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Stock Market Drops By 1,000 Points, the Mortgage Crisis, Etc.

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Excuse my rant but ... anybody could have seen this coming. It never ceases to amaze me how people make the same mistakes, over and over again.

I suffered through the real estate crash of '92 so, when I bought my house four years ago ... I learned from my previous mistakes. I bought a cheap house that we could afford on one income if necessary, nothing fancy ... and I locked in a fixed interest rate because I had been burned by adjustables before.

But I couldn't believe the number of people who told me I was crazy ... what was really amazing was people who were burned by the '92 crash like I was were still buying into the hype.

Buy more house, they said, you can afford it ... get an adjustable rate mortgage ... you'll lose money with the supposedly higher fixed interest rate.

They were getting mortgages that ate up 50 percent of their income ... crazy. And, of course, their adjustable interest rates are now going through the roof.

I also can't believe the banks were making these loans ... like duh ... this crash was inevitable. What were they thinking? I guess they weren't thinking at all ...

History repeats itself ... over and over again.

Yes history does repeat itself. One of my favorite books is Hetty by Charles Slack. Hetty Green, the Witch of Wall Street, told the New York Times in a November 1905 interview that she never speculated and never bought on margin. She purchased stocks as an investment when prices were low and nobody wanted them.

The wisdom of this "hopelessly stodgy and archaic" advice was soon proven during the 1907 stock market collapse. While speculators were being ruined, Hetty was able to loan $1.1 million to New York City by purchasing short-term revenue bonds paying 5.5 percent interest. This was just one of the times she single-handedly bailed New York City out of its financial problems.

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My friend has an adjustable rate mortgage that she originated in late 2005, and the rate lock expires in late 2008. She is desperately trying to refinance to a fixed rate, but no bank will finance her due to her checkered credit history and 3-year old bankruptcy filing. Also, she is considered a 'high' financial risk due to her 13 credit card accounts, expensive car payment, outstanding payday loans, and unpaid property taxes.

She is a wonderful person, but most of her financial moves have been silly. She is 53 years old, and this is her first experience with homeownership. I think she's doomed, because she just cannot find a lender who is willing to take a chance on her anymore. I get the feeling that she'll be losing her house within the next couple of years. Also, she owes about $3,500 in past-due property taxes.

This is sad. Believe me, I do not take joy in the suffering of others.

The banker is not your friend. He will gladly loan you more money than you can possibly pay back, and yet people complain that banks are not willing to loan them even more money! 30 year mortgages that last beyond your working years, variable-rate loans, balloon payments, and loans with rising payments are all financial traps.

People who take out home equity loans are betting their house that they can pay back the loan. Borrowing money because it is tax deductible is a losing proposition. The tax savings is only a small proportion of the interest. In general, arranging your finances for the sole purpose of reducing your taxes is a bad financial policy.

I built a house on land that I owned in 1988. The 15 year fixed-rate loan was at 9.5 percent. Although I borrowed as much as the bank would allow, I had a substantial down payment, and additional cash in the bank. I did not count on falling interest rates or rising income to pay off the loan, and had no other debts.

Interest rates fell during this period, but refinancing charges rose greatly, so I never refinanced. My income did rise, so I kept putting additional money into paying off the loan, rather than accumulating additional debt. I paid off the loan by the time I turned 40.

I have been thinking of adding on to my modest, but paid for, home. This will be done with cash, not by a loan. I will be able to retire in 5 years. If I continue to work beyond then, it will be because I want to, not because I have to.

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This is sad. Believe me, I do not take joy in the suffering of others.

The banker is not your friend. He will gladly loan you more money than you can possibly pay back, and yet people complain that banks are not willing to loan them even more money! 30 year mortgages that last beyond your working years, variable-rate loans, balloon payments, and loans with rising payments are all financial traps.

People who take out home equity loans are betting their house that they can pay back the loan. Borrowing money because it is tax deductible is a losing proposition. The tax savings is only a small proportion of the interest. In general, arranging your finances for the sole purpose of reducing your taxes is a bad financial policy.

I built a house on land that I owned in 1988. The 15 year fixed-rate loan was at 9.5 percent. Although I borrowed as much as the bank would allow, I had a substantial down payment, and additional cash in the bank. I did not count on falling interest rates or rising income to pay off the loan, and had no other debts.

Interest rates fell during this period, but refinancing charges rose greatly, so I never refinanced. My income did rise, so I kept putting additional money into paying off the loan, rather than accumulating additional debt. I paid off the loan by the time I turned 40.

I have been thinking of adding on to my modest, but paid for, home. This will be done with cash, not by a loan. I will be able to retire in 5 years. If I continue to work beyond then, it will be because I want to, not because I have to.

