In this episode of Motley Fool Answers, hosts Robert Brokamp and Alison Southwick bring you something inspirational, something informational, and something... infuriational? They'll start us off with a "What's Up, Allison?" segment on robocalls -- and if you think you're getting more of them lately, you're right. The quantity is up, and it seems like government has been unable to stem the tide. However, there are a few private sector initiatives that you might want to take part in.
Next, they bring us another installment in their new "The Philanthropist Next Door" series, with profiles of four philanthropists who lived full (though frugal) lives, but via the power of long-term investing, quietly amassed fortunes that they mostly gave to charity after their deaths. And finally comes the part of the show with a set of answers you're most likely to need at some point: Your hosts have invited back Austin Smith of The Motley Fool's new personal finance-focused website, The Ascent, to talk mortgages. He'll dig into the three key aspects to landing a good one, three benchmark numbers to help you figure how much of a home loan you can actually afford, and more.
A full transcript follows the video.
This video was recorded on Aug. 7, 2018.
Alison Southwick: This is Motley Fool Answers! I'm Alison Southwick and I'm joined, as always, by Robert Brokamp, personal finance expert here at The Motley Fool.
Robert Brokamp: Hey, Alison!
Southwick: In today's episode we're joined once again by The Ascent's Austin Smith. He's got advice about how to get a great mortgage. Also I'm going to get snappy about something that's been bugging me and Bro is going to introduce us to another philanthropist next door. All that and more on this week's episode of Motley Fool Answers.
Brokamp: So Alison, what's up?
Southwick: Oh, I'll tell you what's up, Broseph. Every day I get at least two robocalls and I am sick of it!
Brokamp: On your cellphone?
Brokamp: Yes, it drives me nuts.
Southwick: It drives everybody nuts. Rick?
Rick Engdahl: I don't answer the phone if it doesn't say who's calling anymore. I just don't even answer.
Southwick: Right. So it turns out we're not alone in our suffering. Robocalls have jumped dramatically nationwide this year form 2.9 billion in January to 4.1 billion in the month of June.
Brokamp: Billion? Billion.
Brokamp: Holy cow!
Southwick: In the first five months of this year, alone, that totals 16.3 billion robocalls. And three of the top 10 area codes for robocalls are in Atlanta, so we don't even have it as bad as people in Atlanta. And it's also July, there, so they're really suffering, because it's so hot.
Brokamp: Because it's so hot!
Southwick: It's hot and their phone won't stop ringing. Robocalls are the No. 1 consumer complaint to the FTC [19,000 a day, in fact]. The Washington Post describes the FTC's attempt to stem the problem as "a commercial fisherman trying to use his bare hands." Much of the problem has to do with the lack of FTC resources but also how robocallers have gotten so sneaky.
So, they can spoof your local area code. All of the calls I get spoof the first six numbers of my phone number, and then the last four are different digits. And then thanks to voice over IP --VoIP -- do you say voice or do you have to spell it out?
Brokamp: Sure. You can do whatever you want.
Southwick: Basically the idea that you can make phone calls over your computer makes tracking these people down nearly impossible. They could literally be calling from anywhere in the world and it doesn't help that those who are breaking the law know that they're breaking the law and they don't care.
While most of us would call them pesky and annoying, for some people they are being outright scammed. Take, for example, a new call that people are getting which is in Chinese. Have you gotten this one? My husband has gotten this one.
Southwick: You answer the phone and a message says [again, in Chinese] that they are from the consulate and there's a problem, or maybe a package needs to be picked up, and the person needs to submit their credit card number or bank information.
Brokamp: If it's in Chinese, how do they know what's being said?
Southwick: Well because someone not in the Southwick household speaks Chinese and wrote an article. I mean, someone is able to speak Chinese in the United States and figured it out. Not us. I didn't know what it was until I read this article.
Brokamp: Got you.
Southwick: In New York City, alone, 30 residents have been scammed out of $3 million.
Brokamp: Oh, geez, Louise.
Southwick: So let's give you a sense of the volume that these robocallers are willing to make. There are more than what? 300 million people in the United States? 330 million? And in America there are 2.9 million people who speak Chinese. These robocallers are willing to make thousands of robocalls just to hit upon one person who speaks Chinese in America.
