stellarly horrible financial advice

[87tweetybirds]

Ok, so after saving for a while DH and I are finally in a position to buy a home. We calculated out how much to save based on estimates for down payments and our ability to pay off the mortgage over time. (I could detail more but an entire other conversation). In the course of home buying we have been given some doozies of advice.

1- what! You actually have x amount(x amt being a little over 20%) that's crazy! You need a new realtor if your realtor told you that's how much you need. (PMI explained, my idea, not a realtor) response:it's not that big s deal! Just Y more a month ( y adding up to be significant in my book)
2-the monthly payments for x mortgage would only be about $60 less a month than y. You should go with y unless you really need the $60 a month( ahhh that adds up way fast!)
And last, but definitely not least,
3-"ohhh you're buying  a house! My advice is to buy all new things to furnish your new home." (Face palm)
What about you? Any stellarly bad advice?

[mm1970]

My goodness, that made me sad.

When we bought our house, we looked at a house that was $899,000.  It was still living in the 70's, but had a really awesome fully grown loaded avocado tree.

I thought about it for about 30 seconds.  Mostly because it was a 4BR, 2BA,with two "wings" and the living space in the center. (My thought: I can rent two bedrooms on the other side of the house to grad students).  Anyway, I said "we don't have any furniture for this house!"  Realtor said "go shopping!"

[Rezdent]

Oh absolutely gotten tons of this kind of advice over the years!

IMHO, the common flaw was that the helpful person was advocating that we take on more (house, car, appliance, whatever) than we needed.  Seems like people look at what the monthly payment is and whether or not it could be paid instead of looking at the total amount owed and how much something actually cost over its lifespan.
Salespeople know and use this line of reasoning all the time, and sadly people fall for it. Yep, it's only 60 more a month...but it will also take more in running costs too.

[DeepEllumStache]

I got the "oh when you buy a new place you have to buy new furniture for it" too.  I also got the "it doesn't matter if you buy at the top of your range because your income will increase or the market will increase."

[aschmidt2930]

I got the "oh when you buy a new place you have to buy new furniture for it" too.  I also got the "it doesn't matter if you buy at the top of your range because your income will increase or the market will increase."

Seconded. I have a few family members that are just stunned I don't want to go on an IKEA shopping spree to furnish my new apartment with furniture/decorations.

[flamingo25]

We got a lot of that too.

We often get asked when we are going to buy new furniture or remodel. Our house and some of our furniture is a bit dated but still works great and looks fine.

I was also told by an acquaintance that I would never find anything "decent" in our area for under 500k. Our house cost half that and is a great house in a lovely neighborhood.

[mm1970]

I got the "oh when you buy a new place you have to buy new furniture for it" too.  I also got the "it doesn't matter if you buy at the top of your range because your income will increase or the market will increase."

Seconded. I have a few family members that are just stunned I don't want to go on an IKEA shopping spree to furnish my new apartment with furniture/decorations.

I remember being told when I first moved to CA that I would eventually "grow up" and want "matching furniture".  I'm still waiting.  Much of our house is decorated in what I refer to as "Late college/ early Navy".

Our TV stand is only a few years old and it hides the electronics from the toddler.  But it doesn't match anything else. The kitchen table and chairs are garage sale and hand me down.  The computer desk is the one I bought from Kmart in 1994.  The bedroom set is also from 1994 (but we are finally replacing the 20 year old mattress for Christmas).

Our coffee table is in the shed - my husband built it.  It's nice. Right now our "coffee table" is a kid-sized picnic table that one of my former coworkers built from an equipment shipping crate.

We have an end table that was my stepfather's.  We have another end table that my husband's grandparents made out of old green formica from a kitchen in the 70's, and metal legs.  We have a glider chair that my neighbor was giving away when I was pregnant.

We are about to build our own "chaise" because the four of us don't fit on the couch anymore.

Mind you, I'm 44 and still waiting for the urge for matching furniture.

[iris lily]

I was 40 years old before I bought upholstered furniture new. I slept on a mattress on the floor some years until I was 30.

