mortgages - good debt and bad debt, property ownership / renting for a liftime

I realise recently I had written a lot about this subject and some responses have been very insightful, and I regularly read other posts about avoiding any form of debt.
DEBT TYPES
There is a strong case for GOOD types of debt.
Good debt is borrowing to purchase an item you will use for a long time, that will reduce your living expenses{ IE no rent] grow to be an asset and is affordable.
Good debt may be of the order of 1 or 2 years income, paid back over say, 5 or 6yrs.
If the repayments are less than rent you may pay, you are better off.
Good debt is purchasing some equipment that will earn far more for you than the repayments cost over time, thus creating income and cash for the repayable at an affordable rate.
BAD DEBT
Bad Debt is borrowing for a flash holiday and spending years paying it back with no benefit other than memory.
GOOD DEBT BAD DEBT Many people muddle them up. AND CONFUSE THEMSELVES ABOUT WHAT TYPE OF DEBT THEY ARE taking on,
Some think borrowing for a party or a holiday is a good idea, it may be in their eyes, but it is actually badt debt because you are left with nothing tangible.
I SUGGEST YOU LOOK APON MONEY AS A TOOL TO BE MORE COMFORTABLE
Some think apon cash as a tool of the devil, it does not need to be.
Used cleverly and simply it has improved the lives of many, you just need to understand the tools.
HOMES
I look apon a home as an asset.
If I live in it I save rent but have outgoings and some maintenance. If I rent it, I have income, outgoings and some maintenance.
If I borrow and rent, I have some money tied up, I have income, outgoings, some maintenance and mortgage repayments,
and I have a growing share of the house with the bank until the mortgage is paid out.
In all cases I believe its better owning than renting. and doing nothing with my cash or time.
In fact ownership means your cash is working for you and if you have time and skills or even just time you can improve any property
with your that time and  you may then have an asset that increases in value because of the improvements. Be they gardening, painting fencing etc.
MY EXPERIENCE OF BORROWING
Over 50 years of working I have only had good debt and at times I have borrowed eye watering amounts.
I have never been bankrupt, I have paid all my debts and I have had great experiences.
Today I am financially comfortable, but I am still careful with money. And I am still creating work for myself with modest income to preserve cash
and improve what I own with maintenance ahead of time.
FROM THE PERMIES SITE
I have read on this Permies site some saying, ' I dont want to improve my own house because the taxes will rise'!!!
A couple of my own thoughts on the matter.
- tax is the price of a civilised society.
- I am not convinced letting a house fall into ruin to save tax is a good idea
- If you have maintained it and need a quick sale,{ to purchase a motorcycle or something else important] the maintained house will sell faster and maybe at a better price.
- Well maintained rental houses rent faster and are kept in better condition by the tenants.
BUT INTEREST IS LOST MONEY
"If you get a longer loan term, the compulsory payments are lower, and yes you will pay more money over time, COMPARED WITH A SHORT TERM LOAN, if you ran to the end of a 30 year loan.
But those payments are in future dollars, not now dollars.
INTEREST IS THE PRICE OF THE MONEY
With good debt it will always be less than renting or trying to save first.
- Most loans dont go full term, many people manage to pay them off quicker because of 'rent ' savings and luck.
- If you have any inflation in the country that helps property owners and makes it harder for renters.
- Make sure you can pay the loan down faster without penalty its a great idea.
There is nothing wrong with GOOD debt.

I think a lot of people lose opportunities by waiting to save, while the world rolls past.
-  If you are paying rent while you save to pay cash for a modest place, a loan would enable you to save rent
  and have a place of you own at todays dollar cost.
- Inflation is the enemy of savers!
Think about it.
From Permies:
What about those 0% down 30yr USDA loans?

This is the type of mortgage I went for because I had no money for either a down payment or closing costs. The USDA loan rolled the closing costs into the mortgage.
What I ended up paying monthly for the mortgage, home insurance, and property taxes was less than what I would have paid in rent for a home.
Now, 6 years later, I paid the mortgage principle down by about 16%, and the house also went up in value by about 60%.
If I were to sell this week, I would walk away with close to 100k in my pocket. Not bad for something that I put no money into 6 years ago.

From Amedeo;
FINANCIAL PLANNING
-use debt, only if you can multiply the value. some people are able to use good debt, they invest money they don't have and create infrastructure to generate more money than they have spent.
 Imagine you buy a cheap land, or a tractor, or a greenhouse... It's expensive, but It will repay if you can manage what you've bought
-ask for a loan only if it is easy to pay it back:
 "I'm not feeling good at spending money i don't have, maybe I'm not entrepreneurial enough, but if I ask for money i must be sure I can repay.
 Sadly, the only thing I'm sure of, is that nothing is sure, so I ask myself: if my tractor get stolen, how easy is it too repay it? [ This is what insurance is for ]
 If i am not able to produce can I still pay back?  
 So my strategy here is to ask for a loan if you are easily able to pay back anyways."

Perhaps additional points?

