Do you really know what a mortgage is?
A mortgage is a loan used for the purchase or refinancing of a home. Basically, it is the amount of money given to you by a lender for the financing of a home.
The mortgage loan typically has many variable parameters including, but not limited to:
Mortgages are typically used when you do not have all of the money upfront for the sale of a home. If you do happen to have the entire upfront cost, you might still choose to mortgage the property if you do not want to give up such a large sum of money, all at once.
Is a mortgage the same as any other type of loan?
Yes and no.
A mortgage is specifically a loan given as financing for a home purchase, or refinancing. As collateral for such a large amount, the home is typically put up against the value of the home just in case you stop making payments to them. If payments should stop, the home could then be used as collateral for "repayment" of the loan. I use the term "repayment" very loosely because you lose more than just a home in this process. In the process of losing a home due to missed mortgage payments (essentially a foreclosure), your credit score will be ruined.
Keep in mind that this black mark--i.e. foreclosure--stays on your record for 10 years. Avoid this at all costs if you ever hope to receive any other loans or favorable terms on lines of credit.
Lenders typically get into business to lend money, not to own homes. They want your money, not the house. I have heard of many people getting away with up to a year's worth of missed payments prior to the lender foreclosing on the property. This is proof of concept that lenders really don't want to be homeowners.
How Does the Whole Mortgage Process Work?
The initial process is pre-approval or pre-qualification. These two terms are often used interchangeably, but they are not the same thing.
A pre-qualification is solely based on information that you provide to the lender. This is simply a way to help you "ballpark" the amount of money you can hope to spend on a home. This is by no means a commitment nor is it a hard number to use when making home buying decisions.
A pre-approval is a much deeper dive into your history including, but not limited to:
How Does a Mortgage Work?
An offer, which almost always includes a pre-approval letter, is accepted by the seller for a specific property.
The next steps, aside from inspections and other contingencies, is to attain final approval for the mortgage financing. This is the part where you are looking to finalize and receive a set amount of money from the lender to help you purchase a desired property.
The lender will now perform any final verification of employment, income, and assets. The lender will also attain details on the specific property for which you intend to purchase following the seller's acceptance of your offer. The lender will look to have the following done prior to fully approving your loan:
If everything checks out and terms are acceptable (interest rates, loan duration, loan type, etc.), you will move towards closing on your mortgage.
Closing on your mortgage involves meeting with the lender and your real estate agent (and any other necessary parties depending on your state's rules/regulations). This is where you will sign your mortgage papers. This is also typically when your down payment and closing costs are due.
This is, by no means, to be considered as financial advice. Check your local rules and regulations as some of the information will ultimately differ according to where you live or desire to live.
Above is a summary of the basic "moving parts" surrounding mortgages. It is important to understand the nuts and bolts of a mortgage since it will likely be the largest financial transaction of your life.
The creation of mortgages permits many to attain home-ownership where it would otherwise be impossible due to limited income and finances.
There are many more things to know about mortgages. Learn everything you can. Knowledge is power.
Best of luck and happy hunting!
Why This Headline?
I am amazed about how many people recommend paying for everything in cash and proponents of the Dave Ramsey camp encouraging you to cut up your credit card.
Why do I have such a problem with this? Cutting up your credit card to avoid spending does not correct the actual behavior of overspending.
I agree, it adds friction to the process which psychologists believe will interfere with the participation in an undesired behavior. Another example would be to lock your cigarettes in a cabinet and hide the key in a separate location. Why do this? Your lazy ass will be less likely to smoke because you added a layer of friction by needing to travel and get the key, then go unlock it to have your cigarette.
Personally, I think it's avoiding the original problem and instead not attempting to recognize and regulate that you have undesired behaviors and urges that need some attention.
This is similar to cutting up your credit card. If you have poor spending habits, then recognize that and slowly work to control this issue. I am just not convinced that you have to cut up your credit card.
An Argument for Credit Cards
First, I love me some credit card rewards. The guys over at ChooseFI have a great section on their site about travel rewards and credit card rewards.