To sum up the problem, robocallers are happy to break the law. They have the technology that enables them to elude authorities and also make a ton of calls. Is there hope, you wonder?
Brokamp: I am wondering that. Is there?
Southwick: Well, I don't have much good news for you. Not really. The Washington Post reports that on the horizon perhaps there is this moonshot called Caller ID Authentication, which would function like that blue Twitter check mark to verify your identity. It's being developed by some telecom providers and so it's being tested by AT&T and Comcast. It may or may not come out in 2018.
So, in the meantime what can we all do? Well, here's what the experts say you should try. Like Rick, if you don't recognize the number, don't answer it. But if you're someone like me who gets calls from strangers all the time because I work in PR [and you do have to answer it and you pick up the phone on a robocaller] you can block the number on your mobile phone [but good luck with that because they're just going to call you on another spoof number].
You can make sure you're on the Do Not Call Registry with the FTC, but know that that probably won't help because, again, most of these people are knowingly breaking the law.
You can check with your cellphone provider to see if they already offer some sort of service. AT&T customers have a thing they can do called AT&T Call Protect app. I think Verizon also has some options to help people out.
There are other apps. Admitting that the FTC was in over their head they created a competition and invited developers to create a technological solution. One of the solutions is called Nomorobo. This one is free for landlines, but it charges $1.99 a month for mobile phones. We don't have a landline. This is not necessarily a good option for us. But for my dad -- who completely stopped answering his home phone -- this might be a good option.
There's another top-rated app called RoboKiller. It's $2.49 a month, but this a good one for the particularly vengeful, because this app doesn't just block calls. It apparently deploys answer bots that keep the scammers on the phone...
Brokamp: I've heard about these...
Southwick: ... and decreases the number of calls they'll be able to make.
Brokamp: They have something on YouTube. You've got to watch them. They're pretty funny.
Southwick: They claim they'll reduce 90% of spam calls you receive in 30 days. There's a free app called Hiya. People seem to have some amount of luck with that. But again, if you're someone like me, you just have to suffer because I have to answer my phone. I can't not answer my phone. It could be a reporter.
I'll end with one crazy story in the news this week. This is from the Chicago Tribune. In 2016, Caribbean Cruise Line agreed to pay between $56 million and $76 million to settle a class action lawsuit alleging that the company and its codefendants made millions of robocalls offering free cruise trips. Individual class members could get up to $500 per call received.
So learning by word of mouth about the settlement, days before the filing deadline Sears [yes, the struggling retailer] put in an initial claim for 18 robocalls saying 18 of our employees received these calls. We want to get paid the $500 a pop per person, and by the way, we also want an extension. So they amended their claim and said, "Actually, our employees suffered as a result of 12,424 calls."
Southwick: Which at $500 a pop could mean a windfall of $6 million for Sears. I don't know what lawyer at Sears was like, "Wait a second. I'm going to keep this ship from sinking just a little longer. I've got the solution. We're going to start entering class action lawsuits." Poor Sears! Anyway, they're waiting to hear if the judge will accept their amended claim.
And in a fun, ironic twist, while Sears is trying to get paid from Caribbean Cruise Lines for getting robocalled, they are also getting taken to court. The lawsuit is seeking class action status alleging that Sears made unsolicited autodialed calls to consumers without their consent to pitch Sears Home Services in violation of the same federal law.
So, yeah, robocalls. It's only going to get worse and that's what's up.
Brokamp: Ding dong!
Southwick: Who's there?
Brokamp: It's the philanthropist! The philanthropist next door!
Southwick: I don't know why that's funny.
Brokamp: So, a few episodes ago, as longtime listeners will remember, we launched a new segment we're calling The Philanthropist Next Door, which profiles people who have lived seemingly financially modest lives but actually accumulated impressive wealth that they used to make the world a better place.
Engdahl: Or they collect stamps. One or the other.
Brokamp: Or something like that. In the first installment we delved into the story of Oseola McCarty, a washer woman from Mississippi who accumulated hundreds of thousands of dollars that she then used to create a scholarship fund that has been helping students for more than 20 years and is set up to continue for decades to come.
Southwick: That's a great story.
Brokamp: It is a great story. This week, though, we go for more breadth than depth by profiling four other people who turned their frugality into philanthropy.
