Yes indeed, "we" have woven ourselves a tangled web of debt. Through greed, lack of self-education, errant Christian leaders, commercial media, financial industry leaders, 'instant gratificationism', and plain ignorance many of us have become financial slaves to our creditors and lenders.
Most of you thought that your home was an asset. Why? That's what you were told. In fact, the real estate bubble was predicated on that lie and the complicity of banks, mortgage brokers, Realtors, and appraisers. Had you ever considered the definition of an asset? At best, your home or any real-estate is considered a long-term asset. A long-term asset implies that it cannot be quickly converted into cash. However, you home was functioning as a quasi liquid-asset during the real-estate bubble and gave you access to easy money that tempted many to go out and live well beyond their means.
The reason I said "quasi liquid-asset" is because a true liquid-asset can be converted completely into cash; You simply sell the asset relatively fast and receive a sum of money for it with no debt obligation. A home equity loan or line of credit (HELOC) should have been viewed as a means to raise capital. That capital should have been put towards some venture that generated revenue and profit in order to justify the use of it. On the other hand, the capital could have been used to truly consolidate or 'restructure' debt payments and save money on interest and/or other fees and penalties associated with the previous debt(s).
The key to securing a capital loan against an "asset" is to understand the past, present, and future valuation -worth- of that asset. The banks and other lending institutions speculated the future worth of your home and lent you money based on their assumptions about its future value. You spent the money based on the same set of assumptions. However, the bank can afford to speculate as they ultimately retain ownership of "YOUR" home/asset. They can sell their failing lending business, receive government assistance (i.e. corporate bailouts), and/or write down their losses on their corporate income tax.
Most people don't understand how banks work or how their mortgage works. For example, what's the difference between APR and APY? How is the interest applied to the loan? These two basic question are essential to understanding the most fundamental financial instrument that many middle class people have -a mortgage. For example, would it surprise you to know that the interest payment on your mortgage is calculate daily? 7 days a week, 365/yr
I would encourage you guys to begin reading about bi-weekly mortgages and other mortgage accelerators that will help you pay less in interest over time and build or re-build equity in your home. Furthermore, many now have mortgages and are experiencing negative amortization. What is negative amortization? It is when the value of your home or "asset" is less than the outstanding mortgage balance on the home. So, if you house is worth $200K and your mortgage on the home is currently $230K -you are in negative amortization which means your paying more for your house than what it's worth! You possibly can't afford to sell it and you can't refinance it. What a tangled web we weave.
So what are our options? First, pray to God for a solution out of your present financial trouble. Make a solemn vow to never re-enter a "negative" debt obligation but trust in him for provision if you have a need that can't be met without going into debt. To digress a bit, "negative debt" is credit card debt, car loans, payday loans/title loans, and etc. Good debt is real-estate investments, margin loans secured by stocks or other securities, or any form of debt used to produce consistent income/profit, well managed, reduced over time, can easily be converted into cash, offers nice tax advantages/savings.
An example of good debt is purchasing a rental property. In short, the tenant's rent should pay the mortgage note at a minimum. Additionally, there may be a small profit that can be used to help manage the property. Moreover, rental property affords tax advantages such as depreciation, property maintenance expenses, etc. Over time, you can refinance your investment property to get cash to roll-over negative debt balances into now making that negative debt tax deductible and improving your monthly cash flow.
To begin untangling this 'web of debt', we must begin with God and understanding that He does not want us to be in debt but be lenders. We must also understand that debt repayment is required by God unless the creditor forgives some or all of your debt. Finally, we must begin sowing seeds through our monetary giving to the local church and others around us that are in need.
God does STILL have a plan for us and it's not too late for Him to execute that plan in our lives. God is able to do the impossible -including getting us out of debt. Be encouraged and pray today for a plan and act on it.
2 comments:
Good post! These are the types of conversations that we need to start having with our children and other family members. Long gone are the days when we sit around the dinner table bantering about trivial things. Education begins at home and should included this type of valuable information.
Financial Education is what has brought our country to where it is at. Rich Dad created a great game to play at home with kids.
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