Think before signing up for a mortgage (death contract, and that root wording alone should give pause), after looking at all your alternatives; if there is any other way, see if that alternative is better for you. If you *need* someone else to build something for you, then a mortgage isn't a bad thing; it will just cost you a lot. These days, there are so many handcuffs (can't finance that, it has to be this way), chains (no insurance, no mortgage), and whips (codes, etc.), that it is more like ... well, you get the idea.

After all that, the housing and mortgage process is still too much like "musical chairs" ... the game is great while chairs are available ... when the music stops with no chairs left (you are holding a negative-value mortgage, and thrown out of a job), then it is no longer any fun.

If you can get to mortgage-free, then that is a better thing. We bought land and self-built, sinking every dollar we could convert from anything else into funding for the process. There were no dollars left, but we had a mortgage-free house at the end.

Why? To prepare for fluctuating job markets and other madness ... the writing was on the wall, given how hard it was becoming to get and hold on to a job.

All of which is much better than renting, which, given the insane contract requirements these days, should be outlawed ...

I didn't anticipate CoVID (perhaps should have?), but we survived it because we were mortgage-free; my wife didn't use the words "you were right" (she never does), but she came awfully close in her mumbled words during the tough part of the disaster. The effects are still upon us, given inflation and such ...

Being debt-free on top of mortgage-free is the best of all. I'll leave all of those arguments to the Ramsey's and Howard's (radio shows, websites) of the world.

Did I mention off-grid?

The only other point to make is avoiding property tax where possible; I believe it is better to build small than large, mobile vs stationary, and so on. If I were building over again, I would only build mobile or skid-based tiny homes, which avoid property tax. A gentleman in our county has property, but lives only in RV's, which are not (yet) taxed ... I imagine his tax bill is a fraction of anyone else's.

The system, on the other hand (mortgages, construction, zoning/codes, etc.), is designed to build up the tax base, support trades and businesses, and more ... not reduce it with alternative construction, PC, etc. It is up to you to do that, where possible, and those locations left in the country where it *is* possible  are shrinking.

In my mind, one of the most important aspects of going into debt for capital purchase such as a house, car, etc. is to restrain yourself from purchasing more than you need. Our society has been bombarded with the "I want more" message for decades because buying more keeps an economy growing. But it's not necessarily a good strategy on a personal level. We were a 2 income household but we always budgeted for a single income which was a good thing since that happened more frequently than we liked to see. It kept us out of deep debt when our income shrunk due to job loss. I had a boss once tell me that we should purchase the most expensive house we could qualify for since our income would only go up. Good thing I didn't listen to her because the next year both our jobs went away. If I'd listened, we would have defaulted or gone bankrupt.

When you go to look for a house or car, there is the push to go for the most you can afford, which is not always the same as what you need. We have tried very hard to keep our desire for that little extra something in check. Not that we haven't gone for nice things, but just not too much for our budget. It's a personal choice for everyone as to what's enough. A couple of quotes say it better than I can.

“To know when you have enough is to be immune from disgrace. / To know when to stop is to be preserved from perils. / Only thus can you endure long.”

“There is no calamity like not knowing what is enough. / There is no evil like covetousness. / Only he who knows what is enough will always have enough.”— Tao Te Ching

JT LAMB thanks for you insights.
My article is primarily focussed on people who are planning on taking a mortgage, its not a paper about whether you should.
That is a different story.
Discussion about perils of debt are superfluous here, because I am only talking about GOOD DEBT, which:
-  within you capability
- creates an asset
- provides shelter in the case of a home.
- or its machinery that pays for itself  

ROBIN your point about keeping within your means is part of the GOOD DEBT story,
if you are spending more than your NEEDS and is unaffordable then it becomes BAD DEBT.

Indeed, for many years my wife asked me why we couldn’t afford a better house like “those people on TV”.   When the bottom fell out of the real estate market around 2008, she knew why.  I stopped in a restaurant in Atlanta around that time and got a newspaper. There were around 17 pages of foreclosures.   Yes, newsprint sized, several columns per page.  

We had been debt-free for a long time until we bought this place where we now live.

We had the cash to pay for it though it was the most expensive property we had ever bought.  The thing is it had an unfinished house and I was not sure if we paid cash for it we could swing the money to finish the house.

I looked at it like we were going to pay rent.  Yes, we had the money to pay rent in our budget so we got the loan.  

We have been in the position to pay off that loan though I have not decided that is the thing to do.

So my suggestion for people reading this is to save as much money as you can so you will be able to live debt-free.

The more cash a person has the less interest they will pay.

Keep your credit in a good position.

