7/27/2008

What Is: The Smartest Advice You Ever Got

CNN money has a montage of 40 people (rather well-known folks, like Derek Jeter) sharing the smartest advice they ever got. As you mights expect, these have to do with money, so "brush your teeth" isn't going to show up here.

I'm still working through all 40 as it is quite a bit to churn through. They are interesting to read. Every athlete and celeb should take to heart Derek Jeter's advice of, "Know where your money is going". Even if you aren't doing the day-to-day handling of it, know what is going on. There is a long line of folks who didn't do that, and are flat broke, despite the millions they earned in their hay-day.

All of this lead me to think about what is the smartest advice I ever got? Certainly, "get out of debt and stay out of debt" from Dave Ramsey would rank highly, but I didn't want to settle for that since I didn't receive it directly from Dave, but rather via video (and audio, and print). It really doesn't fit with the spirit of the article.

After some thinking, I came up with a real gem.

I recall riding in the car with my father one day. He was in real estate, and seemed to know everything about most of the homes in our town. We drove slowly through a few neighborhoods while he pointed out houses, talking about who lived there, what it was worth, and how big some of their loans were. It wasn't braggy or preachy, more a matter-of-fact sort of way. Honestly, I have no idea what we were really doing that day, or why I was with him on this little tour. I was young, but I suppose old enough in my father's eyes to get a few lessons on money and mortgages. Apparently he was right, as I can recount this to you so many years later.

"That's where Chris and his mom live. You know that was the third time I'd sold that house? His mother borrowed 98% on it. This one, so-and-so's used to live there. After she passed and he went to the nursing home, their kids sold it and that's when Cathy and Frank bought it. They borrowed 103%. ...." This continued on for a while - longer than I appreciated at the time.

Now I understood the confidentiality of these sort of things, and my father knew that I wasn't about to go around spouting all of this off. We were taught that early in life as people can be quite nosy.

I remembered asking, "How do you borrow 103% on a house?" "Well... ", he began, "you can borrow 100%, that usually means that you don't have any money. If you have no down payment, then you have to borrow all of it. Some folks will go a step further and borrow 102%, 103%, some banks will even loan you 105% sometimes. Now sometimes that extra amount is to make some repairs or upgrades or something dumb like putting in a pool, but usually they have other debt that they are rolling into that loan." As that sank in, I replied, "That sounds dumb". He smiled, "Yeah. More so for the banks, because if the owners lose their jobs and can't pay the note, then the bank can get stuck with a house that doesn't cover the debt. A lot of banks won't do those, that's why they had to go to Such-n-such Federal. I can't believe they are doing those."

"Really", he continued, "If you can't put 10% down then you're not ready to buy the house. Ideally, you'll want to put down more like 20%. The more you put down, the lower your payment. Also, the ability to put more down makes you less of a risk" We went from talking about folks who couldn't put anything down to putting 10-20% down.

With the current state of the US housing market, my fathers wisdom is fully realized. We put 10% down on our first home. The second time around, we put 20% down (yay, no PMI!).

What is the smartest advice you ever got, directly, pertaining to money?

2 comments:

J. Money said...

yeah, that's totally smart for sure! although we actually borrowed 100% for ours (1st mortgage 80%, 2nd as a maxed out Home Equity Line for 20%) and avoided pmi. it's also "interest-only", have i scared you yet? haha....

It's def. not for everyone (esp w/ today's market! if you can even get away with it anymore) but it works out perfectly for us. We're good at paying more each month, so we wanted the flexibility to do as we please.

But I'm def. for putting more down payment for sure when you can! Unfortunately i don't have any "cool stories" for ya, but those Money ones were killer :)

(not) the Jet Set said...

"have i scared you yet?"

You had me at "interest-only", J. You had me at "interest-only".

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