Don't Pay-Off

You don’t want a mortgage, you want a house, but to get a house, most people must obtain a mortgage. You hate having a mortgage and you’d love to pay it off as soon as possible. You know that over 30 years, you’ll pay more interest than you paid for the house in the first place. You’ve been taught that the best thing is to own your home outright.

Despite this, a big, long-term mortgage is best. Though advice you’ve been given to pay your mortgage off may have once made sense, today it’s not the best decision. In today’s economy, a high loan-to-value, long-term mortgage is great. Don't pay the mortgage rapidly, never pay extra, and never use a bi-weekly payment plan. You know paying off the mortgage early will save huge in interest cost, but there’s another side you may have overlooked. Consider the following justification for carrying a big, long-term mortgage.

Your home’s value has nothing to do with the mortgage
Despite how you finance your home, it’s going to fluctuate in value without consideration of the loan balance, and the odds are good that it’ll appreciate. Many homeowners try to build equity by paying off the mortgage, but that produces minimal results compared to the equity built through appreciation. Spend the extra money you’d pay on the mortgage to upgrade the home. You'll enjoy your home more and create a more valuable asset.

A mortgage is cheap money
There’s no way to borrow money at a lower rate than a mortgage. A high quality mortgage to a creditworthy borrower, secured by a residential property is considered one of the safest investments for lenders so they offer low rates to entice borrowing.

Mortgage interest is tax deductible
In addition to great rates, the government subsidizes borrowers by making interest tax-deductible. You can save as much as 33% on the interest. That means a 6% loan really costs as little as 4%, making the cheapest money even cheaper.

Mortgage interest is tax-favorable
Assume you have a 6% mortgage and a 6% profit on your long-term investments. The mortgage is deductible at your top tax bracket, but the long-term investments are taxed at 15%. Say you’re in the 33% tax bracket, the mortgage will cost you 4%, while the investment nets 5.1% after taxes. In other words, tax law makes it beneficial to maintain your mortgage. Compounding increases the yield of the investment as well, creating a greater arbitrage and thus enhancing the tax-favorable situation.

Mortgage payments get easier over time
A long-term, fixed rate mortgage guarantees the payment will never rise. Alternatively, inflation is eroding the value of the dollar and inflating income. Therefore, the payment becomes cheaper relative to your income, making it a smaller percentage of income and easier to pay.

Large mortgages are safer
Assume you have $200K and want to buy a $500K home. How much should you put down? The entire $200K or a 20% down payment? Put down 20% and borrow the extra $100K. This allows you to retain liquidity while controlling additional appreciable assets that can compound wealth. What if you were suddenly without income? The payment wouldn’t matter because with little to no reserve funds, you’d be in danger of default. With the additional $100K liquid investment, you’d have the ability to sustain the payment and your other life expenses for an extended period of time. What if the payment is just too much some months? Subsidize it by taking money from the liquid account. It probably made enough return to not have to draw against the principal anyway.

Mortgages let you create more wealth
Wealth is created by owning appreciating assets. Acquiring the assets is best done by diverting cash flow to purchase and sustain them. To do that, lower your expenses with a long-term loan with lower payments than a short-term loan requiring larger payments. They allow more cash flow to be diverted to control more assets.

To sum up, the advantages and safety of liquidity, controlling additional assets and current tax laws make borrowing more money a prudent decision. If you’re still hesitant, be sure to discuss your options with an experienced mortgage consultant and your personal tax advisor before making any decisions.

Credit Scores: How They Can Be Drastically Impacted

Everyone has heard how important credit scores are when applying for credit. The higher an individual’s scores, the better the terms of financing that are available. Understanding what actions to take to avoid getting a lower score or improving a score is something of a science.

Certainly the area of most concern is payment history. Being late however on a debt is not bad if the payment does not go beyond 30 days late. Only after being 30 days late (from the original due date, not the grace period date) will the institutions report you as delinquent. You will still have to pay the massive late fees however, which is a burden on your cash flow.

If your cash flow simply will not allow you to meet all of your obligations in a given month, pay your real estate debts first, your installment loans next and finally your credit cards. Missing even one mortgage payment in the last 24 months can disqualify you from some lenders’ best programs. The credit scoring systems assign more weight to installment loan delinquency than to credit cards.

Taking a cash advance on a credit card to pay other debt is much better than allowing any delinquency to take place. Although the extra debt will decrease the score temporarily, it will not be nearly as damaging as late payments. You can also recover from a balance increase and quickly erase it, but a delinquency will show on your report for 7 years.

Spread your debt around. It’s not how much outstanding credit a consumer has that is important, it is what amount of available credit is being used. For example, a person with a credit card that has a limit of $4000 and carries a balance of $4000 on the card is going to be severely impacted. While in comparison, the same $4000 distributed at $1000 each over four credit cards that have available balances of $4000 each will get a great score. The difference being the first consumer was carrying 100% of the available balance as opposed to the second one who was only carrying 25%. The logic holds true that if a person appears to need to borrow money, no one wants to loan it. Ideally keep the balances below 30% of the available credit limit on each card.