I still don't buy hard wood pieces new, but that doesn't mean that what I've got is cheap. I just don't like new stuff. I have 6 pieces of Victorian furniture that I absolutely love, 2 are family pieces, and it's enough for our small house. 

[kib]

We put a portion of our car purchase on a cc, only because we'd get 2% back.  When it came time to finalize the paperwork they brought us into the back for what I call "The TruCoat Torture" (oh, you really need this TruCoat and the seat protection package is only $1000 more and we can add it onto the price of the car and the extended warranty is really worth it for this car and you honestly ought to have and oh my god face palm GO AWAY) and I calmly replied that none of this was in our budget, I already gave her the total we were willing to write a check for.  The salesperson looked at me in total surprise and said, "but don't you have another credit card?" 

[firelight]

I'd have loved to put everything on my card when we bought or car. But sadly they said there was a $3500 limit :(
I so wish I could've put everything on card. Think of the points and cash back!!! Oooh!!

[DeepEllumStache]

I'd have loved to put everything on my card when we bought or car. But sadly they said there was a $3500 limit :(
I so wish I could've put everything on card. Think of the points and cash back!!! Oooh!!

If the car dealership takes Mastercard, the retail agreement with the company prohibits them from limiting the amount you can put on the card.  Two years ago, I learned this the hard way when I tried to pay via card and was limited.  Did some research later and found a spot on the Mastercard website that allowed me to report the dealership for violating their agreement.  Not sure it did anything, but I was cranky about the missed points too.

I believe the other card companies have something similar in place.

[Self-employed-swami]

I'd have loved to put everything on my card when we bought or car. But sadly they said there was a $3500 limit :(
I so wish I could've put everything on card. Think of the points and cash back!!! Oooh!!

If the car dealership takes Mastercard, the retail agreement with the company prohibits them from limiting the amount you can put on the card.  Two years ago, I learned this the hard way when I tried to pay via card and was limited.  Did some research later and found a spot on the Mastercard website that allowed me to report the dealership for violating their agreement.  Not sure it did anything, but I was cranky about the missed points too.

I believe the other card companies have something similar in place.

I wonder if that is the case in Canada as well? I bought a 'new' work truck last year ($11,000 all in) and I wanted to get the airmiles for it, but the dealership would only run $1000 on my MasterCard for it. Hmmm. Maybe I should have raised a stink?

[johnny847]

I'd have loved to put everything on my card when we bought or car. But sadly they said there was a $3500 limit :(
I so wish I could've put everything on card. Think of the points and cash back!!! Oooh!!

If the car dealership takes Mastercard, the retail agreement with the company prohibits them from limiting the amount you can put on the card.  Two years ago, I learned this the hard way when I tried to pay via card and was limited.  Did some research later and found a spot on the Mastercard website that allowed me to report the dealership for violating their agreement.  Not sure it did anything, but I was cranky about the missed points too.

I believe the other card companies have something similar in place.

Did the dealership charge you a fee for paying with a credit card?

[firelight]

Nope! They let me pay on card as usual and I wrote a check for the remaining amount.

Damn, I should've read the fine print before going to the dealership. Now I'll have to wait about 15-20 years to do this again... I change cars every 15-20 years.

[johnny847]

Nope! They let me pay on card as usual and I wrote a check for the remaining amount.

Damn, I should've read the fine print before going to the dealership. Now I'll have to wait about 15-20 years to do this again... I change cars every 15-20 years.

Now that is amazing. I mean, that's just free money right there. The dealership is eating what 2-3% fee on that transaction?

[randymarsh]

A family friend told me recently:

"Have you looked at houses yet? You want to be building equity as soon as possible."

Uh...no?

• I'm 22
• I just finished undergrad in May
• I just moved to a new city 900 miles away 3 months ago
• I've been at my job for ~90 days
• I have no downpayment

Congratulations on the house shopping though 87tweetybirds!

[Murse]

This made me think of a question, is it truly better to invest say 25k on a down payment to avoid PMI when you could instead invest it in the market and accept PMI? 25kx.07=1750 earnings/year 1750/12= nearly 146/month, I have no clue but if PMI was less then 100$/month then it seems like it would be a good trade off?