Cash back. Bonus points. Airline miles. Travel rewards and hotel credits. There are a lot of things to "game-out" and benefit from when it comes to credit card rewards.
No credit card? No rewards.
Let's address the elephant in the room. Why do credit card rewards even exist? At face value, they certainly do not exist to benefit you if you are an absent minded spender who is a glutton for marketing schemes. These rewards encourage spending behavior. Period. You are lying to yourself if you say that rewards will not encourage you to spend more. It will, unless you are hardcore about recognizing your spending habits and budgeting.
Next up, cards can help build your credit score if you pay attention to the following factors:
Why is building a credit score important? The benefits of a high credit score (720+) include:
Another benefit is the added safeguards of carrying a credit card vs. carrying cash all the time. If you think this doesn't apply to you, think again. Lost your wallet? Just immediately call and freeze your credit card. If there was cash in your wallet, likely forget you ever had it.
Pulling out your wallet or money clip and revealing some serious paper is asking for trouble. Remember, criminals are looking for targets. If they see you at the checkout shuffling through your $100 bills to pay for a light bulb you might have an expected encounter on your way out to your car in the parking lot.
Good Credit Habits
Yes, you can be both frugal and have a credit card. I won't tell anyone. Just manage it responsibly and it can be an asset instead of a hindrance. Spend wisely and continue to find ways to improve your saving habits and spending behavior.
Let me know your thoughts in the comments below.
Help, the sky is falling...
During a period of decline in the market, many individuals feel like they are losing their shirts (and possibly much more).
Remember, corrections happen often.
Technically, so do recessions.
How often do these things happen?
According to USnews, corrections happen at least once every 2 years. Sometimes they happen annually. They typically only last a couple of months and drop less than 20%.
Bear markets and recessions occur every 4-5 years. They typically drop at least 20% and last for about a year.
The worst meltdowns or recessions in recent memory was "The Great Recession". That sucker lasted 18 months and was the worst meltdown since World War II. During that period, the S&P 500 lost approximately 50% of it's total value.
Now that's scary stuff!
How long does it take to recover?
The biggest factor of a recovery is if you actually stayed invested throughout the downturn.
You see, if you choose to try and time the market and you get out while it's on the way down, you technically have to time it correctly twice. Once on the way down, and then once on the way back up when you "re-enter" the market. Market timing is a fool's errand.
There are professional money managers who spend their whole entire life's work trying to time the market and, guess what... 92% of actively managed funds fail to match the returns of the market (i.e. S&P 500 index) over a 15 year period.
That means if they cannot do it, why would you even try? You don't have the time to sit around and read financials all day like these guys do.
As for how long the typical recovery takes.
In a correction, you'll be back to square within a couple months.
Recessions take a bit longer but you usually get your shirt within 18 months, sometimes shorter, sometimes longer.
The point being is that they always come back. Always.
Sometimes it took a little longer (think Great Depression). And sometimes you were back so quickly you didn't even realize it happened.
What's a guy (or gal) to do?!
Or better yet, invest.
In what? Low cost index funds. Come on, you knew that was coming.
If you are an index fund investor, selling is the worst idea during a downturn. If you are in single stocks, and not in index funds like any smart person would be, then you might actually want to consider jumping ship and selling. My advice for the future would be stop trying to stock pick because you're no good at it.
It was the infamous Warren Buffet who said when the sky is raining gold do not go outside with anything less than a washtub. This is the very basis of the saying "buy low".
When you invest in index funds like the S&P 500, you are betting on the entire US economy. Realistically, in order to lose ALL of your money, the entire country would have to "go out of business". I wouldn't bet on that happening. Even if it did, who cares how much money you have in your investment accounts! Maybe you better start working on that underground bunker you've been yapping about with your buddies.
If you are invested in broad based, low-cost index funds, then I would plan to stay the course and avoid selling in a downturn. The only time that you could ever lose money is when you sell or the entire U.S. economy goes bankrupt. If you stay invested in a broad based index fund you won't have to worry about any single company going out of business because you are investing in hundreds of them at a time. They would all have to lose their shirts for you to lose everything.