Credit scores are important though I weigh being debt-free over having a good credit score since you can explain a low credit score with being debt-free.                                                                                                                        

[quote=Robin Katz]

When you go to look for a house or car, there is the push to go for the most you can afford, which is not always the same as what you need. We have tried very hard to keep our desire for that little extra something in check. Not that we haven't gone for nice things, but just not too much for our budget. It's a personal choice for everyone as to what's enough. A couple of quotes say it better than I can.
[/quote]

This is SO true. I turn 50 this year and many of my friends who are my contemporaries have had serious financial ups and downs from this push to get as much as you can possibly afford. I even had friends, whose first step in househunting was to go to the bank and see what the maximum amount of mortgage they'd be approved for!   Because I live in Mexico, I was able to buy a home that was about 2 years' salary and pay it off with low payments in 7 years.

People interested in this topic who also like podcasts will love the lasted episode of Hiddle Brain.
[url=https://hiddenbrain.org/podcast/money-2-0-rewrite-your-money-story/]Rewrite Your Money Story[/url]

Debt is never good. Ever. I strongly believe in Dave Ramsey's principles and they have provided us with a stable life.

Yes, he does say get a mortgage if you need to but the best way is to pay cash.

Nothing else is required enough to go into debt for it. You don't need any machinery enough to get a loan for it.

My opinion, debt isn't good, any of it. Debt is awful. Did I get my house and land on debt, yeah. I did it before i knew anything and paying it off quickly has been our biggest priority. Wish we didn't have a mortgage at all, it's our only debt. It sucks.

John C Daley wrote:

With good debt it will always be less than renting or trying to save first.

Granted my father did the calculations over 50 years ago, but in my country at that time, you would have been further ahead renting than buying with a huge 40 year mortgage. At that time, and still in some situations, land taxes, building insurance (not content or liability though), upkeep costs, and most utilities (water, heat, electricity) were included in your rental fee. The problem is that many of my cohort, rather than using that savings to their advantage and investing that money, they "improved" their lifestyle. The government was so concerned about the lack of saving happening, they encouraged people to buy houses - banks (hardly a uninterested party to this) - stressed the benefits of home ownership with none of the dangers or true cost analysis.

That's led to a dangerous shortage of reasonable rental options, making renters feel precarious, and the homeowners stretched to the breaking point. Well-built, community-sized rental housing can save a huge amount of environmental damage by allowing people to live closer to work, conserving heating costs, and use building materials more efficiently on a per-person basis.

I totally agree with the concept that "money is a tool - make it work for you", but it's very important to consider any hidden costs. Buying a tractor with a loan for generating income against which both the interest paid, upkeep of the tractor, and depreciation can be charged may certainly get you further ahead than saving money and paying for the tractor up front. However, when we bought ours, the dealer was pushing their "interest free loan" - why not, Hubby thought? When he found out what the "management fee" was, and looked at the amount of time he'd have had to spend getting all the paperwork done, he realized it was by no means an "interest free loan" and neither those fees, not the value of his time could easily be charged as business expenses against it. We paid cash.

So there is definitely, 'better debt' and 'worse debt'. All the people advocating for carefully analyzing the difference between "wants" and "needs", so as to keep that "better debt" as low as possible, are headed in the direction I would choose. Absolutely, sometimes people *have* to gamble and take chances to get ahead, which makes taking on some sort of "better debt" the best route and all they can do is cross their fingers and hope their luck will hold.  "Risk tolerance" is a measurable attribute and some of us thrive on risk (at least in some areas of our lives) and others find it damaging to our sense of safety.

Think of it this way - if your mortgage is large, what you are effectively doing is "renting your house from the bank" only now you are liable if anything breaks rather than the landlord.

Property taxes in the US vary hugely from state to state and at least in Oregon from property zoning. In California you have to make major changes to your property for your tax basis to change. In Oregon, property is taxed regardless of having a structure on it. I don't actually know if or when they reassess here. We've been here three years with no reassessment even though the housing market has shot through the roof.

I agree that mortgage debt can be fine unless you overleverage yourself. I have no debt, but I also have no taxable income.

To my mind, like with many things, it is complicated.

Anne Miller wrote:So my suggestion for people reading this is to save as much money as you can so you will be able to live debt-free.

The more cash a person has the less interest they will pay.

Keep your credit in a good position.

Credit scores are important though I weigh being debt-free over having a good credit score since you can explain a low credit score with being debt-free.

I agree with this approach. This gives you more choices on whether or not to go into debt and by how much.

I know that having a good credit score is important for us. At one point we had our roof replaced due to age and hail damage and it was covered by insurance. Then we had more damage due to hail so we filed a claim. They paid for the second repair but then dropped us for having too many claims. I don't even want to get started on insurance companies and their behavior towards clients. We shopped around but being dropped by one company means others won't take the risk. Until we found one agent who dug a little deeper and found that our credit score was good so he knew we were a good risk and just had some bad weather events. Not having homeowners insurance was not an option for reasons I won't go into here. So a good credit score opens doors in unlikely places.

Robin Katz wrote:

I don't even want to get started on insurance companies and their behavior towards clients.

Yes, sliding into cider press for sure! However, that's a wonderful segway to the issue of buying properties with a serious look at long-term weather risks - in the 20 years we've lived in our current house we've had the snow storm of the century, the windstorm of the century, the rainstorm of the century... hmmm... do I see a pattern? The house we bought is marginal for some of the threats that are likely to come down the pipe next.