First up, No. 1 is Genevieve Via Cava. Genevieve began teaching in the schools of Bergen County, New Jersey in 1945 and she taught general ed and special ed kids until she retired in 1990. She lived in the home she grew up in. She was known to clip coupons. Known to be pretty frugal. She scolded friends if they went out to eat too often.
She was married but she didn't have kids. One example of her frugality was told by a friend of hers named Richard Jablonski who also ended up being the executor of her estate. As she got older and started losing her hearing, she refused to spend the $4,000 on new hearing aids, and she told him, "Don't be foolish with money, Richard. It's not how much money you earn. It's how much you save."
Southwick: Actually what she said was, "Don't be foolish with money, Richard!!!"
Brokamp: That's probably true.
Southwick: Was I far enough from the mic for that?
Brokamp: But when she died in 2011, her estate was worth several million dollars. Of that amount she left $100,000 to the Salvation Army, $100,000 each to the country's animal shelters, and $1 million to the school district for whom she worked which will provide college scholarships to a special needs student each year and perhaps two scholarships depending on how the investments in the trust perform. Jablonski told People magazine, "Genevieve was very smart. She knew finances and now she'd be thrilled to hear that the interest, alone, from her $1 million gift to the school district will pay for a scholarship every year. She was a strict teacher, but she loved those kids. They meant the world to her and now her legacy will live on forever."
No. 2. Ronald Reid. Reid was born in 1921. He was the first in his family to graduate from high school, and he had to walk every day, or hitchhike, to get to the school. He served in World War II and then he returned home to Vermont. Married a woman who had two kids. He worked at a gas station for 25 years and then he retired. He found retirement kind of boring, so he went back to work as a janitor for J.C. Penney's and then retired in 1997. According to his lawyer, he had two favorite hobbies: chopping wood and investing.
One of his friends said, "I'm sure that if he earned $50 in one week he probably invested $40." According to The Wall Street Journal, he owned at least 95 stocks at the time of his death in 2014, many of which he held on for decades. His attorney said that he only invested in what he knew and what paid dividends, so companies like AT&T, John Deere, Procter & Gamble.
At his death his portfolio was worth more than $8 million and most of it he left to the local library and the local hospital; not because he needed the healthcare, but he went to the hospital's cafeteria every morning and ordered the same thing.
He lived so frugally few people knew about his wealth. There's a video about his life. His house was actually pretty nice. A very lovely town in Vermont, but not even his stepson knew how much money he had. In fact, he said the only clue was that he read The Wall Street Journal every day.
No. 3 is Sylvia Bloom. Sylvia was the child of Eastern European immigrants and grew up in Brooklyn. In 1947, she began working as a legal secretary at a Wall Street law firm and she kept that job for 67 years learning about investing from the lawyers she worked with. Her niece told The New York Times, "she was a secretary in an era when they ran their boss's lives, including their personal investments."
Southwick: Wait! What? Oh, wow! So she would actually call and execute the actual transactions.
Brokamp: Yes, she was like an administrative assistant type of thing. When the boss would buy a stock, she would make the purchase for him and then buy the same stock for herself but, of course, in smaller amounts because she was on a secretary's salary.
She and her husband, who was a firefighter, teacher, and a part-time pharmacist [that's kind of interesting] lived modestly but comfortably in a rent-controlled apartment. When she died in 2016 at the age of 96 her portfolio was worth more than $9 million.
She left more than $6 million to the Henry Street Settlement for disadvantaged students in New York. Part of the money will be used to help students from 9th grade through college graduation with free counseling, tutoring, SAT prep, and college visits. She also left $1 million to her alma mater, Hunter College, and created a scholarship fund with another $1 million.
And lastly No. 4 is Leonard Gigowski. So like Ronald Reid, Gigowski also served in World War II, specifically as a cook in the Navy. When he returned to his home town in Wisconsin, he worked as a butcher in a grocery store, receiving some company stock that he held onto for a very long time, and then when he sold it he bought some other stocks. He eventually opened up his own grocery store, and then a nightclub, and then a dance studio...
