The mortgage monolith vs. common sense and common decency
By Jeffrey Reeves MA
Even after the insanity that brought down the American economy due to unsound lending practices, and the mortgage industry is back at it again.
Anyone familiar with money now, money later, money for life? What about the how to thrive in good times and bad? These are the ideas and ideals that show up in EUREKONOMICS™ on a regular basis; conventional wisdom is defined as “doing what everyone else is doing and thinking what everyone else is thinking.”
The first of the four pillars of this concept is freedom from debt to others. However, even after the insanity that brought down the American economy due to unsound lending practices, the mortgage industry is back at it again.
The foolishness of refinancing
The foolishness of refinancing to “save” money is one of the most insidious of the conventional wisdom shibboleths. Radio, TV, the Internet, even smart phones attack you and your clients with this flawed idea every day and every hour.
If American homeowners were to refinance $360,000 every five years and “save” $250 per month each time, they would “save” $15,000 over the next five years. However, they would pay over $105,000 in interest during the same period. Carry that process out four times – 20 years – and they would “save” $60,000 but pay over $420,000 in interest and end up with a $340,000 mortgage.
That means that American family would have paid a mortgage company $440,000 in principal and interest. However, they would have paid down their mortgage only $20,000 in 20 years in order to "save" $60,000.
If, on the other hand, they were to forgo the “savings” and simply pay down the mortgage over that same 20 year period, they would pay about $350,000 in interest, but have only a $193,000 mortgage. (I can’t believe I just said only about $193,000.)
An extreme case
I know the math in this example is a little skewed. Someone with a really advanced financial calculator could mangle my numbers after an hour or two of computing.
That’s the way conventional wisdom-holders work when they are presented with obvious common sense solutions. Because common sense solutions don’t promote and propagate the flawed thinking that is essential to the businesses of behemoths, they confound their audience either with complex calculations or with snapshots of rosy scenarios — neither of which have any chance of ever occurring, but they look good on paper. The alternative
In a previous article I wrote:
The fact is, Americans know how to manage personal finances but the forgotten generation — the cohort from 1924 to 1946 — has failed to keep the simple formula at the front of the mind of America’s baby boomers.
I’ve been practicing for almost 40 years and have met only a handful of people that started out with wealth. Most Americans and most advisors have gained wealth by struggling for years to:
- educate themselves about saving, investing, risk management, etc.
- build equity in:
- whole life insurance policies and savings accounts
Washington and Wall Street have used Madison Avenue advertising and marketing strategies to separate Americans from their money. Mortgages, HELOCs, tax qualified retirement accounts, mutual funds, college plans, credit cards, auto loans, and on and on — they all aim to move money from the pockets and accounts that American families control and into the pockets of behemoths and their minions through accounts that the behemoths control.
This situation reminds me of an encounter I had in 1963 when I was teaching at a Catholic grade school. One of my fifth grade students, her parents and several of her nine siblings — remember, it was a Catholic school — became quite fond of me. I was a guest for dinner at their home on several occasions.
One day I was on recess duty in the schoolyard and the youngest of the children was staying close to me and holding my hand. The good nun that was her teacher approached me and told me I shouldn't keep such a close watch on Bethany. I was taken aback by the comment. I asked what she meant. "She's my child," was her response.
Consider that within the recent past an article on ProducersWEB inferred the same attitude as the good Sister when it referred repeatedly to "your assets under management" while addressing financial advisors. The assets the author referred to are not the financial advisor’s assets. They are the client's assets and they should be controlled by the client.
It's time for our industry to back away from conventional wisdom and stand for the economic principles and financial practices that the founders and builders of America's economy paid forward to "We the people."
It is especially time for those of us that sell life insurance to recall that it is participating whole life insurance that built and still sustains the insurance and financial services industry. It is participating whole life insurance that produces the strongest companies and balance sheets in the insurance and financial services industry as well as the strongest among America's top 100 corporations. American families need what whole life insurance delivers.
There were no mutual companies standing in line with mortgage giants looking for bailouts from the federal government.