I have a lot to be thankful for this past year so from my growing family to yours Happy Thanksgiving!
As back office support for a financial planning firm sometimes I have to create cash flow projections for clients. The projections can be as simple or as complicated as the financial planner needs/wants it to be. Today, I had a very interesting discussion with a planner about a particular client and this is not the first time this type of conversation occurred.
What happened today:
Anyone figure out the problem yet? They are spending $48,000 + $20,000 in savings = $68,000, but they are taking in $111,000 net. When the client was provided with the information they simply bumped up their monthly need instead of taking the time to just sit down and figure it all out!
While I read a lot of pro-budget personal finance blogs, I am not a huge “budget” kind of guy. The structure of it all just makes me feel like I am trapped; in my opinion life is more than did I spend my allotted $27.50 in beers this month? Notwithstanding, it is beyond important that you at least know and understand around what you are spending per month. How else are you going to plan your life? So back to
So how much is the client really spending per year? Do you know how much you are really spending per year?
I don’t think I have a good balance with thinking about and not thinking about money. From the moment I wake up on Monday morning until the moment I mentally check out on Friday, I have money on the mind and it makes me curious if I am the only one?
Every day I:
This is what I go through everyday weekday. Every Single Weekday. Monday through Friday I wake up and think about what money has gone in and out of my accounts.
It is 9:20am Monday Morning and I have already had the following thoughts before I could stop myself:
When I told The Wife about this post idea she told me that “money” was my hobby – coming up with different ways to make it and managing it. That statement made me feel great and weird at the exact same time. It made me feel good because what a fantastic hobby to have, but at the same time does that mean my life is empty?
So is it just me? or is this part of being an adult?
There seems to be a debate between whether it is ethical to strategically default on your home mortgage. Where I personally land on the issue is probably irrelevant, but if you promise to read to the end you’ll get your answer as to what I believe. If you walk away from your credit card debt what happens? Does it go away? Nope. What about if you default on your student loans? Nope they don’t go away either. What about your auto loan? Nope, they repo and can still come after you for the difference. So how is it that homeowners can participate in a short sale or strategic default and not receive a judgment against them?
As most people are aware a mortgage is “a debt instrument that is secured by the collateral of specified real estate property and that the borrower is obliged to pay back with a predetermined set of payments.” In other words you are taking on a loan which is secured by a note which is usually amortized over a certain amount of years, and since that note is secured by a piece of real property if that note is defaulted upon then the property will be the first thing taken.
There are three scenarios when you decide to foreclose on your home,
That shortfall is what creates the term, short sale; the term, which was once a taboo subject, now is common place. The National Association of Realtors provides a very basic and intuitive definition of a Short Sale,
A short sale is a sales transaction in which the seller’s mortgage lender agrees to accept a payoff of less than the balance due on the loan.
While the definition of a short sale is that simple, it is the repercussions that occur afterwards that differ State to State.
There are different remedies afforded to lenders who are securing the note with a piece of real property used as a residence as compared to an unsecured line of credit or even an auto loan, and these remedies differ state from state. From About.com,
Recourse loans get their name from the fact that lenders have power. They are allowed to go after you for amounts that you owe – even after they’ve taken collateral. If you default on a recourse loan, the lender can bring legal cases against you, garnish your wages, and try to collect the amount you owe.
A legal action to collect money after foreclosure is generally called a deficiency judgment
A non-recourse loan does not allow the lender to pursue anything other than collateral. For example, if you default on your non-recourse home loan, the bank can only foreclose on the home. They generally cannot take further legal actions against you. The bank is out of luck even if the sale proceeds do not repay the loan.
Non-recourse loans create the most risk for lenders. Because they can only collect the collateral – and nothing else, they want to see lower loan to value ratios to reduce their risk. These loans may have higher interest rates than recourse loans.
Is any of this news to the bank? Nope. If they are licensed to sell mortgages in the State, then they’ll know whether they are providing a loan in a recourse or non-recourse state. Do you know who is usually clueless? The mortgagor-borrower.
How do you determine if your State is a Recourse or Non Recourse State? I would check with a licensed attorney. That may seem like a “cop-out” but every resource that I have come accross on the Internet while researching this post, doesn’t seem to list every State, or is just plain wrong. You should also be able to check your mortgage documents.
It is really interesting to see the results of making an extra payment to a mortgage, auto loan or any other amortized loan. I think there is some confusion as to what exactly happens, mathematically, when you make the extra payment. To understand what happens when you make an extra payment you first have to know if you have an amortized loan. The definition of an amortized loan is “a loan with scheduled periodic payments of both principal and interest. This is opposed to loans with interest-only payment features, balloon payment features and even negatively amortizing payment features.”
For our example I am going to use a very common auto loan:
This gives us a payment of $377.42/month, however, each payment will be made up of differing principal and interest amounts.
Your payment doesn’t change but the interest per month goes from $83 in the first month to $1.57 and the principal payments go from $294 to $376 (you may have to click the pictures to zoom in).
Now lets add an extra $50/month to our payments. As I learned the hard way you may have to tell your auto financing or mortgage company that you wanted any extra payments added to the principal (a long time ago I had a problem with my extra auto loan payments going to future payment rather than going to principal).
You may have to zoom in to see the numbers clearly, but what is happening is that all those extra payments are going to the later payments effectively erasing those later interest payments. That is the reason why bloggers and pundits say prepaying debt is like getting a guaranteed return.
In the above example paying an extra $50 saves 7 months of payments and $352 in interest payments.
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