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Financial Myth (i stole this from another financial forum). please, don't sue me.
Old 08-14-2007, 11:26 PM   #1
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Financial Myth (i stole this from another financial forum). please, don't sue me.

#5 MYTH: "If I move all my credit card debt to a HELOC or consolidate it into my refi, I'll save a ton of money and the payments will be lower".

This makes sense ONLY if you stop charging and living beyond your means. If you "zero out" the credit card debt by taking out a HELOC or Refi, and then charge them up again, you will be in a much WORSE financial position. If you cannot be financially responsible, do not add any debt to your house and develop a budgeting plan to pay down your CCS, starting with the highest interest rate card on down...


#6 MYTH: "I bought a house/car/boat/etc but I cant make the payments. I'll just send the lender the keys and let them take it"

That will cost you more than any other option. The lender will take the item, charge you a ton of fees, sell the item at auction, then come after YOU for the difference! It is likely much better to sell the item on your own, even at a small loss, to avoid the bad credit marks, repo fees, and possible lawsuit.

#7 MYTH: "I bought my car in 2002 with 0 down and now I want a new one. The dealer says they will take my old car, payoff the loan for me, and get me into this new car - Sounds great!".

Nope. This will cost you a ton of money and likely lead to a default. Chances are you owe a lot more on your current car than the dealer will give for it. If you owe $20,000 on the old car and the dealer will only give $15000 for it, they will tack that $5000 onto the new car. So you now startoff owing a ton more on the new car...when it comes time to trade that one in, you'll likely be $10,000 "upside down" on the loan compared to the car's value, and this vicious cycle repeats a few times, until you default.

#8 MYTH: "I just got a collections letter, but its only for $100 and I dont think theyll sue me for that so Ill just ignore it. Plus, they dont have my SSN".

Bad idea. If you dont dispute it or pay it, it can hurt your credit and end up costing you a LOT more than the collections amount. Even if they dont sue you, they can still put it on your credit report. EVEN if they dont have your SSN. See the debt collection FAQ and related websites.

#9MYTH (courtesy of Waterman myths #9&10) - "I will save big, big money on my taxes when I buy a house. The interest payments are deductible!"

With the increase in the standard deduction for filing married, there is very little tax advantage for a median income family buing a median price home.

#10 MYTH - when buying a car, "I buy cars based on payments" .

Look at the total cost of ownership for that new car.

#11 MYTH (courtesy LittleHulk) "The best way to keep your job is to work hard."

When something is not yours to begin with, how can you hope to keep possession of it?

#12 (myths #12-19 courtesy UnknownShopper)
MYTH "I can lie on my insurance application in order to get a lower rate."

With insurance policies this can result in your claims not being paid.

#13 MYTH: "I put my property in somebody else's name for tax or child support reasons"

Beware of IRS and other implications.

#14 MYTH "I can save money by not getting an attorney involved in a legal document or financial transaction".

This will not save you money if the deal goes bad, and the cost of professional help after the deal has gone south is much more costly.

#15 MYTH "I dont need a Real Estate attorney since I have a "buyers' agent."

Buyers agents do not always know the laws. Think about who they really represent in a real estate transaction considering they only get paid if the deal closes.


#16 MYTH: "I think size matters when buying real estate"

50 inaccessible acres in the Rockies or in a Minnesota swamp or under Florida tides is usually not a better deal/investment than 1/5 acre in a good suburban neighborhood with good schools.


#17 MYTH "I dont need to draw up a contract for a financial transaction so long as the other party to the contract is my relative/best friend/co-worker, etc."

This is the beginning of a lost friendship or family disputes. Get it in writing.


#18 MYTH 'I rented an apartment with 2 friends who are moving out, and we are all on the lease. So I'm only obligated to pay the landlord 1/3 of the rent".

You are typically liable for 100% of the lease. Even if all three names were on the lease, chances are you are JOINTLY AND SEVERALLY liable, meaning EACH of you is obligated for the full amount. Read and undestand what you sign.

#19 MYTH" I'm business owner running low on money this month, so I will borrow from employee payroll/benefits to fund other "more urgent" cash flow needs."

Not true even on a short-term basis. Unilaterally diverting employee funds for any purpose is illegal in most states.

#20 (courtesy MyTwoSense)
MYTH "I think Quality and Price are explicitly related."

the price factor alone does NOT mean you are getting a better product.

#21 (courtesy rooster1865)
Myth: "I don't want that raise/extra job because it will move me into a higher tax bracket and I'll actually come out behind"

Nope, this isn't the way tax brackets work. If you move into a higher tax bracket, only the portion of your income that is above the threshold is taxed at that rate .