One of the huge factors that makes "better debt" actually "better" is doing one's research and recognizing dangers and figuring out best practices to protect your investment against them.

Example: the tractor we bought - apparently the "very expensive key" to operate it, is identical to every other tractor manufactured by that company. We've had some "issues" with the lock not connecting properly electrically. I seriously looked at Hubby and said, "so... if you're messing with it anyway is there any chance the hole and wiring is standard enough that we could get a lock and key from a junkyard and replace it?  Talk about a theft risk!

I find it funny that everybody who has 'slammed' a mortgage, actually has one.
Having a 'good debt' mortgage means the following;
- its not enormous and beyond your needs and means
- You cannot be "Being debt-free on top of mortgage-free is the best of all." Debt free means no mortgage either.
- you will not foreclose
- you will pay less than renting
- you will have an asset
Others points that I believe muddy the waters are;
= "you are just renting from a bank", so what if its within budget its OK
= " I agree that mortgage debt can be fine unless you over leverage yourself.", then its not GOOD DEBT which is the basis of the topic
= " the dealer was pushing their "interest free loan", this is not part of the topic
=

This comment about Dave Ramsey was exellant and and is in line with the topic
"Yes, he does say get a mortgage if you need to but the best way is to pay cash." But its hard to save enough sometimes, and thats where GOOD DEBT comes in.

This is another great observation
"When you go to look for a house or car, there is the push to go for the most you can afford, which is not always the same as what you need"
This is true, BUT, if people keep their EGO under control they will not fall for it. The EGO is the issue, not the DEBT.

Any way I hope I have caused people to think about the topic.

Still mortgage-free, still slamming mortgages ...

I started off mentioning Ramsey & Howard (good debt, bad debt thread), and now I'll further explode your mind with Kiyosaki (as mentioned to me by someone else in the financial forum) ...

Perhaps the term debt shouldn't be used, but the terms assets & liabilities, and the differences therein ...

Had to teach investing to my two home-schooled girls ... they've invested (their 4H money and such) in some assets, and recently "earned" $40 doing exactly nothing. They also "earned" $40 working very hard on a garden for someone else. They are rethinking the whole work equation, which is what I wanted them to do. Now, it's "what do I do to make some money, and buy more assets". They immediately reinvested the $40 of garden money ...

Mom wants them to "get a degree, get a job, get a mortgage" (what she and I did in our generation) ... Dad is saying otherwise, and showing them with investing lessons, mortgage-free tiny homes, and such. You should no longer count on degrees, jobs, or mortgages to do the right thing by you.

Not in today's world ...

There are a lot of points I agree with here.  Generally I think that well-managed debt is a good thing.  To me, well-managed includes the following:

Debt pays for a necessity (a home) with money an individual can’t realistically save in a practical amount of time.

The individual does not automatically take out the maximum amount of debt a credit rating would allow.  There are ALWAYS unexpected experiences and some of those unfortunately might require more debt (a medical expense).

The individual taking on debt finds the lowest possible rates.

The individual is educated about debt.  Importantly, this means reading the fine print in the contract (can the debt be paid off early?).

The individual is encouraged to pay off debt early.

The individual finds the shortest term possible for the debt to last.  For example, we refinanced our home from a 30 to a 15 year mortgage.  We will pay off soon.

Did I miss anything?

Eric

I think you covered it well Eric. T+Ithink this is the best line from your contribution

Generally I think that well-managed debt is a good thing.

I can only add that nobody else can tell you what is well managed, you have to look at all thats involved and it will be clear to you.
Listening to people who slam mortgages will only confuse you.

John, I think you are right in that the notion of "well-managed" will probably look different to every person.  There was a time in my life when I was positively allergic to any form of debt.  Of course, I didn't own a house then and my rent was money that was lost.  The day before I got married I was about $20k in the black.  I got married and I was much, much further in the red.  That sounds bad, but really that was only bad superficially.  Much of that debt went to a house which was appreciating.  We sold that house for a profit.  My wife had student loans, but those quickly paid for themselves.

Today we are solidly in the black, even though we still carry some debt.  When we buy a car, we will finance the car if the interest rate is less than the inflation rate.  We generally have pretty good credit so we can finance a car purchase (and we really only buy a new car once the old one has been run into the ground) at low interest rates--we just did so for far less than the current rate, and we put a hefty amount down to lower payments.  I even "financed" a tractor once for a zero percentage rate loan.  Does that even count as debt?

I think that we keep our debt generally low.  Basically we make our debt work for us and not let it get out of control (we never carry a credit card balance).  But what we do will not necessarily work for everyone.

Eric

Hi Eric and John C. D,

When I got out of school, I had a banker advise me to always pay at least 20% down for a home  loan, have a term of no more than 10 years, and to max out at 2.5 times my annual income.   I have always stayed within those rules and have never seriously regretted it.  Yes there were a few times I wished I had broken those rule to take advantage of a target of opportunity, but more often those rules protected me from disaster.  

