Approximately seven in ten Americans report that money is a significant source of stress (71 percent), according to the American Psychological Association. That is why I’m launching my Financial Health Series with Shawn Perkins, a personal financial advisor.
Chronic stress has been shown to cause chronic disease and wreaks havoc with your psychological and physical health. The Primal Power Method focuses on nutrition and exercise, but is also about pursuing a truly healthy and happy life. Financial stress affects all of us at some point, so this is a great series to get your finances in order, which will ultimately lessen your stress, and make you a healthier person inside and out.
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Gary Collins: Hey this is Gary Collins, best selling author and creator of www.thesimplelifenow.com. Today we’re going to be talking about finances, a little different topic. People are going, “What does this have to do with health and nutrition?” People’s major stress point is finances and money.
We want to talk about that and have people have financial independence, and more freedom in their life which will make them happier, which will make them healthier. That’s the whole point. Shawn Perkins is here with me today. He’s a financial adviser, and mortgage broker.
He financed my first home when I was a young lad in my twenties, starting out in my federal government career. It went very well. Obviously that’s why we still talk. He works for a company called Principal Shield Financial.
We’re going to talk over five ways in which people lose money. Today we’re going to go over the first one which is how you choose to mortgage your house, which I think everyone can deal with because a lot of Americans obviously own homes. Would you expand on that, and explain how people are losing money financing their house?
Shawn Perkins: You alluded to something earlier on, which was that I’ve seen in many people that I deal with, five common areas that they lose money, that they’re transferring their wealth away from their own circle of wealth as we call it.
Those five ways are how they choose to structure and pay for their mortgage, how they choose to pay their taxes, how they choose to save for their retirement, how they choose to save for higher education, and then the last one is how they choose to pay for their major capital purchases.
Area number one, how they choose to structure and pay for their mortgage, is that many times when people buy a home, they delay buying a home because they think they have to save a 20 percent down payment to be able to buy a home. They can cost themselves money by waiting to buy a home, instead of buying the home today at $300,000.
If they choose to save money for the down payment, it might take them five, six, eight, ten years to come up with that money. What’s the house worth then? If the home value has gone up to say $375,000, you’ve waited eight to ten years to save the 20 percent down payment, but now you’re paying a significantly greater amount for the home. That costs you money.
How you structure your mortgage is, you give a larger down payment than what is necessary. That means that that money is no longer available to you to do other things that might be more beneficial to your financial profile, whether that’s increasing your savings for retirement, whether it’s financing debt that you could otherwise not finance with credit cards and things like that.
It could be paying a higher interest rate on your mortgage, than you could be paying if you were to refinance. It could be consolidating non‑tax‑deductible debt. Credit cards, car loans, and things like that, into a mortgage that has a much lower monthly payment and allows you to write off the interest.
There’s several different ways that people may be losing money within how they choose to structure and pay for their mortgage.
Gary: That’s a very interesting point. The first loan we did was a VA loan, for my first place, and what was it then? I want to say, was it three percent down? Was it zero? You know what, I financed the whole thing. I think I did…
Shawn: Yeah. VA is zero down, always has been.
Gary: And you’re right. I actually made good money off that place. It was right at the beginning of the boom, and I did well. After that, I did finance my houses putting 20 percent down. The last one, it got me. I lost all that money. That’s an interesting point that if, say, something happens in your life to where you cannot pay that mortgage or you have to get rid of the house, short‑sell it or just get rid of it, you’re totally right.
You’re going to lose money if you put that 20 percent down. I’ve gone the opposite way now of where I’m paying for my house cash, because I have to. [laughs]
I didn’t have a choice. I’m building a place off the grid, and there’s no financing it. That’s an interesting point. I’ve done the math, I want to get your perspective on this. I’ve done the math on a home long‑term, if you finance it. It’s a tricky situation. If you do it over the long term, the interest that you pay over 30 years, which very few people today own their home for 30 years.
I’m on your side on, “Hey, put the least amount you have to put down as you can.” If you do finance a house and go long‑term, the math I put together, you don’t make any money. When you go to sell the house, you basically break even at best. All the finance charges ate all of your profit.
Then, all of the upgrades and all of the upkeep and remodels, because you’ll probably remodel your house twice during that 30 years. Heck, people in California spend $150,000, $200,000 remodeling a house today.
Shawn: You bet.
