THINGS I'VE LEARNED

About Borrowing Money. There are a lot of misconceptions where borrowing money is concerned. Common sense wisdom may not apply in all cases. Here are some of the things I've learned in almost 50 years of borrowing money and 25 years of helping others acquire financing.

1. There Is No Such Thing As A Bad Loan. I can imagine the majority of my readers will disagree with this statement but it is never the loan that is bad, its the way its used. Bet you still disagree. Think about it. How can a 36% interest rate ever be a good loan? The answer is when you have to have the money and there is no other loan available. I recall getting such a loan many years ago to buy two new tires. One of the old tires was totally ruined and the other not far behind. I drove 20 miles to work each day and had to have those tires. No one else wanted to loan me the money so I got it from a consumer finance company at 36%. Best deal I ever made. If you are considering that same loan to buy a new couch, you are probably better off getting a used one from goodwill and waiting until you can save enough money to pay cash for a new one.

2. Borrowing Will Not Provide More Discretionary Income. If you have five thousand in discretionary income per year, borrowing another five thousand will give you additional income for the year you borrow the funds but it will cut your income for subsequent years when you are paying it back. If you have to pay interest on the money, the reduction in discretionary funds will be permanent by the amount of interest paid.

3. The Interest Rate Isn't Always Of Paramount Importance. Too often people shop hard to find the lowest interest rate when other loan terms may be more important. For example, if you are borrowing to buy a $100,000 property that offers a 20% return, you are better off passing up a $50,000 loan at 4% interest in favor of a $75,000 loan at 8% interest if you can buy two of these properties with your $50,000 in equity. This assumes that the rest of the terms are similar. It also assumes that you have adequate tools to manage the risk of the higher leverage.

4, All Borrowing Adds Risk to Your Life. In case you didn't quite understand the meaning of that last statement, I would emphasize that even though buying two investments with a 15% return with 8% money will give you a higher return than buying one 15% return with 4% money, the risk is higher with the larger loan. This is because you have to make those loan payments whether or not the investment performs as anticipated. If one of those properties becomes worthless (possible but not probable), you will owe $150,000 and only own one property worth $100,000. If the result is foreclosure, your dream of success using OPM (other people's money) turns into a nightmare.

5. There is No Free Lunch. Some people advertise zero closing cost loans. Other's advertise rock bottom interest rates. In the absence of outright fraud, there is no way they can offer both in the same loan. When you do business with a mortgage company they have to make a profit. In order to do so, they can charge you fees or a higher interest rate that can be sold for a premium in the market place. In most cases, they get their profits with a combination of the two. In my opinion, the most ethical companies explain the trade offs and allow the borrower to choose the financing that fits his or her needs the best.

6. Be Careful What You Ask For. I recently counseled a real estate investor who was about to lose a property to foreclosure. She told her loan officer that she wanted the lowest payment available. The loan officer got her a loan with an interest rate of 1.5%.........for the first month. At the end of this time the rate escalated but her payment stayed the same. How did that occur? They simply added the unpaid interest to the loan amount. Over the time that she owned the property, her entire equity was consumed. While this loan may be a good one for some circumstances, it was not a good one for her, mainly because she didn't understand how to use it. In this case, I doubt the loan officer did either or he would have explained it more thoroughly.

It Is Not Only Dishonest Men Who Are The Most Dangerous. It can be the honest man who doesn't know what he is doing. Unfortunately, there are a lot of those in the mortgage business. If you need advice on a mortgage loan call Susan at Westmont (720-449-0200). She can arrange a telephone or personal appointment with me. Again, I want to remind everyone that I will be available for appointments in Colorado from May 16-31.