Are you married? ;) You sound too good to be true. ;)

steph

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A bit off topic, I remember saying years ago that I didn't understand the sudden upsurge in Americans buying big gas guzzling SUVs and other vehicles saying "don't they realize that eventually gas prices are going to rise again, and perhaps dramatically?" I stuck to buying fuel efficient cars and whine when filling up costs $30, but at least it's not the $50 and $60 some people are paying.

I recently bought a gas guzzler ... intentionally ... because I'm sick of getting rear ended by idiots on the road. It completely changed my perspective on small cars. The ONLY reason I survived those accidents, especially when I was hit by a big rig ... was because I was driving an SUV.

My new Toyota Tundra gets about 18 miles per gallon which isn't too bad considering the size of the truck ...

Yes ... I would love to save on gas but, I'd rather be alive the next time some idiot decides to hit my car. Saving money isn't going to do me much good if I'm dead. This time, I got side air bags in addition to the regular bags in case I get T boned also.

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I recently bought a gas guzzler ... intentionally ... because I'm sick of getting rear ended by idiots on the road. It completely changed my perspective on small cars. The ONLY reason I survived those accidents, especially when I was hit by a big rig ... was because I was driving an SUV.

My new Toyota Tundra gets about 18 miles per gallon which isn't too bad considering the size of the truck ...

Yes ... I would love to save on gas but, I'd rather be alive the next time some idiot decides to hit my car. Saving money isn't going to do me much good if I'm dead. This time, I got side air bags in addition to the regular bags in case I get T boned also.

We are looking at the same thing . . . a 70 mile drive in the mountains during winter for me. I need safe and reliable transportation - we are looking at 4-wheel drive.

We've always had a pickup and had a Suburban that saved my son's life (long story I've told before).

It is worth the extra gas $ . . .. .to me.

steph

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The 15 year fixed-rate loan was at 9.5 percent. Although I borrowed as much as the bank would allow, I had a substantial down payment, and additional cash in the bank. I did not count on falling interest rates or rising income to pay off the loan, and had no other debts.
Funny you mention this.

I recently bought a car. When I walked into the dealer showroom to close the deal, the dealer asked me how much I would be putting as a down payment and for how many months.

"$5,000 for 36 months"

(shocked and surprised) "Five THOUSAND! You mean you actually saved 5 grand for the down payment?!"

(my turn to be amazed) "Sure did. Why pay more in interest?" [5000 is about 25% of car price]

"Oh, nothing really. I'm just not used to seeing people... especially young people putting down bigger down payments. Most people usually put down about $2000".

I don't get it. Why pay less up front and end up with a bigger loan and bigger interest payments over the long run? :confused:

Guess being a banker's son does have some advantages :p

cheers,

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I only put $2000 down on my last car. Why? Cause it was all I had. The car cost less than $10000, so it wasn't unreasonable, but I can completely understand why people don't put a lot down on a car. Sometimes you need to get a car and that comes at a time when your savings has been depleted through things like divorces, moves, etc.

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Well ... I didn't put any money down on my new Toyota Tundra because they didn't require it and were offering 2.9 percent interest at the time so ...

I'm probably going to put my spare cash in retirement accounts instead. The tax savings far exceeds any interest I'd save by paying off the truck early (see post below).

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Are you married? ;) You sound too good to be true. ;)

steph

I have always been single. I heard that one of my younger cousins, who is married and has at least one child, has the same goal about paying off his house and being able to retire young. Perhaps there is a genetic component for this behavior :)

I decided to avoid borrowing money early in life, about as soon as I realized that by waiting until I could pay cash meant that I got to keep more of my money. ;)

I think it was in fifth grade when I decided that alcohol, tobacco, and mind-altering drugs were bad habits, and resolved to never use these products.

As far as being too good to be true, my chronic use of aspirin to control tension headaches (likely related to my "uptight" personality), resulted in a bad GI bleed and a trip to the Critical Care Unit in 2003. I no longer use analgesics, and have had to come to terms with being in pain at times. My interest in healthcare is the result of this experience.

My first few years as an independent working adult were financially rough. Being financially secure is another way of reducing stress in my life.

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We are looking at the same thing . . . a 70 mile drive in the mountains during winter for me. I need safe and reliable transportation - we are looking at 4-wheel drive.

We've always had a pickup and had a Suburban that saved my son's life (long story I've told before).

It is worth the extra gas $ . . .. .to me.

steph

Yeah ... you really do need a major vehicle for mountain snow driving ... definitely.

If I lived in Europe where everybody drives small cars and the odds would be more even in a crash then ... I'd be happy to drive a small car.

But, the fact is, I just can't take any chances with the nut job drivers on California freeways. Especially big rig truck drivers.

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