[skunkfunk]

This made me think of a question, is it truly better to invest say 25k on a down payment to avoid PMI when you could instead invest it in the market and accept PMI? 25kx.07=1750 earnings/year 1750/12= nearly 146/month, I have no clue but if PMI was less then 100$/month then it seems like it would be a good trade off?

No, as your principle goes down the "effective" interest on that PMI skyrockets. You're still paying say $90/month for PMI even when you're only $500 in principle away from wiping it.

[slugline]

This made me think of a question, is it truly better to invest say 25k on a down payment to avoid PMI when you could instead invest it in the market and accept PMI?

Don't forget that you would not only be accepting PMI, but also the regular mortgage interest on the larger loan amount. Maybe someone who does mortgage numbers on a regular basis can comment on whether it still balances out.

[Kaspian]

The banks and realtors here in Canada routinely tell Millennials to "buy as much home as they can afford".  ...Which for anyone with two brain cells to rub together should send off mad alarm bells of conflict of interest,  but it doesn't seem to.  Furthermore, they like to toss around some crap term like "forever home" to purvey good feelings and convince the poor sucka he should buy a massive home because God knows, he/she'll surely have a giant family, need the space, and work in the same city their entire life.   What could ever go wrong?  (We need some serious regulation up here.  If an investment advisor talked the way real estate agents do, they'd be thrown in jail.)

[thd7t]

This made me think of a question, is it truly better to invest say 25k on a down payment to avoid PMI when you could instead invest it in the market and accept PMI? 25kx.07=1750 earnings/year 1750/12= nearly 146/month, I have no clue but if PMI was less then 100$/month then it seems like it would be a good trade off?

PMI is sort of like interest on the remainder of your loan beyond the 80% LTV.  You can't get rid of it for at least 24 months, and you have to get to 78% LTV to pay it, so it's as if you have a second loan on that portion of your house for a very high rate.  If you like, I can search for a thread where it was discussed in some detail with math, but over all, it's as if you're paying a similar interest rate to a credit card on a portion of your loan.

[Cheddar Stacker]

This made me think of a question, is it truly better to invest say 25k on a down payment to avoid PMI when you could instead invest it in the market and accept PMI? 25kx.07=1750 earnings/year 1750/12= nearly 146/month, I have no clue but if PMI was less then 100$/month then it seems like it would be a good trade off?

It comes down to return on investment. Can you expect an 8% investment return on average? Let's say you can for arguments' sake. Now you have to beat that with the savings from the $25K payment.

You will automatically save 4% or whatever the current interest rate is, so that's a start. Next you have to calculate the PMI's imputed interest rate, and let me tell you now, it's very high. Most of the "case studies" I've seen on this put the PMI rate between 7-15%, and that's on top of the regular mortgage interest rate.

So the answer to your question is yes, it is better to use capital to avoid PMI than to invest in stocks, unless you can guarantee 20% returns or higher.

[rocksinmyhead]

IMHO, the common flaw was that the helpful person was advocating that we take on more (house, car, appliance, whatever) than we needed.  Seems like people look at what the monthly payment is and whether or not it could be paid instead of looking at the total amount owed and how much something actually cost over its lifespan.
Salespeople know and use this line of reasoning all the time, and sadly people fall for it. Yep, it's only 60 more a month...but it will also take more in running costs too.

So true. I bought a car for the first time ever a couple years ago (previous car was bought for me by my parents when I graduated high school). I was all freaked out about getting ripped off because you hear so many horror stories, and I don't have a ton of car knowledge. But I knew generally what I wanted, I know how to use Google, and I know how to do math. For every car I seriously considered (which was like three), besides using the internet to make sure I was getting a good price, I added up what I'd pay in interest (I know, this was pre-MMM...) and counted that as part of the total price of the car. Car salesmen kept pointing me towards the monthly payment number and I just kept comparing the total cost of each car. It's weird, it was like... do people... not usually do that?

[johnny847]

IMHO, the common flaw was that the helpful person was advocating that we take on more (house, car, appliance, whatever) than we needed.  Seems like people look at what the monthly payment is and whether or not it could be paid instead of looking at the total amount owed and how much something actually cost over its lifespan.
Salespeople know and use this line of reasoning all the time, and sadly people fall for it. Yep, it's only 60 more a month...but it will also take more in running costs too.

