Financing?

[woodturner]

Some passing comments in other threads got me to thinking about financing. Conventional wisdom has been that one should not finance depreciating assets such as cars, but with the increase in the standard deduction and allowance for property tax, the financial advantage of even a mortgage is essentially gone.

While I realize many people could not buy a house without financing it, I wonder if most people could buy a car without financing it.

My impression is that many of the participants here are "above average" and a bit more fiscally responsible than the perception of the "average American" the media portrays.

So what are your thoughts on financing? Are you a "pay cash for everything" person? A "pay off my credit cards every month" person? An "always use other people's money (finance)" person? Something else?

[x00018]

Car financing

I bought a car in August 2009. Financed it for 72 months at 0% plus got all the rebates. Free money for 6 years! I am not to worried about getting on the back side of this loan as I always keep my cars for 6 to 8 years.

[crokett]

Well... we pay the credit card off every month. We do carry a mortgage. There are some folks who believe that all debt is bad and don't even want to carry a mortgage, to the point of renting instead. What they miss is that debt, properly leveraged is a tool just like any other. Most people don't factor in the cost of money when making decisions. Even if I had the cash to pay for a car, if the interest rate was low enough (or 0) I would borrow somebody else's money to buy it. I worked hard for my money and the cost of using somebody else's is cheaper than spending all of mine, because then I have to work hard to get it back.

It might be feasible for some folks to purchase a car for cash, assuming they either buy a cheap enough car or put the money away ahead of time. Most people aren't willing to settle for less car and/or have the discipline to do that.

[jackellis]

We buy property using debt but we either pay cash for our cars or take out relatively small loans. We also keep our vehicles and our property for a very long time (my Ford Probe, now an airport car, just turned 18 and aced its smog test). Credit cards get paid off every month. We use them as a cash management tool and to avoid carrying around large wads of bills.

I think a modest amount of debt is fine. As David points out, it's a tool. Like alcohol, a little bit does not harm, but binging can be fatal.

[docrowan]

We carry a mortgage, but would not if we had the cash to pay it off. Conventional (real estate agent) wisdom is you can afford as much mortgage as three times your income. I have always used the rule of only twice my annual income. $50,000 per year salary equals a $100,000 mortgage. This works out to just about the same as Dave Ramsey's advice that payments should be no more than 25% of your monthly income.

If I had the cash I would pay the mortgage off since I would have a hard time getting a guaranteed 6.5% rate of return, which is what my mortgage rate is. I live in an area that did not have much of a housing bubble so my house should continue to appreciate. We've put some money into it and a lot of sweat equity so I know it has gained value.

I do have a Shell gas card that is automatically paid off every month. The card gives me 5% rebate for all Shell gas purchases, effectively making it the cheapest gas I can buy. I also use the card for hotel stays on business trips that I am reimbursed for. I have to admit we've used it a few times for vacation trips to pay for hotels at Disney World and such, but we've never carried a balance. Everything else is paid for with debit cards, checks, or cash.

We pay cash for our cars and always buy used. I've got a 99 Grand Prix that cost me $700 I use for work and I bought my wife an 01 Ford Taurus for $4,000. The Grand Prix has 236,000 miles on it and has a damaged side, but it gets me all over the Southeast. I've found the keys to running used cars is to have personal mechanical knowledge, keep up with the maintenance, and have mechanics that you can trust. I can calculate to the penny how much I've spent on the Grand Prix and it's waaay less than a car payment if I'd bought new and financed.

[Alex Franke]

We're a lot like jackellis. We put everything on point-earning credit or debit cards if possible (mostly debit, but any credit paid off monthly or before any finance charges are applied) and pay cash otherwise. We even tried to buy the car with a credit card but they would only allow us to charge $5k of it I think.

We would consider financing something like a car if the interest rate was extremely low and we couldn't negotiate a better price without financing, but we wouldn't finance it if we didn't have to cash to pay it off immediately if necessary. We keep cars as long as possible, and prefer to buy "almost new" -- after someone else has taken the depreciation hit by driving it off the lot.

[germdoc]

The only time as an adult I had no debt at all was when I was in the military. (If they had wanted me to have debt they would have issued it to me...)

That was also one of the happiest times of my life for many reasons, though I made much less money than I have made in the private sector.

I am still digging my way out of debt caused by the divorce fiasco. Divorce, in case you don't know, is a powerful tool of income redistribution. The government only takes 1/3 of what I earn, while 3/4 of the remainder goes to the ex-SWMBO and to pay off lawyer's fees, etc.

Not that I'm bitter...

I plan on being debt-free in 1-2 years. Part of my plan is to sell my house, finish paying off my one car, and marry my fiance, who has a good enough income that I can use my income to pay off loans. I will be taking another job which should within a year be more remunerative than my current one. And I am praying that the ex-wife marries her BF, which would relieve me of maintenance obligations, but I'm not counting on that happening.

I advise younger folks like my children and medical residents to approach the issue of debt very carefully: don't overextend yourself--especially with a big-ticket item like a mortgage, invest money toward retirement right from the beginning, and consider the worst-case scenario (loss of job, divorce, disability) when making financial decisions.

I would strongly advise the 20% down rule when taking out a loan for a house or car--pay 20% at least or 30% if possible down, then finance the rest. If you can't afford to pay the downpayment, DON'T BUY IT. I have violated that rule a few times usually to my detriment.

[Shep]

We've got 2 mortgages, one for our home and one for our rental property. We only use credit cards for online or major purchases. We pay them off every month. Most months the bill is less than $25. We used the Dave Ramsey methodology to pay off our car last summer. Own it free and clear.