Eric, you have done well which is good.
And you have clearly explained how you made the money work for your benefit.
Thats great.

Inflation is the killer of a savings plan, it just reduces in value unfortunately.
John FD, you had the same bank manager as myself by the sounds of it!

In todays market where housing seems to have become a tradeable asset the 2.5 times annual salary cost for the house has blown out to x7 in Australia.
Its not susatainable and of course ruins chances of people even getting to live in a home.

Where I live, the average house price is about 13x the local average annual income. Unfortunately, there's no way most people are going to save 20% of purchase price in a reasonable time frame.

When we bought our land, we scraped up every penny we could and got a personal loan for the rest. At the time, we were paying $1100 in rent, which was pretty typical, maybe even a little low. Our rent went up 2% every year. Our earnings (about $35,000-40,000) did not. Our savings sure as hell did not.

Borrowing and buying when we did was an excellent decision. We were able to move onto our land and stop paying rent, saving ourselves $13,000. We spent about $12,000 building our house that first year. Our living expenses (food, loan payments, property taxes, car insurance and fuel, a propane, firewood, etc.) that year were also about $12,000.  Because we were able to lower our cost of living so significantly, we were able to pay off the loan (and all the living expenses we put on low interest credit cards) in 4 years, way faster than we would have been able to save that same amount of money.

Our incomes had even gone down significantly when we moved. I think our very first year here, we made $5000 or something ridiculous. The year after that was maybe $25,000. We would barely have been able to pay our rent and feed ourselves on that income, but having replaced those rent payments with much lower loan payments, and it was okay.  Renting from the bank? Okay, sure. The bank was charging us less than a third the rent at a fixed interest rate, though. Not 2% more every year.

Very good debt, in my opinion.

I often hear people talking about limiting their income to avoid higher tax rates, which makes no sense to me. I had a woman in my office this year who was complaining because she had to pay $2000 income tax on $12,000 wage replacement received from the government for covid relief. She was absolutely livid, and insisted it would have been better if she'd never received the $12,000. She was much more adamant about it than most, but I talked to quite a few people who shared her opinion.

One bad debt trap I'm grateful never to have fallen into is the car loan. I see so many people who need a car right now, but don't have a few thousand dollars lying around to buy a used one. We're in a rural and small town area, so public transit is pathetic. If you have a job, you pretty much need a car to get to it. So people who can't afford a used car are forced to buy a new one. Of course they go for the cheapest piece of junk with the lowest monthly payments, and end up still paying $300 a month eight years later for a car that's, charitably put, ready for retirement.

John C Daley wrote: those payments are in future dollars, not now dollars.
...
- If you have any inflation in the country that helps property owners and makes it harder for renters.
...
- Inflation is the enemy of savers!
."

I think far too many people fail to factor in inflation.

My husband still has a government student loan that he's making minimum payments on because the interest rate is so low. Inflation is higher than the interest rate, so we're saving money by not paying it all back right away.  The key is, we can afford to pay it off if we need to.

One question for couples to ask themselves before signing for a mortgage is if for some reason one of us were to become incapacitated or pass away, will the other be able to handle the payments alone?  My first husband laughed when the lender mentioned mortgage insurance, saying we were too young for that.  He had a change of heart a few weeks later but the loan would have had to be rewritten and quickly dropped the idea.

A little over a year after moving in, my husband became ill and testing revealed he had terminal cancer and died eleven days later.  I had changed jobs the year before and took $1.50 per hour pay cut because I mistakenly thought I'd have a future at my new job.  I was only contributing about 1/4 of the household income and after his passing,  the mortgage took half my paycheck.

So I struggled for a few years, working 2-3 jobs and unfortunately racking up more debt as I was optimistic that things would get better and I'd soon be able to pay it off.

I found another job which I thought would be the job I retired from, remarried and started the get out of debt journey.  A few years later hubby suddenly lost his job and was working a temporary job when I hurt my knee a few months later.  That required surgery, which after the hurdles I had to climb by not having insurance, had me off work for five months and I practically had to beg the doctor for a work release.  By this time the debt had grown more and we started venturing into having yard sales and eventually flea markets.  By this time I realized my future at work was grim as positions were being eliminated by technology and there were hundreds of people with more seniority, who would first in line for any full-time benefitted positions and I decided to take a chance and quit my job.  It was one of the best decisions I ever made and hubby was joining me on the weekends.  

Things were going well and the debt was almost gone when I was in a head-on collision with a drunk driver.  Luckily no major cuts or broken bones but I did have some damage to my shoulder which required months of therapy.  Thankfully I'd worked a temporary job for about six months over the winter and was eligible for unemployment after I obtained a medical release.  A week after receiving the release, my hubby had a heart attack and a quadruple bypass and was off work for months, so the debt once again was starting to pile up.  

