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Are we financing ourselves into BIG TROUBLE???

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Are we financing ourselves into BIG TROUBLE???

Old 02-24-2006, 10:39 AM
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Default Are we financing ourselves into BIG TROUBLE???

After looking at a photo thread, I noticed a Shamrock being marketed to the masses at around $800 for 20 years.

20 years for a boat loan??? If you have to finance this boat for 20 years, you can't afford it. Doing a simple interest loan on that 20 years, you're paying over $88,000 in finance charges. That's almost double what you're financing.

What are we (and banks) doing to ourselves in this country? We are placing too much debt on us. Fiancing a house for 30 years is one thing. Probably still not too smart, but at least the value of that house doesn't plumit in the first couple of years. However, I saw on tv the other day, that there are now 50 year home loan products out there. 50 years!!!!! That is downright scary!! You can buy a car w/ 7-8 year loans now. You can buy boats with 10-20 year loans.

People, we are in big trouble in this country. If we don't get our debt load under control, there's going to be a serious price to pay.
Old 02-24-2006, 10:58 AM
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Default Re: Are we financing ourselves into BIG TROUBLE???

I know some people that are buying houses with "interest only loans". They only pay the intrest, never any principal. I don't get it.
Old 02-24-2006, 10:58 AM
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Default Re: Are we financing ourselves into BIG TROUBLE???

It's not the options to finance that are causing the problem. Lenders are only offering what they can make money on. The problem starts with the fact that most of society has turned into an "I want it now" society with our heroes and role models being empty celebrities that flaunt material goods at every chance.

THis causes a trickle down affect because now every Tom, Dick, and Harry (and women) feel that they need $200 purses, $3,000 plasma TVs, brand new $40k cars, and 3,000+ square foot houses. And they need those things while they're young. Unfortunately, the same crew either doesn't realize the cost of financing or simply don't care. Either way, as you've mentioned, it's a recipe for disaster.

I don't blame lenders. If you are willing to enter a contract to finance your house for 50 years or boat for 20 or make payments with negative amortization because you HAVE to have it, then lenders are going to be all over that.

It's not the banks responsibility to control spending habits of its customers...
Old 02-24-2006, 11:03 AM
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Default Re: Are we financing ourselves into BIG TROUBLE???

It's all a matter of perspective:

I recall taking a 48-month loan on a new car in that late 1970's, and being criticized for it by my co-workers. "Four years on a car you'll probably trade in after three (years)? You're nuts!", and so on. Today, 48-months is considered 'short-term' on a new car loan, with 60-month terms the most common, and 72-month loans aren't raising too many eyebrows.

My first new boat loan was a standard for the time (mid 1980's) 120-month contract. I had to pay a whopping $220 a month for the privilege of owning a brandy-new Wellcraft 248 Sportsman. It was costing me just over $1,000 to berth & winter store the boat for the year, and my insurance from BOATUS was just a skosh over $250 per annum. I wish boats, motors, slip fees, (etc.) were still that cheap, even allowing for inflation.
Old 02-24-2006, 11:11 AM
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Default Re: Are we financing ourselves into BIG TROUBLE???

t5killer - 2/24/2006 9:58 AM

I know some people that are buying houses with "interest only loans". They only pay the intrest, never any principal. I don't get it.
The interest only thing doesn't bother me so much...depending on the market. An even then, IO isn't so bad in most markets. HOWEVER, it puts a sense of responsibility of the borrower to make sure that, at the time of sale, if value is less than loan balance, to have saved the money to fill the gap. If I buy a $500k, 800 sf condo in manahatten, you're dern right I will go IO. I'm pretty sure that my value isn't going anywhere but up and the savings on amortization is nice. Now, if my house goes down in value, how much will it really drop...so much that I can't afford to fill the gap to my bank? Probably not. And if it does drop then I'll consider the gap as being the amortization I did not pay all along, so it's not like I'm worse off...assuming the value doesn't go down TOO much, in which case my tiny amortization in the first 5 years probably wouldn't have brough the balance low enough anyway.

That's why IO CAN work in just about every market...the borrower just needs to understand the risk. Now, negative amortization loans where borrowers make small payments and actually increase the loan balance are crazy and an obvious speculation that housing value will increase faster than my loan balance. That may have worked over the past 5 years in some markets but it is too risky for the average homeowner. Unfortunately, average homeowners tend not to consider risk.

That being said, I went 30 year fixed on a house I KNOW I won't live in for more than 5 years. The yield curve was pretty flat so short-term rate savings were small, and, in the end, you never know.
Old 02-24-2006, 11:18 AM
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Default Re: Are we financing ourselves into BIG TROUBLE???

ebrady - 2/24/2006 10:58 AM

I don't blame lenders. If you are willing to enter a contract to finance your house for 50 years or boat for 20 or make payments with negative amortization because you HAVE to have it, then lenders are going to be all over that.