He never married, but a few times a week he'd go out in a tux for some ballroom dancing. He also kept 50 to 100 pigeons that he raced, even winning a few trophies. But those were pretty much his only extravagances. One of his friends said this about Gigowski. "He was a tight man. Leonard would buy shoes at discount, even if they didn't fit him, just to save a buck. He wanted to save money and give it to people needier than he was."
While he was alive he began funding scholarships for the Catholic high school that he attended when he was young, which back then was a seminary. Gigowski, like yours truly, at one point was studying to be a priest. For his 90th birthday the school surprised him by assembling the students to sing "Happy Birthday" to him. He passed away in 2015 leaving the school $13 million as a scholarship fund, which will disburse 5% of its assets every year and thus is set up to last in perpetuity.
I got a few takeaways from these stories. Obviously the first takeaway is you don't need a large salary to build a large portfolio. You just have to prioritize where your money goes and time. Keep an eye on your spending and start as early as possible.
No. 2 is if you are inspired to leave money to charity, get good legal help. You don't want family members disputing the bequest. Via Cava, the teacher who left the special ed scholarship died in 2011, but the school just found out this year about the inheritance. I don't know why that is. I don't know if some relatives came out of the woodwork and tried to dispute it.
I read another article about a man who had neither kids nor a wife. He died and left all his money to the people who ran his apartment. Then a long-lost nephew showed up and tried to get some of the money, so they had to go to court because his will was just written on paper. Basically, if you want to do something like this, make sure you get good, legal help so the money goes to where you want.
And third, don't go nuts. If you read online some of the comments about these articles written about these people, some do think that some of these people take it too far. They go a little too crazy with the frugality, maybe denying themselves some healthcare that they needed. Maybe they should have taken a few more trips. I think the people we talk about, here, are perfectly reasonable, but there are other stories that I come across where people really denied themselves too much in order to accumulate a lot of money.
So while I like the message of what all these people are trying to do, obviously you should enjoy some of it and don't deny yourself the things that you really need. But some people do enjoy spending money on clothes, on travel, on things; but, other people do value financial security and financial peace of mind, and really value spending money on ways that will help other people and in a lot of ways the world is a better place because of it.
Southwick: Mortgage interest rates are on the rise and so is the average home price. Oh, it's a fun one-two punch...
Brokamp: What a great combination!
Southwick: ... to think that even more important that you need to try to get the best mortgage for you. And joining us to help improve your chances of getting a great mortgage is Austin Smith. He works over on The Ascent. It's a new website we created, here, at The Motley Fool. Austin, thanks for joining us!
Austin Smith: Thanks for having me! It's good to be back!
Southwick: It's always nice to have you back. So Austin, remind everyone again. What is The Ascent?
Smith: The Ascent is a new site that's been launched by The Motley Fool to help you live life more richly by providing transparent, impartial advice for every financial product you can imagine. Whether it's auto insurance, credit cards, mortgages, savings accounts; we're out there reviewing all of these products, testing them ourselves when we can, and providing you with the most transparent feedback we can muster.
Southwick: There we go. And, of course, the advice is free...
Southwick: ... and so everyone can head over to TheAscent.com. Today we are tackling mortgages. Here's a fun fact. Home prices are climbing above levels we saw before the housing bubble burst in 2006. The twenties and thirties are supposed to be when it's your time to buy a house; but, millennials can't even afford one. How are they supposed to be able to build wealth if they can't buy a house? It's so hard out there.
Smith: Penny stocks.
Southwick: Penny stocks. There we go. You actually live in Denver and Denver has gotten just as bad as D.C. as far as competitive housing, right?
Smith: Denver has become quite spicy. We moved out there a few years ago from D.C. We were thrilled at how much more affordable it was, and some of the Fools who are migrating their way westward now are finding that they're actually not saving all that much. And D.C. is a pretty pricey market, so it's become a lot more expensive and a lot more competitive.
Southwick: That's why we brought you in here -- to talk about how to get a great mortgage. What do we mean when we talk about a good or great mortgage?
Smith: Over at The Ascent, we believe that there are three key aspects to a good mortgage. One, it has to be affordable; two, it has to be the best term; and three, it has to be the best rate. Now, all three of these factors are specific to you, but let's unpack them.