Have enough funds to pay down some but not all of your high credit card debt before applying for credit? There are computer programs now that allow lenders to input scenarios to determine where best to apply available funds. For example: If a borrower has $5000 to use to improve a credit score, some credit companies’ software will allow the lender to submit a “What If” scenario that will tell the consumer exactly which debt to apply the $5000 to for the best score improvement and it will even project what the new score will be. For example, it may tell you to not pay anything toward an old charge off, while telling you to pay down only $50 on a Visa card. This is a tremendous tool that can create thousands of dollars in savings if leveraged.

Don’t close that credit card account! A seasoned borrower will always score higher. Closed accounts are not given near the historical value as active accounts. Ideally, use available credit to continue to score in this area, but sparingly.

Remember that the credit score is a computerized calculation. Personal factors are not taken into consideration when a credit report is generated. It is merely a snapshot of today’s credit profile for any given borrower and it can fluctuate dramatically within the course of a week.

Big Mortgages Are Better

I know that you don’t want a mortgage, you want a house, but to get a house most people must obtain a mortgage. You hate having a mortgage and you’d love to pay it off as soon as possible. You know that over 30 years, you’ll pay more interest than you paid for the house in the first place. You have been taught that the best thing possible is to own your home outright.

Despite all of this, a big long term mortgage is best. Although the advice you have been given to pay your mortgage off may have once made sense, today it is not the best decision. In today’s economic environment, a high loan-to-value long term mortgage is the best thing you can have. Don't pay off the mortgage rapidly, never make extra payments, and never use a bi-weekly mortgage payment plan.

You know that paying off the mortgage early will save you huge amounts in interest cost, but there is another side you may have overlooked. Consider the following reasons why you should carry a big, long term mortgage.

Your homes value has nothing to do with the mortgage; you’re going to build equity anyway.
No matter how you finance your home, it is going to go up or down in value without consideration of the loan balance, and luckily the odds are quite good that it will appreciate. Many homeowners try to build equity in their house by paying off the mortgage, but that produces minimal results when compared to the equity you’ll build through appreciation. Spend the extra money you were considering paying on the mortgage to improve and upgrade the home. In doing this, you'll enjoy your home more and create a more valuable asset that way.

A mortgage is cheap money.
There is no source to borrow money at a lower rate than a mortgage. A high quality mortgage to a creditworthy borrower, secured by a residential property is considered one of the safest investments for the lenders, so they offer their lowest rates to entice borrowing.

Mortgage interest is tax deductible.
In addition to the great rates, the government even subsidizes the borrower by making the interest tax-deductible. You can save as much as 33 percent on the interest cost, so for every $1000 of interest paid, you can save as much as $330 in taxes. That means a 6 percent mortgage loan really costs as little as 4 percent, making the cheapest money already available even cheaper.

Mortgage interest is tax-favorable.
Assume you have both a 6 percent mortgage and a 6 percent profit on your long term investments. The mortgage is deductible at your top tax bracket, but the long term investments are taxed at 15 percent. Let’s say you’re in the 33 percent tax bracket, this means that the mortgage will cost you 4 percent, while the investment nets 5.1 percent after taxes. In other words, tax law makes it beneficial for you to maintain your mortgage. Compounding increases the yield of the investment as well, creating a greater arbitrage, therefore further enhancing the tax-favorable situation.

Mortgage payments get easier over time.
A long term fixed rate mortgage guarantees the payment will never rise. On the other hand, inflation is eroding the value of the dollar and inflating income. Therefore, the payment over time becomes cheaper relative to your income, making it a smaller percentage of income and easier to make the payment.

Large mortgages are safer than smaller ones.
Assume you have $200,000 and you want to buy a $500,000 home. How much should you put down? Should you invest the entire $200,000 in the home or make a 20 percent down payment of just 100,000? Put down only the 20% and borrow the additional $100,000. This allows you to retain liquidity and diversity while controlling additional appreciable assets that can compound wealth.

What if you were suddenly without income for some reason? It would not matter what the payment was, with little to no reserve funds, you would be in immediate danger of default. With the additional $100,000 in a liquid investment, you would have the ability to sustain the payment and your other life expenses for an extended period of time until changes could be made.

What if the larger payment is just too much some months? Subsidize the payment by taking money from the liquid account. It probably made enough investment return to not have to draw against the principal anyway.

Mortgages let you create more wealth.
Wealth is created by owning as many appreciating assets as possible. Acquiring the assets can best be done by diverting as much cash flow to purchase and sustain them as possible. The best way to do that is to lower your monthly expenses. That’s why long-term loans that create lower payments are better than shorter-term loans which require larger payments. They allow more cash flow to be diverted to control more assets.