#22 (courtesy bssc)
myth: If a great deal came to me though an email or is advertised on late night TV, I will get rich.

Think again.

#23 (courtesy LoserBob)
Myth: The laws are there to protect the consumer

Often, the laws protect big business (who lobbies politicians for items favorable to them) . Even if the laws are designed to protect the consumer, big business knows how to make it difficult for the average person to be treated fairly, and they also have the resources to make it nearly impossible for an individual to force a business's compliance with consumer protections.

#24 (courtesy WalStMonkey)
Myth: "It makes more fiscal sense to be 100% debt free than to carry some debt. "

Like dietary fat, there are several kinds of debt. Too much of the bad fats will kill you dead. However you will not be as healthy taking 0 fat as taking moderated portions of 'good' fat. Good debt well applied will enhance one's bottom line.

#25 (courtesy DWJoe)
MYTH: "A multi-level marketing scheme can be a legitimate business."
FACT: Legitimate businesses don't recruit distributors with the prospect of selling to other distributors. Instead, they talk about the prospect of selling to retail customers.

#26 (courtesy Crazytree)
MYTH: "We're from the government and we're here to help."

FACT: RUUUUUUUUUUUN!!!!!! When the govt comes a-knockin, chances are its not because they want to present you the "citizen of the year" award. Consult a professional and know your rights.

#27 (courtesy desi101)
Myth -"FW can save you ton of money!"

Due to FW you end up spending more money! Be CAREFUL when reading the Hot Deals forum! FW helps you to find the best value for your money. It's you who have to decide whether to spend more money or not.

#28 (and 29 courtesy FPduck).
MYTH: "It's ok to have a lot deducted from my paycheck, I love to get a big refund check from the IRS!"

FACT: You probably just gave the government a few thousand dollar interest free loan for a year.

#29. MYTH: "I'll never get audited! (and the sequelae of this logic) there's nothing i can do to prevent from getting audited!"

FACT: The book by Amir Aczel (How to beat the IRS at its own game) has great tips on how to make yourself statistically less likely to get audited, such as:
- avoid round numbers
- make sure there are no obvious math errors
- file late (use both extenstions if possible)
- be careful with large deductions (make sure you are not a statistical oddity when it comes to the percentage you are deducting)
- make sure all of your federal and state data agree

#30 MYTH: "Making present financial decisions based on past financial data."

Example #1: "$30 per share is a good price and this is the time to sell. Too bad I bought mine at $35. If only I had bought it at less than $25, I would be selling right away."

Example #2: "The offer of $5,000 for my car is an excellent offer. Too bad I owe more than that on the car to the bank, otherwise..."

#31 MYTH: "By buying a house further away from the city where I work, I can afford a bigger house and my family and I will be happier".
FACT: Studies have shown that one can rather quickly adjust upward or downward in size of home. But one never adjusts to commuting, and in fact people grow increasingly frustrated as they realize long commutes rob them of time with family or other leisure persuits. Buying a smaller house closer in to the city will result in more overall satisfaction for you and your family and lower car usage.

#32 MYTH: "What a great invention...credit card bonuses and points".
FACT: ONLY if you can pay the balance off right away without incurring any interest. Otherwise that interest may negate your bonus cash!
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Old 08-15-2007, 12:06 AM   #2
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More bad news: If a debt is forgiven (e.g. as a result of a bank repossessing your home), the amount forgiven is income for tax purposes, even if you don't have any money.

Lying on insurance forms is often illegal (a felony in FL, at least for certain health questions.) Call it fraud or perjury, it can get you in hot water.

Also, did you know that in general, if you make false claims and even if you get insurance, if you need that insurance later, it can usually be voided if the insurer can prove you misrepresented anything important. I once so told a smoker friend who thought he was so clever in getting non-smoker insurance rates.
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Old 08-15-2007, 09:45 AM   #3
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What happened to Myths 1 -4.

"The myth of the Unknown Myths"
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Old 08-15-2007, 09:53 AM   #4
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Originally Posted by Enuff2Eat View Post


#6 MYTH: "I bought a house/car/boat/etc but I cant make the payments. I'll just send the lender the keys and let them take it"

That will cost you more than any other option. The lender will take the item, charge you a ton of fees, sell the item at auction, then come after YOU for the difference! It is likely much better to sell the item on your own, even at a small loss, to avoid the bad credit marks, repo fees, and possible lawsuit.