Gary: That’s a very, very interesting point. I’ve gone the other way now of, “pay your smaller debts off first,” is that what you prescribe too? Don’t stick it all in your house. Pay off your car, your credit cards, and maybe smaller debts, as opposed to having a big chunk of money sucked up in a house?
Shawn: Yeah, it’s interesting you say that, because I just wrote a series of blogs. They begin with one, is your house a good investment. I address exactly what you just talked about. I’m not going to say that real estate is bad investment, but it may not be quite the investment that people think it is.
The reality is that your house that you choose to live in, is really more of a lifestyle decision than it is an investment. The piggyback to that series of articles is “Is your house a good place to park your wealth?” as I refer to it.
When you put a down payment on a house, when you make extra principal payments, or whether you just make the principal and interest payment on your mortgage. Every month you’re placing a portion of the principal into your house, that in this case, the bank would require on a regular payment, extra principal, if you send extra money.
That’s what we call a balance sheet neutral decision. You have $5,000 in your checking account right now. You take that $5,000 and pay that much extra on your mortgage. You haven’t improved your financial position in any way, shape, or form. You simply have moved money from a liquid, safe, accessible form in your checking account, into your house, where now you can’t get to it in the event you had some kind of emergency, and needed the money.
Gary: That’s a very good point.
Shawn: You already mentioned the other side of this. If there is some kind of a downturn in the market, now that money’s gone. If you put $5,000 in your house, and now a $5,000 drop in your home comes, you’ve lost that money. It’s risky.
Gary: That’s a very valuable lesson, especially out here in California, in places where houses are very expensive. For most people, they barely get by. I’ve always told people, too, if you have to negotiate your house payment. You’re trying to figure out a house that’s a certain price, and you can almost afford it, but not quite, you need to get out of that range.
Especially the real estate agents, they love sticking you in the biggest, most expensive house they can. If you’re cutting it close to where you cannot possibly make that payment, that is a bad, bad decision. On top of it, if you throw all this money into the initial payment, the down payment, you’re doubly screwed.
I’m going to be honest. My last house cleaned me out financially. I had something come up. I had spinal fusion. I couldn’t work. I was laid up for over a year. I put down 20 percent in a house that I could afford, but I should have never spent that kind of money. I lost almost a quarter of a million dollars in my last house.
I mean cash. Gone, cannot make it up. Trust me, it’s embarrassing. [laughs] I felt like a complete idiot. I’ve always handled my finances myself. I’ve always done very well. I made money on every single house I’ve owned prior to that. I got sucked up in that whole California dream thing, coming back here.
I got sucked in the market, and something went wrong, catastrophic. I was screwed. The banks were not going to work with me. You know why they wouldn’t work with me? I put 20 percent down and they already had their money.
They could care less if I got foreclosed on or not. They’d made their money and then some.
Shawn: I also want to preface that. What we’re talking about is not a right or wrong issue. It’s a right or left issue. It’s about efficiency as opposed to inefficiency. If somebody puts 20 percent down when they buy a house, or they come into an inheritance and they take that large sum of money, and they pay down or pay off their mortgage, that’s not a right or wrong issue.
It is simply whether it’s efficient or not. Does it give them the benefits that they ultimately want? That’s what I want you to understand. You didn’t make a mistake by putting 20 percent down. You just maybe weren’t as efficient. You might have put yourself in a compromising position that at the time, you couldn’t see as being a possibility in the future, but isn’t that what makes them unexpected emergencies, crises, if you will?
We don’t know that they’re going to happen. We put ourselves in a situation where we’re unable to handle that crisis when it does happen, because we did what we thought was the right thing, putting a big down payment, sending extra money on our mortgage, and so on.
Gary: That’s what it did, too. It didn’t allow me to ride out that significant life event. The money that I needed to get by during that event was tied up in my down payment in my house. It was even worse for me because…we discussed. I had a VA loan. I could’ve used my VA loan again. Instead, I went with a more conventional loan, and put the 20 percent down.
Shawn: Why did you do that?
Gary: It was because I had the money. I just didn’t see this life event happening. I got caught out of left field. I didn’t see this occurring.
Shawn: No. Why did you decide to go with a 20 percent payment, if you knew you could go with a zero down payment? What was your reasoning behind that?
Gary: Lower house payment, and like I said what I should have done. The problem was still, as I was buying at a time in the market where there was nothing cheap. I was probably buying in one of the cheaper decent neighborhoods, but I probably should have reevaluated. I bought it for…I bought the house for a resale.