To sum up, the advantages and safety of liquidity, the controlling of additional assets and the current tax laws make borrowing more money a prudent investment decision. Furthermore, if you still have any hesitations, always be sure to discuss your options with an experienced mortgage consultant and your personal tax advisor before making any decisions.

Leverage or Pay Down

Should You Leverage Your Home or Pay It Down Rapidly?

Should we, as loan professionals, encourage clients to borrow as much money as possible? Or would consumers benefit more if we helped them to understand the advantages of 15-year amortization schedules and pre-paying principal? Let's examine the pros and cons of both strategies.

Leveraging Your Property
In order to understand why you would want to borrow as much money as possible for your home purchase, you must first understand the concept that equity has a zero rate of return. Here's an example: If consumer "A" buys a home for $300,000 and puts 20% down, then he has $60,000 in equity. Over the next 5 years, the property appreciates $100,000 in value. Consumer "A" now has $160,000 in equity. Consumer "B" buys a home for $300,000 and puts no money down. At the end of 5 years, that same home is now worth $400,000. Consumer "B" has $100,000 in equity which is the same appreciation as consumer "A", a net $100,000.

As you can see, your down payment has nothing to do with your rate of return. What becomes important is how you choose to manage the $60,000 you didn't use as a down payment. Rather than spend it on the frivolous, such as buying toys or going to Las Vegas, use that money as a down payment. It is more prudent especially because it will enable you to obtain a lower interest rate. However, if you invested the $60,000 in a vehicle that could out-earn the cost of that debt, then it could be a formula for success. That is why putting as little down as you possibly can, maximizing your tax write-off, and investing the rest. The key component is taking the money you would have used as a down payment and putting that money to work by owning more appreciating assets like other real estate or securities.

Paying Your Home Down Rapidly
There are very few times over the course of my career that I have seen a client with zero debt and/or no financial difficulties. Choosing to pay off all your debt can reduce stress and help you to gain freedom of cash flow for investment opportunities. A 15-year mortgage strategy provides structure. It can also put you on track to have your mortgage paid off within a set timeframe. Simply put, it contains built-in discipline. It's important, however, to understand that regardless of how rapidly you pay off your home, you're not getting any greater rate of return on your investment than if you paid it off slowly.

Conclusion
So how does one determine which scenario is best? The choice depends entirely upon the individual. Savvy consumers who are disciplined and are comfortable taking chances from an investment perspective, would do well with the first scenario. It's been proven that your rate of return over the long-haul will be far greater than the rate you'd pay for a mortgage in today's rate environment.

It's important to seek the advice of a skilled investment advisor to ensure success with this strategy. The second scenario is best for those who have a difficult time managing their money or who'll sleep more easily at night knowing they have a plan in place to pay their loan off quickly.

Wealth Through Real Estate, Be Prepared

There are more millionaires created through the ownership of Real Estate than any other investment. If you were fortunate enough to own Real Estate over the past few years, you have seen a dramatic rise in your wealth. The more you owned the greater the gain.

Real Estate will continue to rise in the long term even if we do see a market correction in the short run as many anticipate. Today may not be the time to jump in and buy investment homes due to the volatility of the market today, but it won’t be long again before home prices stabilize and it is time to start buying again.

My suggestion would be to get your funding in order to be able to step in and take advantage of the opportunities of a soft market. Those able to react fast will be the ones that will benefit the most when the landing is over and the market is again taking off.

Some ways to prepare would be the use of the home equity in your primary residence to purchase other real estate. Credit lines may be right for some while others will find value in cashing out by refinancing into a larger first mortgage.

When values are low is the best time to move up.

If you are considering moving up, now may be the time. Although you may have to be aggressive in the sales price of your home to sell it, bear in mind that there are a lot more homes available to buy now, also at discounted values.

If you assume that you would have to sell a $250,000 home at 10% off for $25,000 less that you anticipate, also know that you would be able to buy a $500,000 at 10% off for a saving of $50,000, netting you a savings of $25,000.

If you wait until the market is hot again, there will be less homes to choose from and your likelihood of finding a bargain are slimmer. So, go out with your Realtor and take a look around first to confirm that it is a true buyers market for the homes you desire, then get your home on the market at an aggressive price. It’s a buyers market, take advantage of it.

Remember the Rule of 72s

The rule says that to find the number of years required to double your money at a given yield; you just divide the yield into 72. So if a home is gaining 6% per year, 6 divided into 72 equals 12 years.

With 6% being about the average appreciation of housing over the long run, that means that if you own a home today worth $500 Thousand, twelve years from now the home could be worth $1 Million for a gain of $500 Thousand!

With today’s tax law, for a married couple that gain is TAX FREE! There is no better investment that your own home, not your 401K, IRA or any other investment available.