We do borrow money when it's reasonable. For instance we just bought a new computer whe our old one died. Signed up for the Best Buy credit card, got no interest for 18 months. We'll pay it off shortly.

Our efforts to use credit wisely has paid off. My wife and I both have excellent credit scores.

[germdoc]

Conventional (real estate agent) wisdom is you can afford as much mortgage as three times your income.

I would take the conventional wisdom with a big chunk of salt. I did this twice (1/3 rule) and got in trouble, once because I had to sell the house at a loss with a forced move, and once because I didn't factor in other expenses--eventually had to sell that house for a minor profit. You should not underestimate property taxes, utility costs, the cost of upkeep and repairs, other expenses--health, college costs, etc.--when considering whether you can afford to buy a house.

I would take whatever the realtor tells you you can afford and subtract at least 25% from that number, preferably 50%.

[woodturner]

I advise younger folks like my children and medical residents to approach the issue of debt very carefully: don't overextend yourself--especially with a big-ticket item like a mortgage, invest money toward retirement right from the beginning, and consider the worst-case scenario (loss of job, divorce, disability) when making financial decisions.

Did you happen to see the Yahoo news post yesterday on the resident with half a million in student loan debt? Something like $250K was the actual loan, with the balance collection fees, late payment fees, etc. I'm curious what your take would be on that. I was a little surprised that someone with the intelligence and focus to make it through med school wouldn't read their loan documents or understand the repayment schedule.

[cgallery]

I would take the conventional wisdom with a big chunk of salt.

I agree.

When we purchased our first (and so far only) house 15 years ago, the mortgage broker was telling me to go out and pick out a pretty extravagant house.

I ended up spending about half of what he was telling me.

Which is a good thing, because a year later I hurt my back and was unable to work for several months. Yet, I was able to make the payments and everything was fine.

Looking back, I realize how much money I have saved on property taxes and maintenance. Factoring in taxes and other maintenance costs, I'm not so sure high-end houses are very wise investments.

[dbhost]

While I am certainly in debt, with the house, truck, and education loans that came with the wife... we are actively working to pay off our debt as quickly as possible.

We are working through Dave Ramsey's "Financial Peace" books, and while they are common sense, they are a tool we can use to keep on the straight and narrow financially.

And yes I have a certain amount of stuffitis as he calls it. Particularly when it comes to the shop. However I am now more or less fully equipped, and I did not finance a penny of the shop.

I know I probably annoy some folks with my bouncing back and forth on the separate shop build ideas. The restriction there is financial. I am NOT going to pull the trigger on that until I have the $$ saved up and free to plunk down on seeing the project all the way through.

On the Mortgage Brokers advice, they can take a flying leap. We are in a modest, but comfortable home in a good community. There are guys on the forums with shops bigger than my house... And that is fine.

Where I get sideways with the Ramsey advice is the cost of utilities. My electric bill alone typically puts me closer to the number he suggest than I want to be, plus I have cable, and am covering the bill for 3 cell phones (family plan, for me, LOML, and my father in law...). There is a reason I have been running around like a maniac insulating and caulking everything I can lay my hands on... I have a BUNCH more I need to add insulation wise, but have so far packed R-30 into 400 sq/ ft of attic, added top and side seals to both garage doors, replaced weather stripping around the front and back doors, re-caulked around most of my windows, and am in the process of rolling out insulation a case at a time as I can afford it, as well as installing outlet weather seals on all exterior wall electrical outlets.

My long range plan is to...
Finish with the insulation. I have R30 being added everywhere except over the middle bedroom where I have decking, and under the AC / Furnace system. I am looking at 6 more cases at $120.00 / case... for a total of $720.00 (+ tax) on top of what I already have outgoing... Needs to be slow going...

[jking]

This is what was written...

We carry a mortgage, but would not if we had the cash to pay it off. Conventional (real estate agent) wisdom is you can afford as much mortgage as three times your income. I have always used the rule of only twice my annual income. $50,000 per year salary equals a $100,000 mortgage. This works out to just about the same as Dave Ramsey's advice that payments should be no more than 25% of your monthly income.

This is how you quoted it...

[QUOTE=germdoc;450837]

Conventional (real estate agent) wisdom is you can afford as much mortgage as three times your income. This works out to just about the same as Dave Ramsey's advice that payments should be no more than 25% of your monthly income.

If you are going to quote someone, be careful. You snipped out the middle part of the paragraph & completely changed the meaning.

[Alex Franke]

Finish with the insulation. I have R30 being added everywhere except over the middle bedroom where I have decking, and under the AC / Furnace system. I am looking at 6 more cases at $120.00 / case... for a total of $720.00 (+ tax) on top of what I already have outgoing... Needs to be slow going...

I need to be doing more of this, too. Remember to look into energy tax credits for this stuff!

[germdoc]

Did you happen to see the Yahoo news post yesterday on the resident with half a million in student loan debt? Something like $250K was the actual loan, with the balance collection fees, late payment fees, etc. I'm curious what your take would be on that. I was a little surprised that someone with the intelligence and focus to make it through med school wouldn't read their loan documents or understand the repayment schedule.

Most people who get into medical school are so happy to have achieved their goal they don't think about the financial obligations. They anticipate they will be earning "big bucks" down the road, so they can take care of it. Well, for most docs the big bucks are not there or won't be in the future, and anyway over $100,000 of debt is a lot of money!

I went to med school on an Air Force scholarship and got paid $800 a month to go to school, then served for 5 years on active duty. (Tuition was $10-12,000 a year at the time.) Best financial decision I ever made.

Re' mortgages: most people in any profession are going to move many times during their career, and consequently will be carrying a mortgage more or less continuously. A very important factor to consider is how easy it will be to sell the house at a favorable price when you want or need to move.