So true. I bought a car for the first time ever a couple years ago (previous car was bought for me by my parents when I graduated high school). I was all freaked out about getting ripped off because you hear so many horror stories, and I don't have a ton of car knowledge. But I knew generally what I wanted, I know how to use Google, and I know how to do math. For every car I seriously considered (which was like three), besides using the internet to make sure I was getting a good price, I added up what I'd pay in interest (I know, this was pre-MMM...) and counted that as part of the total price of the car. Car salesmen kept pointing me towards the monthly payment number and I just kept comparing the total cost of each car. It's weird, it was like... do people... not usually do that?

I'd expect the average American does not. I'm sure if the average American truly understood how quickly credit card debt compounds when only making minimum payments, far less people would carry a balance. And the average savings rate for millenials would be better than 2%.

Some people want to avoid math at all costs. In that case, all they're concerned about is my current income is $X, my expenses are $Y, is the car payment less than $X - $Y?

[russianswinga]

I'm not sure if he was truly upset about it but my wife and I ended up buying a 3bd/2br/2car house with new paint, carpet, windows and electrical for $69k. Ha if I had been dumb to buy a $160k house, I wouldn't be happy about it...

Sorry, I had made a quick loud "snort" when I read that.
San Diego here, bought a 30yr old 2br/2ba/no car condo for $210K and super happy we got it this low. No standalone houses in our neighborhood south of $500K, regardless of condition.
But hey, no snow!

[pdxbator]

When I bought my house now 17 years ago I also got the "buy as much house as you can afford" spiel from the real estate agent. Of course they are getting a commission from that sale so it is natural they want you to have deep pockets. Luckily we found a great small-ish house that we thought would be our starter home, but have seen the neighborhood morph into a fantastic area, and over they years have changed the house to fit us better.

[kib]

I'd have loved to put everything on my card when we bought or car. But sadly they said there was a $3500 limit :(
I so wish I could've put everything on card. Think of the points and cash back!!! Oooh!!

I know!  That was our situation, $3,000 or so on the cc for a couple of weeks, the rest was cash.

[kib]

Yes, math bad.  I had a car salesman try to tell me that driving car x was so much more affordable than car y because he only had to fill up the tank once on car x when driving it from another dealership, while he had to fill car y twice.  I asked him what size the gas tanks were and he just gave me a blank look, like that had nothing to do with his point.  Math, bad.

[blueflipflop]

Also as a heads up, PMI is permanent  on some home loans of as the summer of 2013. I am not sure the specifics on which loan but this is what a mortgage lender I work always makes sure clients are aware of. 

[skunkfunk]

Also as a heads up, PMI is permanent  on some home loans of as the summer of 2013. I am not sure the specifics on which loan but this is what a mortgage lender I work always makes sure clients are aware of.

FHA loans. Only way to get rid of it is to pay off the loan, or refinance.

[jba302]

Made the mistake of telling my parents we are figuring on moving down to 1 car from 2. Heard a whole shitload of bad advice about freedom and treating myself when I earn good money.

[JetBlast]

When my wife and I went to prequalify this summer the mortgage broker said he could probably qualify us up to $400k. I had to bite my tongue because I was about to laugh in his face. That would buy at least 4BR 3BA in the nicest gated community in town. It's just me, my wife, and a corgi. Why would I even want to buy a house like that?

[thd7t]

When my wife and I went to prequalify this summer the mortgage broker said he could probably qualify us up to $400k. I had to bite my tongue because I was about to laugh in his face. That would buy at least 4BR 3BA in the nicest gated community in town. It's just me, my wife, and a corgi. Why would I even want to buy a house like that?

When we bought a little over five years ago (premustachian, but not dummies), we did a fair amount of math to determine what we could afford (around $200k max).  We went to get preapproved and the mortgage broker immediately told us that we could qualify for twice that.  We asked him not to.  He was confused, but wasn't terrible about it. 