Interest Only-It's Just An Option

'Interest only' is just an option that is added to many loan programs. It allows a customer to determine when they want to pay the balance of a loan instead of requiring the payoff through amortization. It is a nice feature to add to a loan to minimize the required payment each month. Interest is what a borrower pays a lender as compensation for the use of the money over a specified period of time. An interest only loan requires a payment that pays the interest that has accrued on the loan, but with no principal reduction required for a specified time frame. Interest only products offer a way to lower monthly cash flow, but do carry some risk and must be evaluated to make sure they fit for the particular borrower. They are ideally suited for the borrower who can use the lower cash flow to maximize financial leverage by pursuing other financial opportunities.

Trade-Up While The Market Is Down

If you were thinking about buying a larger home for your family, but decided to wait until the market improves, you're wasting money. Mathematically, the best time to move up is when prices are down.

Let's say the value of real estate has declined by 10% for your current residence as well as the homes you would like to buy. Assume your current home that was worth $500,000 last year, can now only bring in $450,000 and that the home you want to buy was selling for $800,000 last year, but today can be picked up for $720,000. Last year the cost to upgrade from your home to the new home would have been $300,000. Now the difference is only $270,000 which is a 10% savings of $30,000!

In addition to the decreased cost difference in today's market, there are other advantages to moving up at this time. In the 2005 seller's market, homes were often selling in just hours at prices well above the asking price. There were limited homes to choose from and no reason for sellers to make any concessions. It was simply a take it or leave it market, but not anymore.

In today's buyer's market, with the larger supply of available houses, the odds of finding a home more suited to your needs are much higher. In addition, with the saturation of housing, sellers are now required to stage their homes for the market. They are spending money repairing and upgrading their homes so they have greater appeal to the limited number of buyers in today's market. This has further improved your chances of finding a better home that is clean, well-maintained and ready for occupancy without the need for you to pay additional expenses.

Moreover, you may be able to capitalize on the slowing market by finding a highly motivated seller. You may even be able to draft a contract that requires concessions from the seller that enhance your purchase. What about having the seller pay all of your closing costs, repaint, or re-carpet the entire house hurt to ask for what you want.

So, if you are planning to upgrade, find an aggressive real estate agent and price your home fairly based on todays market value. Make the move now while the price difference is minimized and there are still great buys to find in this short-term market decline.

Mortgages, Markets, and Money

Experience has taught me that mortgages are intimidating financial instruments for many people, that markets can and do change requiring a rethinking of mortgage planning, and that saving money is always a good thing. I have been a mortgage professional advising borrowers who need residential mortgage financing for over twenty years.

In your current situation, you probably have an excellent rate on an adjustable rate loan and are aware that rates have been on an upward swing. It's likely you are waiting for the expiration of the fixed period of your loan or possibly the end of a pre-payment penalty phase before restructuring your mortgage obligation.

I am in that situation with my current mortgage. I have a 3.875% interest rate on a 5/1, (5 year fixed then annual changes), interest-only loan on my home that is set to begin adjusting in mid 2008. I know that based on the current market, if I let the loan automatically adjust, my rate will automatically adjust to about 7.5%, nearly doubling my interest cost. I will lose money if I sit tight and do nothing. So, refinancing my mortgage is going to be the best solution for me based on today's interest rates and the market and this ensures that I save money.

I know that if I refinance now, I will lose out on the remainder of the tremendous rate advantage I have compared to the market today. So, I am waiting, closely watching the market, trying to determine when the most opportune time will be for me to refinance my mortgage so that I can save money and invest it elsewhere.

There are several other factors that I need to consider to maximize my strategy in addition to the rate change:

-----Because my interest-only period will also expire at the time of my mortgage reset, amortization will begin, increasing my payment.
-----I also am looking at other financial obligations I have and trying to determine if while restructuring the mortgage, I pay these debts off as well to reduce after tax interest cost and improve cash flow.
-----Housing depreciation has me somewhat concerned. My home has appreciated nicely in the four years since I secured this debt. However, if my home value declines, my borrowing power will be diminished.

There is no absolute answer today to what lies ahead. What I will be doing for my family and me is creating a plan that will:

-----Assure that I have the liquidity and credit reserves to make the payments into the distant future to weather any unforeseen situation that may arise.
-----Utilize my equity to maximize my financial growth, diversity and wealth.
-----Optimize the tax advantages provided by Uncle Sam.

This may not be the time for you to make such a move with your current adjustable rate mortgage, as it is not the perfect timing for me. However, it may be time for you to establish a plan to prepare for the upcoming changes.

Please visit my website www.AmericasMortgageStore.com and check out the current market rates, read informative articles, and learn more about mortgage financing and your current situation. I welcome your call so we can begin reviewing your situation now to formulate a timeframe best for your particular situation.