"It's deja-vu..all over again."
- Yogi Berra
When you're on the wrong side of 40, you possess the luxury of having seen things before. In many cases, it may be the third or fourth time you see them. The recent flurry of "responsible lending posts", here on Active Rain, is no different than the criticism levied at the banking industry in the early 90's.
The virtues of an amortized loan can be extolled like some sage nostalgic advice. The truth is that amortized loans are fantastic...if you are a perpetually poor person. Let me explain what I mean. When I say "poor", I mean undisciplined. This means that you generally can not be trusted with determining your own destiny. It means that you won't establish a side investment account to invest the difference between a fully amortizing and alternate amortization schedule. If this is an apt description of your savings and investment habits, go with a 30 year fixed rate, fully amortizing loan. Better yet, go with a 15 year, fully amortizing loan. Work really hard to accelerate the amortization on your home with bi-weekly payment programs or money merge accounts.
Expect, however, to be perpetually poor in retirement. Oh, you'll have a fully paid off house but you'll be broke. Does that sound doubtful? Ask anyone who's been used their primary residence as their retirement plan (you know who I'm talking about). They've probably rationalized their Depression Economics thinking by selling the homestead and retiring to a more "retirement-friendly locale" (READ: cheaper).
Is that REALLY your dream in life? To pay off an asset you can sell so that you can trade DOWN in retirement? Maybe you can move to a far-off country to live like a king in retirement! Of course, you'll complain that you never see your grandchildren because it costs a small fortune just to visit you.
That's not what the willing wealthy do. The willing wealthy understand that the pitfalls of the Great Depression can be avoided and discipline is how it's done. The willing wealthy do three things when purchasing real estate:
1- They borrow as much money as possible against the home so that the bank shares in the market risk of fluctuating real estate prices. Oh...that's right, they invest the difference between, say a 20% down payment and a 5% down payment.
2- They use interest-only, or better yet, negative amortization loans to ensure that the market risk stays with the market - in the house. Oh, I almost forgot...they invest the difference between the 30 year fully amortized loan and the lower, alternate amortization loan payment. Not only do they enjoy the benefits of arbitrage, they increase the liquidity of an otherwise illiquid investment. That liquidity will save their butt when the tough times come while the perpetually poor person will borrow money against his home at exorbitant rates.
3- They stick to the plan.
Fully amortizing loans are fantastic...for perpetually poor people. If your motivation to buy a home is a "forced savings plan", think twice about buying a home. Mr. Murphy has a funny little way of showing up and wreaking havoc on those forced savings plans. He does it through death, disability, and unemployment. Better to have some cash stashed when Mr. Murphy arrives at your door so you can slam it in his face.
So...what's the difference between perpetually poor and willingly wealthy? You got it...discipline.
Oh, proper financial advice goes a long way, too.