Let's look at the first aspect of what we deem to be a good mortgage, and that is that it's affordable. First, figure out how much you personally can afford each month, and you can do that by heading over to TheAscent.com and checking out our mortgage calculator. And remember, this is your limit. The way we see it is you should never overburden yourself to buy a home, especially in an environment like this where as you said, interest rates are on the rise. Home values are on the rise. Things are pretty expensive.
So, the affordability, you should generally consider that your upper limits. Let's say your affordability calculator looks like you can afford a $300,000 home. Maybe start shopping in the $250,000 to $300,000 range. That doesn't mean to see if you can piece together enough to afford a $320,000 mortgage because life throws curveballs at you and we like to have that margin of safety. We talk a lot about that on the investing side. You can also do it on the mortgage side, and one way to build in a margin of safety is to have a more affordable home given your situation.
Southwick: What you are approved for is not what you should aim for.
Southwick: We got approved for an insane amount of money...
Southwick: ... for our first mortgage. We're like, "No! What? No!"
Smith: That is actually what I meant by your limit -- not the mortgage calculator on The Ascent -- but what your bank will approve you for is generally not the amount of money that you should borrow. You should see that as your red flag that you do not go over.
Brokamp: Right. And you might be encouraged by various people within the industry because there are some conflicts of interest there to take on a bigger mortgage, and sometimes they will oversell different things like the tax benefits of a mortgage, for example, and run numbers by you that are not really accurate, especially with the new tax law, so keep that in mind, as well.
Smith: Yes. Borrowing money to save money is generally a bad recipe.
Smith: A couple of numbers you can keep in mind in determining what an affordable mortgage is for you. Three standard numbers are going to be 20%, 28%, and 36%. 20% is going to be the down payment you need to put together to avoid PMI [or private mortgage insurance]. You need at least this much money to buy a home. Even if you get approved up to a $300,000 home but you don't have $60,000 for a down payment, you shouldn't be buying a $300,000 home.
A simple way to think about this is banks lend a lot more money in the course of a day than you end up borrowing, so they're the experts in this equation and they're going to account for that risk of you not having enough down payment by charging you a higher interest rate or putting PMI on it. So one number to keep in mind is 20%. That's at least the amount of money that you should be putting for a down payment on a home.
Southwick: Unless you're a first-time homeowner and you want an FHA loan. That's what we did.
Smith: But you paid for it with a higher interest rate.
Southwick: Yeah, we did, but then we were able to pay it off and then get refinanced. I just don't know how people can buy a house, anymore, if you have to put down 20%. It's terrifying.
Smith: It can work, but generally you have to be in an appreciating market and the things that have to go right for that situation that makes sense for you end up getting stacked on top of each other, and so any little hiccup in that equation can mean you're losing your home or losing equity and it becomes a dicey situation. And putting that 20% down protects you from a lot of uncertainty in the future.
Southwick: How about 28%?
Smith: 28% is your front-end ratio: your mortgage payment, including taxes and insurance, should not exceed 28% of your pre-tax income. Similar to the amount that you're approved for by a lender, consider this your upper limit. It should not exceed 28%. Aim for 25% or even 20%. 28%, again, just like the amount you're approved for is your outer limit, here.
Southwick: And then 36%? Why should I care about that number?
Smith: This is the back-end ratio. This is your entire debt load, including your mortgage payment, car payments, credit cards, student loans, and other monthly payments should not exceed 36% of your pre-tax income. I will say it one more time. This is your outer limit, so it should not exceed 36%, so aim for a more modest amount like 30% or 25%.
The three standard numbers you need to keep your mortgage affordable for you personally are going to be 20% to guarantee you get the best rate possible and you can afford that down payment.
Southwick: 20% down.
Smith: 28%, which is your front-end ratio. You should not exceed that. And 36% for your back-end ratio, which you should not exceed. And if you're able to do all three of those things, your mortgage will generally be affordable for your situation.
Southwick: Now the second aspect of getting a good mortgage, you said, was getting the best terms.
Smith: Yes. A key part of getting the best term on your mortgage is understanding the various mortgage types and picking the best one that fits your situation. There's fixed-rate mortgages. There's adjustable-rate mortgages. There's 15-year terms. There's 30-year terms. There's even 25-year terms and 20-year terms which a lot of people generally don't get quoted when they go to a bank, but you can save 0.25% on your interest by getting one of those shorter terms. Getting the best term for you means figuring out what your specific situation is.