It was at that point we discussed doing the flea market business full-time and getting out of debt.  After two years of haggling,  I finally received and insurance settlement from the car accident and immediately paid off half the mortgage.  I caught up on all the utilities and paid off all debt except the student loan which wasn’t much.  Finally we were seeing light at the end of the tunnel when I discovered I was pregnant and then hubby's company decided to close the doors.  Our daughter had some heart issues at birth which required us to keep her isolated until she had surgery at six months. Hubby ran the business through all that and again when my daughter and I moved in with my grandma to care for her in her final months.  We were living comfortably but within our means and paid the  mortgage off in December 2019. Of course COVID hit and I did some math and finally convinced hubby we needed to pull out of the flea market we'd been at since 2008. It was a good move as it saved us about $500 a month in rental and fuel.  Hubby sells online and locally and I'm free to build my gardens and orchard as well as spend time with our daughter and volunteer at her school.   Life is good!

So why did I just reveal my life history?  To illustrate that most of the last twenty years could have been different if we'd just taken out that damned mortgage insurance!

Ouch!  Heartbreaking story.  I know this is of little to no help to you now, but I am pretty certain that my bank required me to get the mortgage insurance in order to get the loan in the first place.  I know that there is a lot of discussion on this site about insurance and self-insurance, but when my wife first started her practice I think we were required to buy just about every insurance under the sun.  It was a bit overwhelming at the time but it was also good to know that we were covered for just about every financial contingency.

Opinions on insurance may vary, but in the long run I am pleased that we have the insurance coverage.  Just my experience.

Eric

Michelle, thanks for the story and the eventual good outcome was great to hear about.
I am stunned by the strong negative attitude towards insurance I see regularly on the Permies.
Your story is a perfect example of the benefits.

John C Daley wrote:
BUT INTEREST IS LOST MONEY
"If you get a longer loan term, the compulsory payments are lower, and yes you will pay more money over time, COMPARED WITH A SHORT TERM LOAN, if you ran to the end of a 30 year loan.

When people calculate the interest cost of real estate, they often don't account for inflation. 20 years ago, the minimum wage in my state was $6.50 an hour... now nobody is willing to work for less than $15 an hour. A person making double the minimum wage 20 years ago would have been making $13 an hour then, and would be making $30 an hour now. If that person had taken out a mortgage 20 years ago, the payment in today's dollars would be very, very little financial pain. On a long enough time scale, inflation will wipe out your debts just as much as your hard work in paying down the principal. A 30 year mortgage isn't actually 30 years of financial pain, it's really only about 15 years and then it becomes much less of a financial burden.

I also believe a once in a lifetime home buying opportunity may be around the corner. Rising interest rates makes it difficult to buy a house, which will eventually cause prices to drop substantially. The monthly payments on any new mortgage are quite high with 6% interest rates. Eventually the price of houses will come way down because people just can't afford to buy.  

So the ideal move would be to buy a house 1 to 2 years from now, when prices are low and interest rates are high. You just deal with the financial pain and buy whatever you can make the payments on right now. Then in 3-5 years when inflation is less of a concern and the Fed lowers interest rates, you refinance the house at much lower interest rates. At this point you owe very little on the house you bought for cheap, and you're not making very high monthly payments on it either. Then inflation continues to chip away at what little you still owe on the house and you've really got it made.

Interesting thoughts Nathan.

The concept of investing in good debt, at least in Australia, is something we never really learned about the emphasis was more on building your bank savings, which makes me laugh at how much interest that earns compared to how much the banks leverage from your savings when lending it to someone else!  So this concept of good debt it seems at face value a mugs game, and yet,  this is what has made quite a few people wealthy; probably about 1 percent of the population  they have learned to create assets versus the saving in the bank scenario of the 99 percent of the population.                                                                                                                        

B Zalm, I beg to differ on the issue of 'good debt', its not a matter of getting wealthy, its a matter of getting your own home
at a cost less than rent would be over time.
I put it to you, that 'good debt' is doing the same thing banks do with your saving, but for yourself.

Good debt is not about multiple loans or for items that exceed your needs!

The issue of interest on savings has been brought up several times. Of course, the market demands that that saver gets less interest  than the borrower pays.  There would not be money available to borrow otherwise.  But as with most things, shopping around pays off. I think savings interest at banks in my area   is around 1%.     My savings are getting 4.5% (insurance company annuity).   And, since interest rates really dipped around 2008, I had one bank VP call me and tell me about a CD that was available at 7% over 5 years.  No, you probably won’t find rates like this the first time you look. View it as being like dumpster diving. If you look long enough and in enough places you may find some treasures.

I don’t play the stock market.  It is a personal thing. I have a background as an addictions counselor and found myself getting too big of a “rush” .  Though I was doing OK financially,  I decided that for me it wasn’t healthy.

Going back to the subject of good borrowing.   Realtors and bankers seem to be much too OK with encouraging people to borrow beyond what I consider to be a safe level. Buyer beware.  I am not against borrowing. I am against foolish borrowing.

