 it’s not. This is not in your best interest at all. Here’s why I don’t agree with the ratio.
The 28/36 ratio allows for 4% more than the old ratio. That’s a 100% (4% to 8%) increase in consumer deb! So what they are doing is allowing you to charge more depreciating assets! They haven’t increased from 28% for the generally appreciating asset called your house. Not that I’m a fan of financing to the maximum, but the above shows where the banks interests are focused. What they did was basically allowed for the Average consumer to borrow more money for the highest interest rate category. That means they make more money and you lose more money to interest.
So, you loose the flexibility to use that second 4% that you could put towards an emergency fund, for food, or for investing. You are also loosing the opportunity cost of that 4% compounded over the years if you invest it in your retirement. That’s worth you seriously considering before you decide to max out how much you can borrow on a house and credit cards. Let me say it again: That’s worth you seriously considering before you decide to max out how much you can borrow on a house and credit cards. The old 28/32 ratio was hard enough to recover. The 28/36 ratio would be much harder. So, don’t be Average and max out your credit. Live below your means and invest the remainder in your future.
By now, most of you by now have read about how much credit can cost you. You know to avoid it on depreciating assets. Assets that don’t appreciate in value or provide income should never be financed. So, when buying a house, don’t forget that wasting money on depreciating assets can really mess up your chances to minimize your interest costs. Remember all numbers in relation to your objectives of financial independence. Don’t get caught up in the Average American dream of owning a house at the expense of your financial future.
Maxing out your credit to purchase a house will significantly hinder your ability to save for your future. It will strap you for cash and for emergencies if you don’t have those in place before you finance a house. So, before you even consider buying a house make sure you have a fully funded emergency fund and an appropriate down payment.
Why is the down payment of 20% or more stressed by so many financial people? Because of two major reasons. Fist, it shows the mortgage company that you have skin in the game. You have 20% equity, so the bank has less risk. You are more likely to pay on time and not walk away leaving the bank with a house. They are not in the house buying business. They reward you for this by giving you a favorable interest rate. So, you’ll be financing less and at a lower interest rate. Over the life of your loan, the reduced financed amount and the lower interest rate will be a significantly less amount you pay to the banks.
Secondly, you won’t have to pay for Private Mortgage Insurance or PMI. PMI is insurance that the bank makes you pay for to insure that they actually get the money back that they lent you. That’s right, they make you pay insurance for them! You get absolutely no value for this either. So, you are losing money here too. In most instances, 20% down will eliminate this PMI. PMI increases with the cost of your house. More expensive house will require a more expensive PMI payment. So, just save at least until you get the 20% down to avoid throwing this money away by paying for the bank’s insurance for your home loan. Don’t do it. If you can’t afford this 20% down, wait until you can.
So, don’t be Average. Learn your financial ratios so you get a better picture of your major purchases such as a house.
3 thoughts on “012, Financial Ratios, It’s all About the Numbers”!
Thanks for the comments. Since I’m writing this from my perspective, I should have stressed student loans more. While I’m not positive, I’d bet that the student loan would count as part of the 8% of what I referred to as consumer debt. It was pretty much impossible to get anywhere close to the level of student loan debt when I was going to college. The loan money went straight to the school. The student never touched it. There was no loaning money for all of the things that are included in a school loan like they are today. So, my little student loans were just a small portion of my debt. Here’s a good article that hones in on student loans and mortgages. I still say stick with no more than my old school ratios. Exceeding them would severely limit your disposable income for investing.A superbly presented and deceptively spacious detached house with sitting room, dining/family room, study, stunning conservatory, beautiful fitted kitchen, four bedrooms, three bathrooms, cloakroom, pretty westerly facing rear garden, driveway and garage; located close to the heart of the sought-after historic village of Wrotham.
Ground floor: Porch, entrance hall with oak staircase to first floor; study with fitted office furniture, bedroom with built-in wardrobe; cloakroom with WC and wash-basin and bathroom with bath and wash-basin, First floor: Spacious landing with oak and walnut floor and oak staircase to second floor; sitting room with French doors to garden and marble fireplace with granite hearth and log burner; dining/family room with walnut flooring, stunning conservatory with fitted blinds, limestone floor with under-floor heating and French doors to garden; kitchen with Shaker' style Clive Christian kitchen comprising base and wall units, granite worktops including breakfast bar, sink, range cooker, integrated appliances including: Washing machine, dish-washer, tumble dryer and microwave and space for American fridge/freezer; bedroom and bathroom with bath, shower cubicle, WC and wash-basin.
Second floor: Landing; master bedroom with fitted bedroom furniture, window seat, oak flooring, air con and en-suite bathroom with roll-top bath, shower cubicle, wash-basin and WC; and bedroom two with fitted wardrobes, air-con and oak flooring, The property also benefits from: Gas central heating, double glazing, wooden window shutters, oak and walnut flooring, integrated audio system, driveway, garage, pretty westerly rear garden with paved patio, lawn, plants, shrubs, trees, shed and side access.
Wrotham village offers: Village shop, popular, Ofsted outstanding, primary school; secondary school, recreation ground with its children's play area, cricket pitch, church and several pubs. Borough Green with its variety of shops, restaurants, take-aways, pub, bar, primary school, churches, doctors, dentists, Reynolds Retreat (gym, country club, restaurant and spa) and railway station (with services to London, Maidstone and Ashford International) is approximately 1.1 miles away. Sevenoaks town centre with its comprehensive shopping, education and leisure facilities; and railway station (with fast services to London) is approximately 7.5 miles away.
Access to the M20 and the M26, both linking to the M25, are 0.5 miles away and 1.4 miles away.
Ark. This is a RARE apartment because it's been upgraded via the Estate Development Program (Cost of 2K for the upgrade by itself). Because of this upgrade this is one of the few apartments on Arkadia that actually have enough item points in the front room near the televator to hold a shopkeeper! Start Bid: 5.5 K. Lowered Buyout to 5K. - 5k price DOES NOT INCLUDE alpha core cards. Note: I stay on Calypso, Monria or FOMA these days so that's where the trade will need to take place.Friday, September 25, 2009
Free Museum Day! Saturday, September 26, 2009!
Thursday, September 24, 2009
The Last Chance, Part II: It's Kind of Like Your Parents' Walk to School
Day.
Monday, September 21, 2009
The Last Chance, or, A Very Long Bike Ride Uphill Both Ways.
Saturday, September 12, 2009
Back from Kansas
Thank you for your support of the blog, the Sutherland Center and my ride!
Thursday, September 10, 2009
Ride update from Stephen - Day 1).
Wednesday, September 9, 2009
A pre-update post.
Tuesday, September 8, 2009
Following the Last Chance
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Preparing for the Last Chance
The last long ride I did was the Stonewall Century, a beautiful but rather nasty hundred mile ride south of Pueblo, CO. An out-an-back course over Cucharas Pass, it was either up or down the whole way, and the return, especially, drained me -- strong headwinds at first, followed by the much steeper side of Cucharas. More significantly for me, however, was how quickly I got dropped in the early going. My friend Eric and I spoke confidently in the parking lot of riding hard all day. We both did, I think, it's just that his hard turned out to be a lot faster than mine. I came away from the day kind of upset and anxious -- where was my fitness? Was this a bad omen for the Last Chance? How much more could I do to train? What else might go wrong between then and the start of the big ride?
Competitiveness wasn't the issue. Like