If you had a crystal ball and could see things coming, perhaps you could adjust your asset allocation (i.e. more bonds and less stocks) prior to or immediately after the beginning of a downturn.
Take the onset of the coronavirus (COVID-19) for example. If you were someone who first heard of the potential outbreak on the news somewhere around January or February of 2020, you could have adjusted your asset allocation since bonds tend to hold there value better than stocks (conversely, bonds also tend to have lower returns than stocks over the long-term).
Then, once the "meltdown was in full effect", shift back from heavy bond holdings back into equities and enjoy the recovery as the market rebounds back to it's previous high.
In the end, no results are guaranteed. Past history does not indicate future returns.
Besides, I have no idea what the hell I am talking about and this sure as hell isn't investment advice. You have to take the good with the bad. Those reported 10% returns on equities in the stock market include the horrific 50% downturns like we experienced in 2008. Like I said, you take the good with the bad.
Remember, corrections happen all the time. Further, we are never that far away from a full recession. They are coming. They will continue to come. Be prepared. Be ready to see your accounts lose massive value. This are the harsh realities. If you cannot handle it, maybe you should go bury that money under the shed and let the worms get it.
Life Insurance Policies examined
Insurance in life is often important, but the needs of each person is very unique and individualized. Especially when it comes to life insurance. You need to consider your current situation, and get out your crystal ball to imagine what the future will look like, to decide how you will approach the decision regarding obtaining life insurance.
What is Life Insurance?
Basically, it is a contract. The payer (insured) is in contract with the insurance company. The exchange is a monthly premium for a "potential" lump-sum payout. To remain under contract, the insured pays a monthly premium to remain eligible for a "death benefit", which is often the lump-sum payout.
Common Types of Life Insurance
Basically, there are two types of life insurance. There are fixed term policies and there are lifetime policies.
Fixed term policies are often referred to as term policies, or term life insurance. This type of policy provides coverage for a fixed period of time, most often 25-30 years. Term insurance is the most popular type of insurance chosen by followers of the financial independence and financial freedom movements as it is typically the more cost effective form of life insurance.
Lifetime policies typically come in the form of whole and universal life insurance. These policies typically carry a much higher premium, however they are payable for the lifetime of the insured instead of expiring after a pre-determined period like a term insurance policy.
Essentially, for a higher monthly premium you stay eligible for a "death benefit" payout under a lifetime policy. In a term policy, if you are not deceased prior to the policy expiration date, there is no "death benefit".
Why I Chose Term Life Insurance
My thought process, like many F.I. followers, is that I chose the policy with the greatest amount of value.
Term insurance affords a much lower monthly premium than a lifetime policy. This allows me to instead invest the difference in cost between the two policies, month after month, compounded over time.
By investing the amount I am saving with a term policy, compared to a lifetime policy, I will take advantage of the effects of compound interest. While taking advantage of this investing strategy, I do not leave myself "exposed" to significant losses of income that my family would incur should I meet an untimely demise. This is because I still have a substantial "death benefit" payout with my term life insurance policy.
I chose to avoid a lifetime (universal or whole life insurance) policy because I anticipate reaching a significant amount of net worth and savings by the time my term life insurance expires.
In other words, if you anticipate saving and investing for the next 30 years, you will likely have a significant amount of money at the end of that term. The need for continued coverage beyond this point, like you would receive with a whole or universal life insurance policy, is unnecessary and very expensive.
Overall, everybody is different
Assess your needs on an individual basis. Consult with a financial professional.
Not everyone will benefit from a term policy over a lifetime policy. Your circumstance may be unique. Consider your overall picture (time horizon, investing strategies, savings rate, anticipated expenses, etc.) when determining what type of life insurance policy will best meet your needs.
In the end, whichever policy you choose, I do feel that life insurance in general is an excellent thing to consider for anyone with a spouse or dependents that will be deeply impacted by your loss of earnings upon the event of your death.
The Single Most Reliable Method to Increase Wealth is...
Dr. Jon is a physical therapist by day, and a dedicated frugalist by night, deeply enthralled in the thrill of "pinching pennies" and investing the margin.