#9MYTH (courtesy of Waterman myths #9&10) - "I will save big, big money on my taxes when I buy a house. The interest payments are deductible!"

With the increase in the standard deduction for filing married, there is very little tax advantage for a median income family buing a median price home.
OK, I'll bite on a couple of these -

#6 - in virtually all cases, purchase mortgages for residential real estate are non-recourse, but secondary financing isn't. So, partially correct. And, as another point mentioned, debt forgiveness through foreclosure is a taxable "benefit" to you, even for non-recourse mortgages.

#9 - as with #10, you need to look at total cost of ownership, actually its a better deal (even with all the tax and likely appreciation taken into account) to rent rather than buy in many parts of the country, especially the northeast and California, unless you are going to stay in the home for many years (7-10). This factor may be amplified if (as another point mentioned) you can avoid a horrendous commute by renting instead of buying in some far flung exurb. You need to do a discounted cash flow analysis of both cases to see what makes more sense in your situation.
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Old 08-15-2007, 09:56 AM   #5
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Financial Myths and Urban Legends Thread - Post Yours Here!

linked for the lazy....
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Old 08-16-2007, 08:54 AM   #6
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What happened to Myths 1 -4.

"The myth of the Unknown Myths"
My guess is that Myth 1-4 probably said something about getting all of your financial advice from internet forums is a good idea
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Old 08-16-2007, 09:04 AM   #7
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Quote:

#11 MYTH (courtesy LittleHulk) "The best way to keep your job is to work hard."

When something is not yours to begin with, how can you hope to keep possession of it?

Wow, I've got to remember this one for my w*rking friends.
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Old 08-16-2007, 09:14 AM   #8
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Myth #31: Wow, it's so true. i feel sorry for people sitting on the traffic 1 to 2 hours a day because they "love" where they live.

enuff
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Old 08-16-2007, 10:27 AM   #9
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Quote:
Originally Posted by FinanceGeek View Post
OK, I'll bite on a couple of these -

#6 - in virtually all cases, purchase mortgages for residential real estate are non-recourse, but secondary financing isn't. So, partially correct. And, as another point mentioned, debt forgiveness through foreclosure is a taxable "benefit" to you, even for non-recourse mortgages.
In virtually all cases, purchase mortgages for residential real estate are in fact recourse. Land contracts and contracts for deed often are non-recourse. In any event, most often lenders do not pursue a deficiency and often quicker, simpler methods of foreclosure are available to lenders who are willing to forgo a deficiency judgment.

If you are insolvent, there may not be an adverse tax consequence to you as a result of any debt forgiveness.
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Old 08-16-2007, 01:06 PM   #10
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In virtually all cases, purchase mortgages for residential real estate are in fact recourse. Land contracts and contracts for deed often are non-recourse. In any event, most often lenders do not pursue a deficiency and often quicker, simpler methods of foreclosure are available to lenders who are willing to forgo a deficiency judgment.

If you are insolvent, there may not be an adverse tax consequence to you as a result of any debt forgiveness.
Martha - OK I'm confused because I checked this out (for California) in depth a few years ago and came to the conclusion virtually all mortgages were non-recourse by some provision in state law.

I know your an atty so I'm sure you're right. Is recourse vs non-recourse a function of state law, or is it a function of criteria heaped on by lenders to make the loan conforming for resale to FNMA/GNMA etc.?
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Old 08-16-2007, 04:02 PM   #11
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Martha - OK I'm confused because I checked this out (for California) in depth a few years ago and came to the conclusion virtually all mortgages were non-recourse by some provision in state law.

I know your an atty so I'm sure you're right. Is recourse vs non-recourse a function of state law, or is it a function of criteria heaped on by lenders to make the loan conforming for resale to FNMA/GNMA etc.?
I would be VERY surprised if Cali had a law making real estate non-recourse on default.... lending would dry up faster than the sub-prime problem...
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Old 08-16-2007, 08:28 PM   #12
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You could always post the question on fat wallet...the original poster of that thread is a lawyer in CA and has substantially real estate investments...
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Old 08-17-2007, 01:09 PM   #13
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Martha - OK I'm confused because I checked this out (for California) in depth a few years ago and came to the conclusion virtually all mortgages were non-recourse by some provision in state law.

I know your an atty so I'm sure you're right. Is recourse vs non-recourse a function of state law, or is it a function of criteria heaped on by lenders to make the loan conforming for resale to FNMA/GNMA etc.?


EDIT: I did a quick google search and it looks like California may in fact have an anti-deficiency statute for purchase money mortgages secured by the place where you will live.