It's not the banks responsibility to control spending habits of its customers...
That is only partially true. It is their responsibility to make loans that are going to be repaid. Not necessarily to the borrowers, but to their investors (stockholders). That is the reason they check your credit, employment history, income, etc. Many of these long term loans may look good on the balance sheet right now, but 5-10 years down the road, when the boat is worth half of what the balance on the loan is, and the borrower decides to default on the loan instead of paying money on a boat that isn't worth what they're paying, then the bank is in trouble. The last thing this country needs is another major banking crisis, which is what we're currently starting.
Old 02-24-2006, 11:47 AM
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Default Re: Are we financing ourselves into BIG TROUBLE???

neckbone - 2/24/2006 10:18 AM

It is their responsibility to make loans that are going to be repaid. Not necessarily to the borrowers, but to their investors (stockholders).
I hear what you're saying, but the difference is that banks have scale on their side. For the most part, individually, people whould not finance their house for 50 years or boat for 20. The bank gets to make thousands of those loans and diversify much of that risk away. Not only that, but the extra juice they get from the extended amortization should make up for the extra risk. I've never modeled 50-year mortgage portfolios, but I presume that they are of acceptable risk to investors. And...it's the banks responsibility to disclose it's practices as well as the investor to decide if they choose to invest in that business model. Moreover, it's not like everyone who wants to finance their entire lifestyle has a chance to through a major bank. Banks get to be selective about credit profiles they expose their assets to.

Extended amortizations will not cause a banking crisis as long as portfolios are managed well. What you will see is that more individual borrowers will be pickle because they haven't amortized the loan. Some investors like the incrementally increased risk of extended amortizations, and it comes at a price to the borrower. Again, the whole thing hinges on the fact that borrowers are willing to enter the contract, banks can appropriately diversify the risk, and investors enjoy the return.

On a loan-by-loan basis, you're right...the only good ones are the ones that get repaid. But, because banks have scale, they are allowed to make a bad loan every once in awhile. The problem is that the borrower loses in that case...
Old 02-24-2006, 11:51 AM
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Default Re: Are we financing ourselves into BIG TROUBLE???

good thread here with some heated discussion:

http://www.thehulltruth.com/forums/t...=89579&start=1
Old 02-24-2006, 12:06 PM
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Default Re: Are we financing ourselves into BIG TROUBLE???

One could argue that, if you have the option, and the rates are equal ONLY get an interest only loan. You can always increase payments to pay it back on a 15, 20 or 30 year amortization schedule. But you have the flexibility of dropping payments down to interest only if need be.
Old 02-24-2006, 12:18 PM
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Default Re: Are we financing ourselves into BIG TROUBLE???

with each passing day/month/year, people have become more and more comfortable with debt.

i'm 26, and the majority of my close friends have credit card debt and don't think twice about it.....they've always had credit card debt and just consider their visa statement as just another monthly bill.

i have one buddy who has about $5,000 in credit card debt and $12,000 in student loan debt. his wife has about $175,000 in student loans (law school) and probably at least $10,000 in credit card debt. she needed a new car last year (she was commuting to school....about 40-50 miles one way), so they went out and bought a new chevy trailblazer. she just graduated law school and they want to buy a house in a year or two.....HAHAHAHAHAHAHAHA.

1 - with that much debt i wouldn't be able to sleep at night.
2 - with that much debt i wouldn't DREAM of a new car
3 - if i was in debt that badly and gas prices were at record highs, i certainly would not have purchased an SUV TO COMMUTE WITH!!!!

as someone else mentioned, we have become to obsessed with material things. everyone tries to keep up with each other and compare who has the newer suv, who has the bigger house, and who has the biggest wedding ring.

i was raised by mom and grandparents (who grew up in the depression)......OLD SCHOOL.

my grandmother would KICK MY ASS if i had such poor spending habits!!!

i have another buddy who bought a house 20 years ago for about 60k. he sold it about 2 years ago and owed more than $150k on it!!!!!!! then he financed himself to the gills and just built a HUGE home......he's 40+ years old and he's completely CASH POOR. i bet he doesn't have 1k in the bank. big fancy truck, big boat (that he never uses), big camper (that he uses maybe 5 times per year), big house, big tv's, BIG DEBT.

these days, it's all about SUV's, fancy electronic gadgets, hardwood floors and corian counters.

the other day, my wife was talking to a friend of hers about this same subject...credit card debt. my wife made the comment that we don't have credit card debt, and her friend nearly flipped out on her....."how can you not have credit card debt.?? we've always had credit card debt!!! i don't understand how you don't have credit card debt!!"

sorry to have rambled on, but this has always been a hot topic with me.....for some reason, it annoys the $#%@ outta me.



