to deal with a company that is unclear on what they will charge you and when they will require it to be paid? This is where business finance meets personal finance. The fact of the matter is, I wouldn’t mind a bit if Blockbuster asked me during my next store visit (if and when that ever occurs again) to give them my credit card or debit card number so they could automatically take care of miscellaneous balances, etc. when I racked up late fees. I wouldn’t mind a bit.
Anything is better than being threatened with a collections letter from a collections agency, when you’ve received nothing from Blockbuster stating you have a balance due, and when store employees in the past have actually discouraged you from paying off your balance.
Charitable giving correlated to prosperity, not tax deductibility…
Paul Sullivan, writing in the NY Times the other day, makes an interesting statement about charitable giving behavior:
“While there is not a direct correlation between tax deductibility and personal donations, there is a correlation between increased taxes in a continued weak economy and charitable giving.”
The article this quote was taken from, “All This Anger Against the Rich May Be Unhealthy”, analyzes the popular past time in our country at the present of criticizing the wealthy and tries to dispel some public misconceptions.
Sullivan’s statement and the evidence that backs it up is intriguing because it debunks the view that the wealthy only give in order to reduce their tax burden.
Why does it disprove this misconception? Two reasons can be extracted from Sullivan’s statement:
- Increased tax DEDUCTIBILITY does not necessarily lead to more giving. There are various limitations on how much a corporation, individual, etc. can give and the gift still be fully deductible. These limits vary based on several factors, including the size of the gift, the type of the gift (cash, real estate, etc.), and the income of the giver. As deductibility rules fluctuate, however, giving does not — meaning that individuals/companies are not inspecting current tax rules and then making a decision to give or not to give.
- Increased TAXES in a WEAK ECONOMY does lead to a decrease in giving. Why? Because in a weak economy, corporate profits and personal income is typically lower on average, and if the government is at the same time taking a higher percentage of a lower number, then it logically follows that fewer dollars are available to give charitably, or to use to reinvest in the business which could include uses such as employing more individuals.
It is unfortunate that it takes this type of evidence to debunk that view, as anyone with basic arithmetic skills knows it doesn’t make sense to give away a dollar to save 40 cents anyway. Most people (wealthy, average/middle class, or even struggling financially) give because they care about the cause or organization they are giving to! Why else would they part with the other 60 cents?
I cannot claim that human selfishness does not impact giving decisions one way or the other — this would be blatantly false as human nature includes that very powerful force of selfishness that few are regularly unaffected by.
However, I do think it’s important to point out that giving is not primarily a financial, tax-reduction activity for most who give charitably — rather it is a practice that many do, and increasingly so when the economy is prospering.
Real competition for the iPhone?
Anyone with their TV on last probably saw Verizon’s DROID commercial… encouraging people to visit droiddoes.com
Apparently, this is a Motorola device running the Google Android operating system– many people believe devices that run the Android system are the biggest threat on the horizon for the otherwise-dominant iPhone.
Just to be clear– the Google Android operating system can run on various devices on different cell phone networks. This will allow people choice in devices, choice in wireless carriers, but a set of downloadable applications that will work on all of those different phones and wireless networks, assuming the phone they are using is a phone running the Google Android operating system.
Here’s a snippet from an article posted yesterday about this:
I’m not going to be foolish enough to call this an iPhone killer for the simple fact that the iPhone’s developer community is still miles ahead of Android’s regardless of how good Droid turns out to be. But don’t be surprised if you start hearing about people who quit the iPhone in favor of the Droid. After all, even if the phone doesn’t turn out to be quite as polished as the iPhone, it will be running on a network that will actually let them connect their calls consistently.
One final thing to note: given how direct an attack Verizon is making on the iPhone, it sure doesn’t sound like the iPhone will be making the leap to Verizon any time soon.
From this individual’s comments and plenty of others, it is clear that the consensus is that the iPhone market share is fairly dominant, and that eating into it will take a while.
But in the meantime, for those of us who’ve not yet taken the iPhone plunge, there may be an exciting alternative soon!
Saving for a home down payment: 4 BENEFITS
I read an interesting article the other day which reviewed a book written back in 2005 — the book was about the elimination of down payments and the related fraud in the mortgage industry that often allowed people to qualify for mortgages for which they would have not otherwise been approved (see the article by clicking here). It basically puts mortgage fraud and $0-down mortgages in the same camp — they each existed because the other did.
Mortgage fraud aside, however, one still might ask “is there really anything wrong with a $0 money-down mortgage?”