[Self-employed-swami]

When my wife and I went to prequalify this summer the mortgage broker said he could probably qualify us up to $400k. I had to bite my tongue because I was about to laugh in his face. That would buy at least 4BR 3BA in the nicest gated community in town. It's just me, my wife, and a corgi. Why would I even want to buy a house like that?

When we bought a little over five years ago (premustachian, but not dummies), we did a fair amount of math to determine what we could afford (around $200k max).  We went to get preapproved and the mortgage broker immediately told us that we could qualify for twice that.  We asked him not to.  He was confused, but wasn't terrible about it.

We were also pre-approved for a $400,000 mortgage with our $200,000 downpayment, with only $43,000/year provable income. Completely insane! (we got a mortgage/heloc combo for $174,000, and still bought a really nice house).

[irishbear99]

When my wife and I went to prequalify this summer the mortgage broker said he could probably qualify us up to $400k. I had to bite my tongue because I was about to laugh in his face. That would buy at least 4BR 3BA in the nicest gated community in town. It's just me, my wife, and a corgi. Why would I even want to buy a house like that?

When we bought a little over five years ago (premustachian, but not dummies), we did a fair amount of math to determine what we could afford (around $200k max).  We went to get preapproved and the mortgage broker immediately told us that we could qualify for twice that.  We asked him not to.  He was confused, but wasn't terrible about it.

The same thing happened to us when we were preapproved. We asked for $400k and the bank kept saying, "You can go higher." But why in the world would we want to?

I remember reading somewhere (sorry, I don't recall where to reference) that banks do this because they know that people will, come hell or high water, pay their mortgage bill each month - even at the expense of other bills - because they prioritize it first. (I may have read this before the recession / housing bubble burst).

[Metta]

When my wife and I went to prequalify this summer the mortgage broker said he could probably qualify us up to $400k. I had to bite my tongue because I was about to laugh in his face. That would buy at least 4BR 3BA in the nicest gated community in town. It's just me, my wife, and a corgi. Why would I even want to buy a house like that?

Clearly because you need to give your corgi his own room. I seem to recall from another thread that dogs need their own dogcaves or some such. Are you depriving your corgi?

[skunkfunk]

When my wife and I went to prequalify this summer the mortgage broker said he could probably qualify us up to $400k. I had to bite my tongue because I was about to laugh in his face. That would buy at least 4BR 3BA in the nicest gated community in town. It's just me, my wife, and a corgi. Why would I even want to buy a house like that?

When we bought a little over five years ago (premustachian, but not dummies), we did a fair amount of math to determine what we could afford (around $200k max).  We went to get preapproved and the mortgage broker immediately told us that we could qualify for twice that.  We asked him not to.  He was confused, but wasn't terrible about it.

We were also pre-approved for a $400,000 mortgage with our $200,000 downpayment, with only $43,000/year provable income. Completely insane! (we got a mortgage/heloc combo for $174,000, and still bought a really nice house).

I asked for approval letter for a 15 year loan while I was a sole earner with the wife in school making $48K. They asked what amount I wanted, they would have done anything. Didn't even blink at $250k 15 years (I didn't use even close to that much, just had the letter for it.)

[cheapdad]

My wife and I saved up 32k to put down on our first house.  It wasn't quite 20% but it was close and a work transfer justified it for us.  My mom asked me about the house and I told her how much we had saved.  Her advice to me was to put as little down on the house as possible and make as small of payments as possible.  That way, when I foreclosed, I wouldn't lose much money and the bank would have to take the hit.  She learned that after she foreclosed on a house.  I nodded, smiled, and put my money into the house.

[eyePod]

This made me think of a question, is it truly better to invest say 25k on a down payment to avoid PMI when you could instead invest it in the market and accept PMI? 25kx.07=1750 earnings/year 1750/12= nearly 146/month, I have no clue but if PMI was less then 100$/month then it seems like it would be a good trade off?

