While driving home, I heard a typical hyped up debt free commercial. The ad said mortgages should be illegal.

If mortgages were illegal, what would housing sales be without loans?

Now considering most people need a place to live, there are a few choices. First, live with relatives, who bought a home. However, did they have to get a loan to buy the house? Second, rent. Renting is not always a bad idea, just as homeownership is not always a good idea. Both scenarios have pros and cons. Third, buy a house. Based upon Census information, about 48.7 million people have regular and/or home equity mortgages.

With a population of 307 million, approximate 1 out of 6 have a mortgage. Estimates show 24.3% are under the age of 18, so homeownership in this age group can be kicked out leaving 232.4 available to own a house.

Households in 2000 were105,480,101 and persons per household were 2.59 in 2000 as well. If you take 307 million people and divide by 3 people per household today, that leaves about 102+ million households which is a close estimate to Census’ past data.

With almost 50 million people having some type of mortgage out of 100 million households, it’s easy to see homeownership would be difficult without a loan. Therefore, if mortgages were illegal, housing sales would be much lower; and a 27% decline would be the good news.

Just as homeownership or renting has pros and cons, so do mortgages. Mortgages have pitfalls as we all know, but provide benefits. The benefits are not just the ability to purchase property, but can increase wealth as well. Therefore, and having said all of this, don’t buy the hype blasted all over the airwaves.

If you want to turn the tides against the economic superpowers and mega-machines, read Barking With The Big Dogs; if not follow the crowd.

About a week and a half ago, Friday the 25th I believe or Saturday, I was listening to Barney Frank give some quick responses to a Q&A session on the steps in Washington regarding recent financial legislation.

A couple comments Mr. Frank made referenced banks which would require them to hold more loans versus selling them on the secondary market. Another topic referred to YSP and mortgage brokers.

I’ll leave the second topic to be discussed in the chapter “The Banker’s Secret” in my book, “Barking With The Big Dogs”, but for now, let’s see if the new legislation is really good for you and me and America as a whole.

When I heard his comments, I immediately thought the comments are good talking points, but more to the story exists which probably won’t be heard on CNN or Fox.

So, here is my take on just parts of the recent financial overhaul.

The new recent proposed legislation requires banks to hold more cash on hand, and is not a bad idea. However, new changes may require banks to hold more mortgages too thus affecting the transfer of loans to the secondary market. (The secondary market is where mortgages are in investments such as mutual funds for example which the Average Joe may own.)

The secondary market helps the big banks and small banks and individuals too regarding the flow of money and money earned. However, small and regional banks may not have the ability to sell as many loans or do as much business, thus potentially hurting the local banking community.

If banking laws require lenders to hold loans and keep larger deposits, the changes could be a huge benefit to the largest banks since smaller institutions may not have the balance sheet requirements to compete. Holding loans also reduces liquidity, the free flow of markets and the ability to loan money to more people can diminish.

Okay, Radio Gaga has nothing to do with Lady Gaga. Actually, Radio GaGa Radio Goo Goo are lyrics from an old Queen song. However, the title of this article has to do with the gaga and goo goo of advertising.

While driving, I was listening to a commercial about mortgages. The ad started out saying something like this. “Mortgages should be illegal.”

Then the ad went on to mention that on an average of loan of $200,000 over thirty years, the borrower would send in over $400,000 to the bank including interest. That’s almost half a million dollars!

Obviously sensationalizing half a million dollars going to the bank makes a borrower want to pursue the product the commercial is pitching – a get out of debt and build wealth scheme.

Without debating whether or not wealth can be built using debt is another topic for discussion, the focus here is to cut through the hype of the commercial.

To begin, on a $200,000 mortgage for thirty years at 6% interest, the payment is $1,199 – call it $1,200 for simplicity purposes. Over thirty years, or 360 payments at $1,200 per month, the total outlay by the borrower is $432,000. And yes, this money goes to the bank. However…

$200,000 of the $432,000 goes to principal reduction; or to put the example in another context, the borrower is reimbursing the bank for paying for the property in the first place as opposed to the individual paying the seller.

If cash had been paid for the house, the amount $200,000 is paid by the homeowner anyway. Therefore, $200,000 is a wash for buying the house. This money is spent regardless of getting a loan or paying cash. Therefore, the remainder $232,000 is interest.

Now is paying $232,000 a lot of interest? Sure it is.

Is it wise to pay such an enormous amount of interest to the bank? Maybe.

What will determine if paying interest is wise depends on a couple of questions.

First, is saving money important or making money important?

If saving money is important, paying off a mortgage quickly reduces the amount of interest owed.

Second, if making money is important, then consider “what are you doing with your money?”

If you are making money and creating more income and wealth, sending money in those asset and income directions may be more important than saving the interest. After all, businesses borrow money to make money and without OPM (other people’s money), generating income may not be possible.

If the gains are greater than the amount of money paid, paying large amounts of interest is a wise choice.

Just as paying interest is a choice, individuals have the choice whether or not to believe the hype pitched in advertising, but a little financial education require one to think just a little…and that leads us to my next topic…

Save more, think less.

I was reading an article from a person who gives personal financial advice.

One person asked the so-called expert what is a good hedge against inflation? (The reason I say so-called is because the commentator gives generic advices that is easy to sell and easy for people to understand without have to gain further details and insight.) The “advisor” said real estate – paid with cash. But then again, you have to understand the expert is a person who has been, if not still is, a realtor.

I wouldn’t necessarily agree that a house is a good hedge against inflation. As I’ve stated before in “How to hedge against inflation“, I think increasing your income is the way to hedge against inflation.

Then another person asked about real estate. The same “advisor” said this is a good time to borrow.

So which is it, pay cash or borrow? I would expect this “flip flop” action coming from Washington.

Now in defense of the “advisor”, not everyone can pay cash and maybe the last comment from the person in the audience cannot afford to pay cash. And yes, I would agree, it is a very good time to borrow, and probably a good time to buy a house as well.

But if you could pay cash, would you? Really?

Factors that should be considered include, real estate, mortgages, investments, inflation, time value of money, etc. All of the aforementioned topics are not complicated, but may require a little more time than the popcorn in the microwave to learn.

Therefore, don’t get suckered in to the hype about real estate from a realtor, or the easy advice of paying cash by a debt free pundit. The information may be given because it’s an easy sell, and not real education.

Check out Chapter 3 – It’s All Hype.