If by “wrong” you mean something inethical or morally wrong, then probably not, of course. If by “wrong” you mean ill-advised, then I would say YES it is ill-advised. Many financial counselors and planners alike have recommended sizable down payments forever, and yet many (usually those looking to buy a house with little cash) write off the advice as “legalistic” or “not practical”.
Instead of chiding those of you who have taken the $0 down or minimal down payment approach (because I too have done the $0-down thing in my less-informed past, though I’m now free of such an arrangement), let me instead focus here on FOUR BENEFITS of saving for a down payment.
There are other issues with home mortgages of course – how long of a mortgage do you get, is it possible to put too MUCH money down on a house, etc. — but those I will save to discuss another time. For now I’ll stick to my discussion on the benefits of saving up a down payment.
BENEFIT #1: IT LIMITS THE AMOUNT OF HOUSE YOU BUY TO A DOLLAR AMOUNT WITHIN YOUR BUDGET
There is some scary reverse psychology that most Americans have bought into (pun intended) that goes something like this– “the less I have to put down on a purchase (car, house, etc.), the better I can afford it!”. In fact, the OPPOSITE is true. The very fact you cannot save money to place down on the purchase should give you pause, and make you wonder if you can afford the monthly payments on the new purchase.
But when you force yourself to save money down for a house, you automatically limit the value of the house you can buy to the value of a house you can actually afford. I, along with many personal finance coaches, recommend you save up a down payment of at least 20% of the home’s value, and preferably, another 5% or so to fund new furnishings, minor improvements, etc. that each new homeowner inevitably wants (financial planner Dennis Stearns, according to this article, claims new homeowners on average spend 3.6% to 4.5% of the value of a recently purchased home on improvements alone). Note that this total 25% home savings should be beyond what you would hold in your emergency fund (typically made up of 3-6 months worth of expenses). Some might argue that a base down payment of 20% (plus improvement/move-in costs) is excessive, and that one can lower their risk and mortgage payment by saving up 10% or 15%. While that is certainly true, and while doing so is better than putting down no money at all, I explain below an additional benefit of saving a full 20% — avoiding the cost of private mortgage insurance, or PMI.
Let’s look at an example of how this actually works out.
A- Let’s assume your family has a household income of $75,000, resulting in net “take home” pay of about $55,000 (assuming a couple of kids and typical deductions).
B- You would like to purchase a house in an area that will cost you somewhere in the range of $200,000.
C- According to my recommendation, you would need to save up about $50,000. If you as a family are able to save 15% of your take-home pay, or $8,250, then at that pace if would take you about 6 years to save up for a down payment.
D- If that makes you say “yikes, six years!” then you can either attempt to save up more quickly, or scale down your plans in terms of price/size of house. If you instead aim at a $150,000 house, you could save up the 25% for down payment and initial expenses of $37,500 in about 4 1/2 years. Cut spending and save a bit more, for example save 20% of your take-home pay ($11,000 per year) and you could have 25% of a $150,000 house saved up and be ready to buy such a house in about 3 1/2 years.
Ultimately, most people will find that the closer to 2 or 2.5 times their annual gross income the price of their house is, the more likely they will be able to save for a down payment, and then make the payments on that house successfully.
Unfortunately, the mortgage world is still full of lenders that will loan you 95% or 100% of the value of your house and who would often like to sell you a house costing 3 to 4 times your annual gross income. Think about it – mortgage brokers are typically paid a percentage of the loan amount, so the more they can get you to borrow, the better off they are!
BENEFIT #2: IT LOWERS THE CHANCE THAT FUTURE FINANCIAL DIFFICULTIES WILL DEVASTATE YOUR FINANCIAL WORLD
When you have 20% or greater equity in your home from day one of your ownership you lower the odds that your mortgage payment will contribute to future financial devastation of your family. There is both a direct and indirect reason for this:
INDIRECTLY, by getting into a financial position of saving for your home purchase, you are unlikely to fall behind on your mortgage payments due to overspending as you had to create a disciplined financial environment in your family in order to save for the purchase to begin with.