I bought the perfect house that fits in that Goldie Lock zone of which most people are looking for, but was probably bigger than what I needed. I thought it through and I thought it was a good idea, and it turned around and bit me right in the butt. That’s a good point too. Even as you can plan for everything, sometimes stuff just goes wrong.
I agree with you now. I’m one of those people that a house and a payment is just life, if you’re going to finance it. That money can be spent elsewhere, much more wisely. If you can get down your credit card debt, own your cars free and clear, that’s a huge deal.
That’s a lot of stress taken off, and you just realize that your house payment is your house payment. That’s something that is very difficult for Americans to get out of. Very few can go debt free and own their house free and clear, while they’re still working, while they’re still in the prime of their working years.
Shawn: Some of the things that people need to consider when they have money, and they have something they want to do with that money is you want to consider the safety of the money wherever you’re putting the money into.
If you’re going to put the money into your house in the way of additional principal payments, or a large down payment, or a large inheritance that you’re paying down the mortgage, ask yourself, “Is the money that I’m putting in my house ‘safe’?” If the value of your house can go up or down based on reactions to markets situations, then it’s not safe.
If you needed to sell the house as you reference in a down market, then you’ve lost that money. What makes the money safe is being able to time the sale at a point when the market value is up, so you get your money back. Most people that are in a situation where they have to sell their house, can’t control the timing of the sale.
They need to sell now. Your money is not safe, because you’re subject to the fluctuations of a market. You have no control over it, and many people don’t even understand it. The second thing people need to consider is the liquidity of that money. You just alluded on that too.
If you need access to that money and you move it from your checking account into your house, how liquid is it? How quickly can you convert that wealth in your house…your equity…to cash, in the event that you have a circumstance you didn’t plan on? It’s not very liquid.
The funny thing is lending guidelines are designed to prevent access to that cash, when circumstances arise that necessitate needing that cash. I need to get to the equity of my house, but because of the situation I’m in I can’t get to it. The lenders won’t loan me the money, whether I lost my job, or I had a health issue.
The third thing people want to look at is rate of return. Mortgage money is very favorable. Today we’re looking at interests of three and a half, to four percent. It’s the cheapest money out there you can borrow. If it’s so cheap why are we in such a hurry to pay that off, especially when you consider that it’s the only tax deductible debt we have left besides business interest?
Why would you want to get rid of the only tax deduction that you have left, and the cheapest money that you can borrow, when you have credit cards and car loans at higher interest rates than the mortgage?
Gary: You’re absolutely right. I do. I think we get caught up in things. With that what’s your opinion about people purchasing using that buying power and getting that equity line on their house, and then turning around and buying a car, a boat on that because it is cheap money? For me, I would rather people not do that.
It’s lifestyle that I teach because you’re purchasing items that you really can’t afford, and they go outside the scope of that original mortgage which is a lifestyle issue. Your boat is not truly a…it’s a lifestyle issue, but it’s just to keep up with the Jones. It’s not something that’s…
Shawn: It’s not an investment.
Gary: Exactly. It is an item that is going to lose money as soon as you get it.
Shawn: To answer your question, I’ve been in this business for 23 years. In that 23 years, I’ve seen several up and down cycles in the real estate market. The most recent up as you know was from 1997 all the way through to 2007, before the crash in 2008.
Gary: Yeah. I know it very well.
Shawn: All the way up to 2007. I saw a lot of equity lines of credit driving down the road, cruising around across the bay, down the San Diego Harbor, because people were using their equity to buy cars they couldn’t otherwise afford. In the area that I live in, it’s a fairly middle income America.
I’ll tell you, I’ve seen more BMWs, Lexus’, and Mercedes in this area than I think I’ve ever seen anywhere else. I know the people that live here cannot afford those vehicles, without having taken out some of their source of income which is they’ve moved the equity out of their house.
Same thing with buying a boat, buying Jet Skis, desert toys, toy haulers. They use the equity in their house to finance a lifestyle, and that’s not what the equity in your house should be used to do. The equity in your house is your wealth, and it should be used to improve your financial position.
If that can get rid of other debt that’s not tax deductible, if that can be used in the way of taking that money out and giving yourself what I call the emergency reserve…most people have heard of it as a rainy day fund. You should have a rainy day fund of anywhere between say three to six months worth of your living expenses.
