The Wall Street Journal reports that Donald Trump is in the process of working out a deal with Countrywide that would enable McMahon to stay in his home. Trump would take over the first mortgage (at a deep discount I'm sure) and make a decent profit (after McMahon's departure from this world) while helping out McMahon.
How could this happen to someone like Ed McMahon?
Moody's Economy.com estimates that 1.65 million homes will be lost to foreclosure this year.
Foreclosure and money troubles can happen to anyone.
One of the main reasons is due to money mismanagement.
Most Americans make more than enough money to live a comfortable life, have an emergency liquid account and set aside enough money for retirement.
But, because of our lack of planning and financial knowledge we seem to misuse the money we make. 9 out of 10 people, if asked, will tell you that they think they will be making more money in the near future and when that happens they will start to worry about retirement. Then, they will get their finances in order.
Fact: Rarely does that ever happen. Whether you have money or you are drowning in debt, you should talk to a financial planner. He or she will be able to draw out a plan for you to get your financial situation in order a lot faster than you think.
Ed McMahon probably approached the loan process the same way most people do. Most people think that a mortgage loan is a way to finance real estate. Furthermore, they think a mortgage loan is a 'necessary evil' that must be terminated as soon as possible. After all, that's what we were taught growing up, right? So, we put every extra dollar towards the principal balance.
When times are tough, people need money. And, the money that was applied toward the mortgage is now trapped inside of our homes in the form of equity.
And, when you need it most, that's when it's the hardest to get it out. But, when we don't need it, we seem to be getting all kinds of offers for credit.
Is what we know about mortgages wrong and if Yes, how do we fix it?
In a way, yes. It doesn't always make sense to pay off your mortgage. Each situation is unique, as are people, and their financial objectives. So, to say that everyone should try to pay off their home is wrong and can lead some people to financial distress.
For example, due to the current economic downturn, or recession if that's what you want to call it, many people have lost their jobs. Most of those people have a hard time finding a job with equal pay in a short period of time. This creates a strain on the family cash-flow and more money is needed.
But, since there is money locked up in equity. However, banks and lenders are not willing to give you a loan if you have no job. To them, you fail to demonstrate the ability to repay the loan.
Why is this scenario relevant?
Over the last 2 years I've come across many people, rich and not so rich, who have found themselves in this situation. They thought they were doing well financially. They have a 401K and they were pouring money into their mortgage.
Someone with a no liquid assets and $200,000 in home equity has a net worth of $200,000.
That equity is trapped and no loan is available. If mortgage payments are not made, the mortgage lender will foreclose on your property and you will lose your hard earned money and equity.
Here are some celebrities in foreclosure trouble:
- Ed McMahon - entertainer
- Jose Conseco - former MLB player
- Aretha Franklin - singer
- Evander Holyfield - former boxing champion
- Latrell Sprewell - former NBA player
- Michael Jackson - singer
- Pacman Jones - Dallas Cowboys
- Ernestine Anderson - 4 time Grammy Nominee
- Marion Jones - Olympic Gold Medalist*******
One would think that celebrities that make as much money as the ones mentioned above would have a team of great financial advisors surrounding them. Maybe they do, maybe they don't.
But when you spend more money than what you make you're clearly headed for trouble.
Here's how to protect yourself:
1) Assess your financial situation. Sit down and track where your money is going.
2) Calculate your housing expenses. Add up your mortgage payments, monthly tax, insurance, and association dues. Divide this number by your gross monthly income. If this number is greater than .29 then you may want to consult a mortgage planner.
Example: Mortgage payment $1,500
Annual Taxes $3,600 (divide by 12 to get monthly amount)
Homeowner's Insurance $1,200 (divide by 12 to get monthly amount)
Association Dues $200 per month
Total monthly housing expenses $2,100
If the gross monthly income is $6,000 then $2,100 / $6,000 = .35 or 35% of your gross monthly income is going to cover your housing expenses. You should definitevely consult an experienced mortgage or financial planner to see if your financial situation needs immediate attention.
3) Increase your savings rate. You should save 15% of your annual income each year. If you are not, you should consult a financial or mortgage planner.
4) Add up all your bills and set aside 6 months worth of payments. In case of emergency, you won't have to resort to credit cards or other financially ill-advised methods of keeping up.
If you want a help with this feel free to contact me at Leo.M@Consultant.com