Here is the applicable California statute: CA Codes (ccp:577-582.5)
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Old 08-17-2007, 01:31 PM   #14
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I know which forum you stole this from since Myth 22 is mine that I posted over there.
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Old 08-18-2007, 12:00 PM   #15
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EDIT: I did a quick google search and it looks like California may in fact have an anti-deficiency statute for purchase money mortgages secured by the place where you will live.

Here is the applicable California statute: CA Codes (ccp:577-582.5)
Martha - thanks for the reference. I suspect there are more states beyond CA with similar provisions, and as you said before, in practice many lenders will exercise non-judicial foreclosure options so in effect I believe that many/most purchase mortgages are non-recourse.

With respect to the comment from Texas Proud, I suspect that if all mortgages had full recourse, its buyers that would dry up, not lenders (after all, lenders simply re-sell the loans on the secondary market and its the purchasers of these notes that bear the default risk).

I have never owned real estate on either coast's expensive markets, but I certainly wouldn't be in any rush to pay $500k to $800k for a 50 year old starter home in fixer upper condition if I knew that my home falling to a more rational valuation could result in the bank taking not just the house, but everything else I owned. Especially not in overheated markets like CA where renting often represents 1/3 the cash outlay of owning.
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Old 08-18-2007, 05:24 PM   #16
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Martha - thanks for the reference. I suspect there are more states beyond CA with similar provisions, and as you said before, in practice many lenders will exercise non-judicial foreclosure options so in effect I believe that many/most purchase mortgages are non-recourse.
It looks like Arizona has an antideficiency statute (for home mortgages) too and there likely are some other states. The state laws of which I am familiar allow a deficiency when there is a judicial foreclosure. VA mortgages also require the option of a deficiency under federal law. When poking around, I see that there has been some push by lenders in California to repeal the anti-deficiency statute but as of yet, they have had no luck.

Back in the early 80s when a number of home loans were underwater in the midwest, lenders who previously sought no deficiency started to get and try to collect deficiency judgments. What ended up occurring was a lot of bankruptcies.

Back when I was a bankruptcy trustee, I also saw a number of people who ended up with deficiency judgments resulting after home foreclosures out east. They ended up filing bankruptcy too.

I don't know what the current market will bring and what lenders will decide to do. At least in California borrowers have no worries. (Though there are some exceptions, like fraud and "waste" of the property.) It is interesting that the anti-deficiency statute does not seem to effect the sale of the mortgages on the market.
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Old 08-18-2007, 05:53 PM   #17
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Thanks again, once I ascertained the proper legal term to search for (e.g. "anti-deficiency statute"), it was relatively easy to come up with a list of states that have them.

From First American - Foreclosures, Title Transfers and Modification Strutures, Part 1 that list is Alaska, Arizona, California, Connecticut, Florida, Idaho, Minnesota, North Carolina, North Dakota, Texas, Utah, and Washington.

It appears that these laws were passed after property values tanked during the Great Depression, many people not only lost their homes but were forced into bankruptcy when the lender couldn't sell the property for enough to clear the debt.

I am surprised along with you that the requirements of a "conforming" loan for re-sale are apparently silent on this matter. One wonders out loud if mortgages from states which permit deficiency judgments would trade at higher prices than those that don't, on the theory that they bear marginally lower credit risk. On the other hand, MOST people who lose their homes via foreclosure probably don't have substantial assets elsewhere that could be seized, so it may not be that significant a factor in valuation.
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Old 08-18-2007, 06:12 PM   #18
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Some of these states only bar a deficiency for non-judicial foreclosures, Minnesota for one. If I recall correctly, Texas allows a deficiency if you prove up the value of the property in court.
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Old 08-19-2007, 07:38 AM   #19
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I don't know what the current market will bring and what lenders will decide to do. At least in California borrowers have no worries. (Though there are some exceptions, like fraud and "waste" of the property.) It is interesting that the anti-deficiency statute does not seem to effect the sale of the mortgages on the market.
I was talking to a person very familiar with bank mortgage policies and she said banks were considering going into the land lording business. It kind of makes sense, if you think about it. If they can't receive enough to recover their costs from a foreclosure resale then they hold the property and rent it out until the prices come back up. The bank this person works at, I guess is in contact with someone who is going to manage the properties for them. When you consider the loans they are considering doing this with are only the sub-prime ones they hold in portfolio, it makes even more sense.
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Old 08-19-2007, 08:12 AM   #20
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Enuff2eat -

I plan on suing you for all of the pain/suffering from the "Three Words Thread".
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