Old 02-24-2006, 12:21 PM
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Default Re: Are we financing ourselves into BIG TROUBLE???

prxmid - 2/24/2006 11:06 AM

One could argue that, if you have the option, and the rates are equal ONLY get an interest only loan. You can always increase payments to pay it back on a 15, 20 or 30 year amortization schedule. But you have the flexibility of dropping payments down to interest only if need be.
You're right, except you're counting on the borrower to be fiscally responsible enough to fill the gap if value drops way below loan balance, or to make the choice to amortize the balance on their own.

IO is simply a bet...with some, hopefully, calculated risk that housing values will stay strong. It's also really useful for short-term situations; the first few years of an amortizing loan is basically IO anyway.
Old 02-24-2006, 12:22 PM
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Default Re: Are we financing ourselves into BIG TROUBLE???

My fear is that the big spenders now will need social programs to survive in old age, thus creating taxes so high that those that chose to save would not be able to save enough...
Old 02-24-2006, 12:26 PM
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Default Re: Are we financing ourselves into BIG TROUBLE???

Can and do are many times two completely different animals. I would be willing to bet that most people who are doing the interest only loans, are not adding to their monthly pmts to lower principal. The reason, is that they have other "needs" for that cash. That is the reason they went with interest only in the first place.
Old 02-24-2006, 12:43 PM
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neckbone - 2/24/2006 11:26 AM

Can and do are many times two completely different animals. I would be willing to bet that most people who are doing the interest only loans, are not adding to their monthly pmts to lower principal. The reason, is that they have other "needs" for that cash. That is the reason they went with interest only in the first place.
Head? Meet nail.
Old 02-24-2006, 12:50 PM
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Default Re: Are we financing ourselves into BIG TROUBLE???

ebrady, doesn't every loan count on the buyer being fiscally responsible?
Old 02-24-2006, 12:50 PM
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t5killer - 2/24/2006 9:58 AM

I know some people that are buying houses with "interest only loans". They only pay the intrest, never any principal. I don't get it.
Depends on what you are doing with the principal. When interest rates were at the bottom. You could wisely invest the principal payments and get a better rate on return on the investments than the interest you would pay.
Old 02-24-2006, 12:55 PM
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prxmid - 2/24/2006 12:50 PM

ebrady, doesn't every loan count on the buyer being fiscally responsible?
If every loan counted on the buyer being fiscally responsible, mortgage companies wouldn't even consider making a loan to someone that would put them near the 40% debt to income ratio.
Old 02-24-2006, 01:01 PM
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prxmid - 2/24/2006 11:50 AM

ebrady, doesn't every loan count on the buyer being fiscally responsible?
Each loan, in and of itself, is priced according to the risk profile of the borrower. It doesn't count on them being responsible, simply that the loan terms and lender have categorized the credit profile. The other issue is that the bank gets your house if you aren't responsible so they are protected in that aspect.

When you get to make a thousand loans, the charateristics of each borrower, compared to the pool overall, are less relevant. Fiscally responsible is reflected in a credit score (for the most part).

I will add that this is a really great topic...debt is unbelievably easy to come by (I know because I have a lot, although I'm responsible), which further proves that we shouldn't count on banks to tell us how much debt we should have.

Case and point...I would have borrowed the max amt of money I was approved for under a mortgage, I would not be able to do much else. That's because my loan is pooled and banks/investors get the benefit of simultaneously lending to better credits.

I'm not sure of my D/I, but I bet it's high. $100k of b-school loans after working for 2 years of undergrad (no debt) and I was able to buy a $200k house (although the bank would have gone much higher). That being said, I have one paid for old-ish car. The wife has a leased car (nothing fancy) and that's pretty much it. Still get to save plenty...but I still don't have a plasma! When will I get my plasma!!!??? ;?
Old 02-24-2006, 03:11 PM
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Default Re: Are we financing ourselves into BIG TROUBLE???

What, none of those visitors from New Orleans looted, I mean, brought you one?
Old 02-24-2006, 03:20 PM
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Default Re: Are we financing ourselves into BIG TROUBLE???

I guess my wife and I are both sticks in the mud financially.

We are sitting on a ton of equity, we carry no credit card debt, all of our boats and cars are paid for. We max out out 401k's. We don't owe anybody anything, except for the house, which we owe about 25% of it's value. But yet we feel poor. It seems like everyone we know is living the high life, New cars, vacations, remodeling, must be either a trust fund baby, or mortgaged to the teeth, home equity, borrow, borrow, borrow. No need to ever do without.

I tell you, it wears you down, We are both living the way we though was the "right" way, but we feel like we are doing without, yet the crash never seem to come for the people who are "doing it all wrong"

I don't get it. I don't wish them ill, but I just don't understand how they make ends meet. Her secretary makes 1/4 the money she does, but to look at the cars, the toys, vacations and the lifestyle, you would think she makes twice as much, Go figure.

Secretary's hubby makes maybe 1/4 what I do, so that ain't it. again, go figure?

How de do dat?

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