John,

I agree that financing for less than the inflation rate can be a winner.  For instance, I "financed" my tractor for 0% interest.  Is that even considered debt?  I mean I still have to pay the money, but nothing is lost to interest and I have the tractor much earlier than if I saved to purchase.

Regarding the stock market, I don't invest in individual stocks, but I do invest in mutual funds in order to spread the risk.  They have done quite well for me over the years, much better than saving through CD's or just putting the money in the bank.  Further, my investments have been made in tax-sheltered accounts.  All of this is perfectly legal mind you, nothing is being invested in the Cayman Islands or in a Swiss bank account.  I am risk-averse, but I recognize that perhaps the biggest risk of all is taking no risk at all.  For me, a mutual fund is a safe way to grow money.  I am curious about your thoughts.  Is a mutual fund too risky for you?

Eric

I'm on my third mortgaged property.    Each time I've bought a fixer that was mostly cosmetic, at the lowest price I could find.   Each time, my mortgage was 30-50% less than what the current rental rates in my area were at (and that includes taxes, interest, and insurance).  

When an opportunity came up to sell at a profit I didn't hesitate.    I made back what I had spent, got my down payment back, and then some on top of that.   Invest the majority of it as down payment on my next property.   Same scenario.    

Right NOW I'm at a place where I put 20% down, am paying about half what local rent would be, and home value/sale prices have almost doubled in the last year.  If I sold right now and was willing/able/ ready to move to a new state, I could pay CASH for a small house/trailer on a couple acres.    Then live with no housing payment.   That would severely reduce my monthly expenses, and what my income needs to be.  Which is good because I've done this on what would be considered by most to be a very low income.  

My mortgage debts were good investments.   I stayed at the low end of my approved limit,  kept up with my payments, and put in the labor/time costs to spruce up and make the property attractive (if not modernized), and each sale got me a bit ahead.   Just plain old "savings" would NEVER have done any of that on my small income.   I could never have recovered financially from my unexpected divorce situation if I hadn't gone into mortgage debt and had tried to just keep up with renting.  

Eric Hanson wrote:John,
I agree that financing for less than the inflation rate can be a winner.  For instance, I "financed" my tractor for 0% interest.  Is that even considered debt?  I mean I still have to pay the money, but nothing is lost to interest and I have the tractor much earlier than if I saved to purchase.

Having a rate lower than inflation certainly is nice. As with most people in the US who purchased property in the last decade or so, I've got a 30-year mortgage in the 3-4% range. With inflation coming in at near 8% this year (https://www.usinflationcalculator.com/inflation/current-inflation-rates/) that means my effective rate is about negative 5%. That's just nuts.

I suspect there's going to be a lot of resistance to people giving up these super low rates, which may be part of the reason why it seems like home sales have jammed on the brakes even though rates are still lower than their historic averages. (https://fred.stlouisfed.org/series/MORTGAGE30US)

Even though 0% interest rates are great, the big concern about financing stuff is that people spend more than they otherwise would. See for example, https://www.forbes.com/sites/billhardekopf/2018/07/16/do-people-really-spend-more-with-credit-cards/?sh=5cc49f371c19 and https://www.inverse.com/culture/59670-credit-card-psychology.

John Wolfram, everyone,

You make a great point about using financing to buy too much, even if it is offered at 0%.  In my particular case, I had a need for a tractor in the roughly 35hp range.  I had been looking at the JD 3 series, but those were just too expensive.  Eventually my tractor (JD 2038R) became available and it hit all the right qualities I wanted without adding a bunch of things I didn't want or going to stratospheric price levels.    The price was right and I wanted to get one before prices went up so I planned on getting one in two years.  Two years later I bought one and I got an even better discount than I had been expecting (Details later if you want).  I went ahead and bought it with a loader and a 6' rough cutter for the 0% financing.  To me, this was a good deal as I had been shopping around for years and only bought when the price was right.

I did add a rear grader blade that I use for clearing snow, which I bought separately from the tractor (bought from Everything Attachments) and paid up front.  Together, the loader, rough cutter and the grader blade are the most important items that I need in a tractor.  The whole tractor is paid off by now and I plan to expand my attachment set.  I would like to buy a flail mower for mowing along trails and my pond.  I may also add in a box blade at some point (I use my neighbor's now when I need one) and possibly a 3 point carry-all.

But those items are listed inn decreasing order of importance.  Sure, they would be nice, but I will only buy those items when I have money to buy them up front.

I guess my parting thoughts is to use credit only when saving is either not practical (such as a house), or when one's finances are in order and actual financing will only be minimally impactful.

Eric

Hi Eric,

Personality wise, I am Type A on Steroids.   I have repeatedly taken failing programs and organizations and turned them around. I have now been “retired” since 2014. I have lost well over 50 pounds and am still dropping.    I have worked occasional part time jobs since then, but I set firm limits for myself.   I get a real high off the “rush”.of success. Yes, I have had mutual funds, but I find it best for my health to stay away from the market.