We have PMI. It's $82 a month. It comes out to ~6k over a 6 year period. We're aggressively paying down the mortgage to get out of that. It was a lot of different things at once that caused us to only have the 10% down. Plus there are a lot of little costs that you need cash for up front when you've never owned a home. We also still have empty rooms and waited to finish all the carpet. We're comfortable paying a little bit extra in the short term, but we're actually paying down the mortgage quicker than the 30 years. Right now we've shaved off 3 years 9 months so far. On top of this, we plan on paying our current mortgage amount (including the PMI) after we're below the 80%/78% line. We're used to it and it will accelerate our payoff even more.

Edit: And ours isn't FHA so we can pay it off early.

[Brad_H]

Be careful not to go too low before getting a refinance; I tried the same thing where you pay down quick and Ocwen wouldn't drop the PMI until the 5 year mark and so I looked at 12 places for a refinance but since I owed less than $100,000 none of them would bother with us.

[dandarc]

Be careful not to go too low before getting a refinance; I tried the same thing where you pay down quick and Ocwen wouldn't drop the PMI until the 5 year mark and so I looked at 12 places for a refinance but since I owed less than $100,000 none of them would bother with us.

Try small local banks / credit unions - you might be surprised.  I've done 2 mortgages with my bank - one was 49,500 initially and the other 100K but they had us ready to go for a 50K loan - we just had a timing issue on the sale of our condo at the last minute and so didn't have the down-payment expected in hand when we needed to close.  Worked out OK - two weeks of overlap made the move easier for sure.

[Adventine]

My wife and I saved up 32k to put down on our first house.  It wasn't quite 20% but it was close and a work transfer justified it for us.  My mom asked me about the house and I told her how much we had saved.  Her advice to me was to put as little down on the house as possible and make as small of payments as possible.  That way, when I foreclosed, I wouldn't lose much money and the bank would have to take the hit.  She learned that after she foreclosed on a house.  I nodded, smiled, and put my money into the house.

Such words of wisdom. More people should listen to your mom. /sarcasm

[sarah8001]

Worst house shopping advice ever? When my coworker and my mom convinced me I could buy a 150k house with 5k in the bank, 2k net monthly income, and 13k in debt (on a time share, no less). Obviously, this was before I started reading finance blogs! Bought it on an FHA loan, so PMI for the entire 30 years. PMI = 167$ per month. That's 60k in PMI if we don't refinance! Hopefully if all goes well we'll be able to refinance it without PMI in the next couple years.

[eyePod]

Be careful not to go too low before getting a refinance; I tried the same thing where you pay down quick and Ocwen wouldn't drop the PMI until the 5 year mark and so I looked at 12 places for a refinance but since I owed less than $100,000 none of them would bother with us.

Yeah, it was a requirement for us to be able to pay off the PMI quickly and have no negative effects. Also, our state has made it illegal to charge an early repayment penalty.  We'll figure out about the re-financing at some point in the future.

[boarder42]

I just did the math and for me putting 10% down even though I could do 20 is a better idea.  The PMI over 7 years will be less than the 10% invested would be. Plus if you buy low you can refi if rates stay low after one year and ditch PMI.

[boarder42]

So say you have 325k mortgage. PMI is 1841 a year. If you invest 32.5k and get the market avg 10% return after 7 years the 32.5k is worth. 63k. The 1841 compounded over 7 years is worth 19k. So you come out over 10k ahead in this situation. And it doesn't take into account a refi after 1 year. If rates stay low. What am I missing here cheddar

[gooki]

Investing in stocks for such a short time is no guarantee you'll see market average returns.

You also have to add the PMI rate to the interest rate of the mortgage, to get the total cost of not putting that extra 10% down.

[ScienceSexSavings]

"Now you put that on a credit card and I'll pay you back a little at a time when I got some money."

Uh, no thanks, Dad.

[dmn]

My fiancee was once told by her mother (half-jokingly) that she should spend more to enjoy life while she's still young, because money will be tight later in life.

The logic was that being poor late in life is a law of nature, so you better spend the money quick before it all mysteriously vanishes.

[dandarc]

My fiancee was once told by her mother (half-jokingly) that she should spend more to enjoy life while she's still young, because money will be tight later in life.

The logic was that being poor late in life is a law of nature, so you better spend the money quick before it all mysteriously vanishes.

Sort of a more cynical version of my now monther-in-law's "why worry about retirement now - there will be plenty of time to save later".