So that if life’s little un‑budgeted emergencies come up, you’re not destitute. You’re not loathed to find a way to get out of it, without losing your house, or losing your car. Most people don’t have that. In fact “The Wall Street Journal” recently reported that, 70 percent of Americans are living paycheck to paycheck…
Gary: I saw that.
Shawn: …regardless of their level of income. What goes hand in hand with that is, 76 percent of Americans have less than six months of their living expenses in an emergency reserve. That means only 24 percent of Americans are really financially able to handle a crisis if it came their way.
That means you’re putting yourself in a serious financial situation, and you may not even realize until that event happens. That’s the worst time to find out how ill prepared you may be financially.
Gary: Not only that, but it’s a perfect example of…I’ve known people who’ve gone through that situation. I know what it did to my health. My health was absolutely deplorable for…to include back surgery and everything else I had to go through. The stress level it put on me, was the worst stress I’d ever been in my life.
I’ve been in the military, and law enforcement, and that incident was the most stressful I’d ever dealt with. That is absolutely a true statement. I think people will learn from this. I hope that from this series people will get to understand too, is this is to help you through your entire life.
This is to put all the pieces together. To put the health pieces together, the happiness pieces together and understanding financial wellness. I think that’s one thing too. We’re not taught very much in school. That’s one of the things we’re never given the tools and told about.
I didn’t learn about a mortgage until I might you Shawn. I never learnt that in school. I never learned how it worked. I wasn’t in a business major. I know business majors will get some of that. For the most part, 99 percent of Americans don’t know what a mortgage is until they get one.
Shawn: Yeah. You learn about it going 65 miles an hour into the brick wall.
Gary: Yeah. When I you got your first house. I remember in my twenties, I was pretty good at math. I remember going, “Wait, wait. How’s all this working now? Let’s slow this down.” You get your Truth‑in‑Lending statement, and its pages, and disclosures, and there’s numbers all over the place. I think that is something to learn from it too.
Take your time, work with a good professional. Work with someone who you can trust. Just don’t jump right in and get a mortgage. I actually walked out of a signing for a new house I had bought several years ago, because the guy changed everything after I walked in.
I got my Truth‑in‑Lending and it was different, and then I walked in…which they used to do back in the day a lot. Today you’ll get your butt handed to you, if you try and do that today. I actually had to turn around and walk out of there, and go get my mortgage through my credit union. I had to do it within a day.
Make sure it’s someone you can trust. I did trust the guy, but it was pretty shady. Do your research too. I always tell people just like health, go out there, take your time. What would you say Shawn, as far as interviewing lenders or mortgage brokers?
Go out and find three to six, and go out and talk to them, and weigh and see if you have a good relationship with them or not?
Shawn: Where I tell people to start is, first and foremost, work with somebody that you personally know and trust. You have a relationship with them already. If you don’t have somebody that you personally know and trust, and have a relationship with. Then talk to somebody you know and trust, and see who they know and trust and have direct personal experience with.
Referrals are always the best way to go, because you know them and you trust them. If it’s not the person you’re working with that you know and trust, then the person you know and trust has somebody they know and trust. There’s really two ways right there.
The last thing you should be doing is dime for dollars, going with someone who you see on the television or a radio ad. You want to make sure that you have reason to trust that person. We are far too willing to give our trust to people today, because they’re sleek talkers.
They sound really good in what they’re talking about, but we don’t have any reason to trust them from experience. You have no reason to believe that what they’re going to do, and what they say they’re going to do, is actually what they do.
Gary: Absolutely. That goes…I preach that in health all the time, and working with personal trainers, and where you buy your supplements, and where you eat your food from. It all goes together. This big circle comes back. I really appreciate it for coming on Shawn.
We’re going to have at least four more financial series, on the Primal Power Method website in my blog. Shawn where can people get a hold of you, if they want to use your services, or contact you?
Shawn: We were talking about blogs. My blog is at www.wiseandwealthyblog.com. They can read individual installments, and bite size pieces of the things that we’re talking about. They can reach me by my email address at shawn ‑‑ S‑H‑A‑W‑N ‑‑ @principalshield.com.
Principal is P‑R‑I‑N‑C‑I‑P‑A‑L shield.com. Of course they can reach me on my mobile number which is my business, is 619‑994‑1110.
Gary: I’ll have all that information on my website. It will be contained within the blog for everyone, so if you want to get a hold of Shawn you’ll be able to. Again thanks again, and I look forward to our next installment.
Shawn: Thank you Gary. I appreciate it.
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