I had a friend in another state who ran an NPO. He took it from nothing to having a new $10 mil building another $15 mil in savings. He did it by day trading company funds.   He retired.   The person who replaced him was fired in about two years.   The $15 mil in savings was reduced to a few hundred thousand.   The board of directors begged my friend to return to his job.  He did.   In a year the organizations savings were at $7 mil.  Of course, he is dead.

John C Daley wrote:B Zalm, I beg to differ on the issue of 'good debt', its not a matter of getting wealthy, its a matter of getting your own home
at a cost less than rent would be over time.
I put it to you, that 'good debt' is doing the same thing banks do with your saving, but for yourself.

Good debt is not about multiple loans or for items that exceed your needs!

Maybe I will beg to differ that you beg to differ?   The concept of "good debt"  has in my opinion, been better understood by people from wealthier backgrounds than myself; hence I was saying about 1 percent of the population have learned to create assets versus the saving in the bank scenario of the 99 percent of the population.
                                                                                                                                                                                                                                                                          Perhaps we are saying something similar in different ways? As I actually agree with you that good debt is not about getting wealthy nor having multiple loans or in exceeding your needs. I was more contemplating that the concept of investing in good debt, at least in Australia, is something we never really learned about the emphasis was more on building your bank savings.  To people like myself who don't come from a money savvy background, at face value we were taught debt was a mugs game and I for one have learned about "good debt" and not to create excessive wealth but allowed me create and live a more sustainable way of living.      

B Zalm, I agree we seem to be on the same page.
In the 1950's in Australia people were encouraged to own their own home;
- It enabled families to grow
- It encouraged people to work and not go on strike, so the workforce was stable.
In part it was achieved by encouraging people to save, so a house loan could later be obtained.
It worked well for many people.
In the 1990's I believe housing became a commodity, something to be bought and sold
and thus housing became fancier and more expensive such that now I dont know how
people can afford a home.

I think there is a lot of hype going on involving debt, and to me there seems to be a lot of fuzzy math going on involving debt to make it seem like it is "good debt". I am not convinced there is such a thing.

(1): When you borrow money, you pay an interest rate, and no matter what it is, you MUST pay back 100% of what you borrowed, and then give them a certain percentage of your money on top of the purchase price that is the interest rate. There is nothing good about that. When you pay for things with cash (or in a dedicated account), you only pay 100% of the purchase price, and often you can really negotiate that price down because of the law of supply and demand... you have money, and everyone else wants it because there is so little of it around. When you pay with cash, you have a lot of wiggle room on the price.

2. A person is at the whim of the lender when you borrow any money. Often times this crops up as legalized extorsion... other words, what is called insurance. A bank makes you put insurance on almost anything that you must make payments on. That really adds up. I have several houses, and because they are paid for, I don't have farm insurance on them. Over the years it has saved me around $50,000 in premiums I did not have to pay for. That frees up cash to buy other stuff, making the savings circular and exponential.

3. Today there is something called market share, and like never before companies are using shady and weird tricks to glean as much market share as possible. It might be as something as simple as Walmart drawing you in, Amazon, or that Mom and Pop store down the street all trying to get "market share" in a given area. So, while a person might borrow for a 30 year loan, thinking that payment in 20 years will be nothing: that is not so. With companies listening in to our phone conversations, and other tricks, as never before American's have so little disposable income, that only 15% of the population has $1000 saved for emergencies. Yes, out of 100 people you meet, 85% are BROKE. It is kind of silly to think in 20 years a payment will be easy to make... it won't... the world will convince them to buy other "needed" stuff that is not even heard of today. Think about it, with all the ads telling us how much money we will save buying their doo-dads, we all should be trillioaires. We are not. They just wanted our money!

4. Forget the stock market. Everyone talks about its amazing average 14% pay off. Screw that chump change. Spend $50 a week, put gas in your car and go to work and turn it into $1200. That is 2400% interest and not a mere 14% with a risk of loss, in less than a weeks time. If $1200 a week is not enough, get a second job, or work overtime. The point is, there is no greater way to make money then to go out and work.

5. The key to getting out of debt, is to NOT get back into it. No matter how much money owed, when you make your payments as required, you are working your way towards being debt-free. In enough time, YOU WILL pay them off. The problem is, a person will pay off their car, then jump right back in and get a new one because they had a little discretionary income. DON'T DO THAT. Once something is paid off, don't get into debt anymore.

6. People will defend how they spend their money to their death, yet with so many American's in debt, and broke, why would we listen to them? Clearly it is not working for them.

7. The ONLY way to win the financial game, is to not play. Like gambling at a casino, the odds are stacked in favor of the house, and while you might win a hand, in the long term, the casino will win in the end. Its the same with lenders. Don't play this financial game that is stacked against you. To not play is the only way to win.

Steve, I have a different view of finance.
At the very start I mentioned that good debt is something that gets you into a home at less cost than rent.
Yes you pay interest and over time you may have paid a lot, but your debt will no longer exist and you will have a home.
If you paid rent while you tried to save for a house, all that rent cash has gone, disappeared, gone up in smoke.
And you still dont own anything.