DIRECTLY speaking, with ownership in a home that is worth substantially more than the debt you have on it, you have a “cushion” of net worth that can be accessed. Although equity loans are certainly available and though I recommend against them, the main thing I have in mind here is that should severe financial difficulty affect your family (such as a loss of all family income), and you burn through your several months of emergency funds and are still struggling, you could sell your home quickly at a good price and still come out with some cash in hand. Families who owe almost as much on their home as its value of their home, or who owe even more than the home’s value, put themselves at significant risk in the event their income drops or disappears altogether. Another DIRECT reason for the benefit of having equity in your home is that, in the event that life circumstances change and require you to move to another part of your city, or another city altogether, it is unlikely that property values will drop by more than 20% and so even though it will not be pleasant, you WILL be able to sell your house if you absolutely must.
BENEFIT #3: IT LOWERS YOUR MORTGAGE PAYMENT!!
See the chart to the right, which demonstrates the difference in monthly payments (loan principal + interest only) on a mortgage with 20% down as compared to 5% down (assumes 5% interest rate and a 15-year term). Note the substantial payment difference with the home values ($150,000-$200,000) used in our example above — there’s hundreds of dollars of monthly difference in the payments! And of course the difference grows even larger as the size of the home grows.
This is an obvious benefit that I don’t think many people think about when weighing the idea of a small vs. a more substantial down payment. However, it should be one of the leading factors to consider! This is because, although during the period of time in which you save up for your house down payment there could be some fluctuation in your budget and savings from month-to-month, once you’re locked into a mortgage, there will be no mercy coming from your lender — you’ll have to make the payment every month. If you’re going to be locked into a large monthly payment for probably at least 15 years, doesn’t it make sense that the payment be smaller if you can help make it so? The only other way to shrink the size of your payment is to a) go for a less expensive home– a good solution for some, or b) use a longer-term mortgage — not as good of a solution but also not a topic I will get into here. Finally, it is also critical to understand that by having a loan amount of 95% of the value of a $150,000 home, you will pay about $32,000 more in total over 15 years for the house (as a result of the extra interest on the extra borrowed amount) than you would with a larger 20% down payment.
The bottom line on my third point here is this: every dollar saved NOW for a down payment on a house is a dollar that you won’t have to pay someone later– with compounded interest.
BENEFIT #4: YES, IT ALSO ELIMINATES THE COST OF PRIVATE MORTGAGE INSURANCE (PMI)
Private Mortgage Insurance, or PMI, is a type of insurance lenders require homebuyers with small down payments to acquire in order to protect the banks against the chance the home buyer will be unable to make their mortgage payments. The fact that a bank would require you to buy insurance to protect them from you should raise red flags — because THEY apparently believe the odds of you at some point losing your ability to pay your mortgage are higher odds than YOU think they are, if you’re willing to get a mortgage despite this extra requirement!
PMI, according to AppraisalToday.com, is typically required when a home buyer brings a down payment of less than 20% of the home’s value. To illustrate the cost of PMI, the same source says that with 5% down, you would pay about $70 per month for PMI on a 30-year mortgage on a $119,000 home.
This cost can be completely avoided with a down payment of at least 20%.
Unfortunately, in recent years when people talk about “avoiding PMI” they are typically promoting an arrangement involving a 80% primary mortgage and a second mortgage ranging from 15-20% of the remaining value, thereby removing the need for PMI. For those who have taken this approach, however, they realize that they pay a higher rate of interest (often at variable rates that adjust periodically) on their second mortgage, and typically incur additional financing-related fees at the time of purchase.
CONCLUSION
It is challenging, from a purely financial and risk reduction standpoint, to make an argument for little-or-no-money-down home loans. And yet, the mortgage industry has made such an argument to do so convincingly, in an effort to drum up more of the commissions and fees they generate for originating a mortgage. The sub-prime collapse and housing market meltdown in general in recent years has brought this further to the forefront of public understanding, and yet mortgage products featuring little or no down payments are still prevalent today for those with decent credit and income — and so do not assume the marketplace is protecting everyone now from every bad financial product out there; I would encourage each of you to think twice before embracing such products.
Chances are, those of you who have bought homes with little or no money down (or are considering doing so) are not making the decision based on numbers or risk, either. It’s an emotional decision for you; you WANT a new home and so you’re willing to ignore the risks to get into that new home.
But I can assure you this — if times get hard for you financially after doing so, the grief that will come from the financial stress of a mortgage payment on a house you can’t afford the payments on, and can’t sell because you owe as much as it’s worth will far outweigh the joy of that new kitchen with granite counter tops and crown molding. Why put yourself through years of stress trying to get out of the house or make money to stay in it? Instead of suffering later, sacrifice NOW for a few years to avoid such a situation. I promise that it will be well worth it!
leave a comment