If you are only going to be in your home, let's say, less than seven years, an adjustable-rate mortgage could be a great way to go. If you're a teacher and you're moving to a city to maybe teach at a university, you know you're going to be there for four or five years but it's not your long-term home, and property is really affordable; an adjustable-rate mortgage could be a great way to go. You'll generally get a lower rate upfront and if you know you're not going to stay beyond that point where the rate adjusts upward, you can find yourself saving, maybe, half a percent or three-quarters of a percent by doing an adjustable-rate mortgage.
On the flip side, if you know this is your long-term forever home, a fixed-rate mortgage is generally the best way to go, and we advocate for going for the shortest term you feel comfortable affording. People default to a 30-year mortgage as being standard; but, again, you can get a better rate by going with a 25-year mortgage or a 20-year mortgage, and if the difference in the monthly payment is not so much that it stretches your affordability, those are ways that you can save a substantial amount of money over the life of your mortgage [sometimes tens of thousands of dollars] just by dropping a 30-year to a 20-year. And if you're living in an affordable part of the country, that may not raise your monthly payments that much, but you will be out of your mortgage five or 10 years faster, and tens of thousands of dollars wealthier.
So getting the best terms for you -- here's the rules of thumb. If you are highly confident you're going to be in that property for less than seven years, and it makes sense for you to buy because it's affordable and you have a down payment, look at an adjustable-rate mortgage. If you believe you're going to be in a property longer than that, look at a fixed-rate mortgage and go for the shortest term you feel comfortable supporting.
Southwick: And the third aspect of a good mortgage is getting the best rate.
Smith: Yes. We talked about some ways to get the best rate, like going with a shorter term, but namely you're going to want to clean up your credit score. The difference between a 650 and a 750-credit score can be as much as 0.5% a year on your rate, which on a $300,000 mortgage is $1,500 in the first year alone, and of course that carries forward through the life of the mortgage at a slightly degrading rate, but that ends up being a lot of money [over $30,000].
So if you are planning on buying a home within the next year, you should reduce the number of credit inquiries that you have. Don't take out any new credit cards. We talk a lot about credit cards at The Ascent. We don't advocate that you apply for any new ones if you know you are taking out a mortgage within the next year because every little inquiry [whether it's an auto loan or credit card] will ding your score.
We also recommend going for online lenders vs. big banks. There's a bias for people to go to the bank where they've been banking for 10 or 15 years. They have a bricks and mortar location. They know the banker and they go there to get their mortgage and they don't shop around.
We found that online lenders tend to be 0.25% to 0.30% less or more affordable than traditional bricks and mortar banks because they don't have as much infrastructure to support and they have to win your business. So for my last three mortgages I've only gone through online lenders. They have, by a mile, been more affordable than the Wells Fargo, the Chase, the banks that were only a mile from my house.
Southwick: That was a lot of information. How about you sum it up for us, here?
Smith: So the three things you need to know to get the best mortgage for you is it needs to be affordable for your situation and to do that remember the 20% down payment, the 28% and the 36% rule. It needs to be on the best term for your situation, so figure out how long you plan on being in the home. And it needs to be at the best rate, and in order to do that make sure you keep your credit score clean and you look at online lenders which are generally a bit more affordable.
Southwick: And for anyone who is shopping around for a mortgage [maybe to buy a new house or refinance], what can they get at The Ascent?
Smith: They can get everything.
Southwick: Everything your heart desires.
Smith: Everything. We will actually give you a home. We have mortgage calculators. We have affordability calculators. We have a list of all the documents you'll need for when you're applying for a new mortgage vs. refinancing. We have all sorts of material on rules of thumb about how much you can afford, how to best negotiate your mortgage. Everything. Head over to TheAscent.com. It's all there.
Southwick: Sounds good! Austin, thanks for joining us again!
Smith: Thanks for having me!
Southwick: Let's have a disclaimer. While The Ascent keeps all reviews and rankings free from issuer influence, for some of the products recommended or discussed on this episode The Ascent may receive compensation for registrations that occur through our site.
Well, that's the show. It's edited hard-of-hearingly by Rick Engdahl. For Robert Brokamp I'm Alison Southwick. Stay Foolish, everybody!