There is a great debate within the inner-mortgage circles these days. 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'd want to borrow as much as possible for your home purchase, you must first grasp 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 they have $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. If you use it for frivolous activities, such as buying toys or going to Las Vegas, it would be more prudent for you to use that money as a down payment. Especially since this will enable you to obtain a lower interest rate.
However, if you were to invest the $60,000 in a vehicle that can out-earn the cost of that debt, then this could be a formula for success. This is why some lending professionals suggest putting as little down as you possibly can, maximizing your tax write-off, and investing the rest. This principle has been applied for many years in the life insurance game. The old saying goes, "Buy term and invest the rest." The key component is taking the money you would have used as a down payment and creating an asset accumulation account. This account should earn a significant enough rate of return to enable you to pay your mortgage off entirely and achieve the ultimate goal of being debt-free.
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 no financial difficulties. Choosing to pay off all of your debt can reduce stress and help you to gain freedom of cash flow for investment opportunities. A 15-year mortgage or a bi-weekly payment 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 your home off, 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. Over the course of time, 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 easier at night knowing they have a plan in place to pay their loan off more rapidly. Be sure that your budget can handle accelerated payments. When consumers "bite off more than they can chew" with a 15-year mortgage, they frequently end up having to refinance back into a 30-year schedule.
If you find this subject intriguing and would like to know more, I recommend that you read a book titled, Missed Fortune 101, by Douglas Andrew. It's an outstanding read that is very simplistic and goes into far greater detail than I can cover in this column. Douglas is a financial planner who advises safe-structured investments such as whole life policies and tax-free fixed income instruments.
What Housing Bubble?
There is a ton of talk right now about the coming burst of the housing bubble.
People are convinced that all of a sudden we are going to see a dramatic drop in home prices.
As a country as a whole we have never seen a year where home prices have gone down on a national basis. Read that again, after you think of all the times we have had recessions, 18% interest rates on mortgages, and the high flying of the 80's among many others. Never as a country have home prices as a whole gone down during a year. This is not to say that there have not been pockets where corrections occurred, this is not to say that certain property types (i.e. condos) have not corrected. Let's now also look at where prices were in the early 90's and where they are today on the same property. The early 90's would be the calm after our most recent run up in values before the past few years. I'll bet that same house is selling for at least 2 times what it sold for the in the height of the late 80's boom, and maybe many times more than that.
I am not an economist, I am not a fortune teller, Could such a decline really be in store? LetÂ’s look at the facts. Let's read an article from someone who is qualified to speak on the subject - The Scotsman Guide is the leading source of news for mortgage professionals, and I offer this link to a recent article by Sue and Barry in the Scotsman Guide. http://www.scotsmanguide.com/default.asp?ID=185&part=1
People are convinced that all of a sudden we are going to see a dramatic drop in home prices.
As a country as a whole we have never seen a year where home prices have gone down on a national basis. Read that again, after you think of all the times we have had recessions, 18% interest rates on mortgages, and the high flying of the 80's among many others. Never as a country have home prices as a whole gone down during a year. This is not to say that there have not been pockets where corrections occurred, this is not to say that certain property types (i.e. condos) have not corrected. Let's now also look at where prices were in the early 90's and where they are today on the same property. The early 90's would be the calm after our most recent run up in values before the past few years. I'll bet that same house is selling for at least 2 times what it sold for the in the height of the late 80's boom, and maybe many times more than that.
I am not an economist, I am not a fortune teller, Could such a decline really be in store? LetÂ’s look at the facts. Let's read an article from someone who is qualified to speak on the subject - The Scotsman Guide is the leading source of news for mortgage professionals, and I offer this link to a recent article by Sue and Barry in the Scotsman Guide. http://www.scotsmanguide.com/default.asp?ID=185&part=1
5 Things To Protect Your Credit Score This Holiday Season:
1. Avoid Department Store Offers for Instant Credit and Don't Open Up New Lines of Credit
"Would you like to save 10% today on your purchase today?". We have all been asked that question when paying for our purchases. Every store under the sun would like to offer you their own credit card. This is not good for your score. The damage to your score you'll incur by opening up a new line of credit is just not worth the few dollars you might save. Department score credit is poor quality credit and the credit scoring system frowns on it. Just don't apply for the card. You may want or need to apply for a new car loan, a new home loan, a re-finance a home loan. By applying for store credit to save a couple of dollars, you could be hurting your chance of getting an important loan at a good rate until the middle of next year.
2. Avoid Overspending
Spending affects credit. 30% of your credit score is made up of how you manage your debt, and when your credit card balances exceed 30% of their available limit, the credit scoring system red flags you and your score goes down instantly. The logic behind this is that if you suddenly max out your credit cards, it looks to the system as though you are in financial trouble. Only charge if you can pay the balance in full before the next statement date. Plus, overspending and overcharging will also cause you to carry larger balances longer. It is best to keep your balances low at all times.
3. Pay Your Bills On Time
Payment history is 35% of your credit score. One 30-day late can cost you 50 points or more. December is traditionally the busiest time of the year. Active calendars filled with work and social commitments for family and friends and the frenzy of the season can preoccupy you and cause you to be late in paying your bills. Make staying on top of your bills a priority. Put all of your bills in a file and make sure you pay them on time. In doing so, you will save points on your credit score and ridiculous late charges as much as $39 or more. Additionally, when you are late in paying your bills, you nullify any preferential finance rate and your account will default to a dramatically higher interest rate. A ding to your credit score, a high late fee, and a huge increase in interest rates are all big incentives to make sure you are on time with your bills. I recently got a call from a customer who had been late, but not 30 days late and the rate jumped on his card to over 30% annually!
4. Take the Time to Plan and Prepare Your Gift Giving
We all do it. We walk into a store ready to buy a specific item and end up getting lured into a spending vortex. Panic spending because the store does not have the item you went in to buy; deciding that if you buy this item for this person, then you have to buy this item for another person; succumbing to the temptation of the latest must-have gadget. You can prevent this well-woven retailer trap by doing your research online. By preparing before you even darken the automatic doorstep of the alluring retail establishment, you can determine where you can purchase specific items and for what price. In doing so, you can avoid the retail traps and retain control of your spending (and your sanity). Online shopping sites have grown tremendously in popularity. Traffic to those sites is up more than 30% from just last year. There is a wealth of information on the web. In fact, www.pricegrabber.com lists all of the hottest holiday items and tells you who sells them and for how much. Remember, if you pay your credit card bill prior to the statement date, it will help your scores. www.froogle.com is another great site to find the item for less.
5. Manage Your Credit Wisely
Keep track of your credit card balances and keep them as low as possible. Studies show that as consumers increase their credit card balances, they become increasingly apathetic about their balances and even about adding new debt. By tracking balances, you will maintain a sense of control over your credit score and your finances. Write out a chart of who you owe, how much you owe, and what the minimum payment is. It will help you to get a handle on your bills, and help start planning how to pay them off.
"Would you like to save 10% today on your purchase today?". We have all been asked that question when paying for our purchases. Every store under the sun would like to offer you their own credit card. This is not good for your score. The damage to your score you'll incur by opening up a new line of credit is just not worth the few dollars you might save. Department score credit is poor quality credit and the credit scoring system frowns on it. Just don't apply for the card. You may want or need to apply for a new car loan, a new home loan, a re-finance a home loan. By applying for store credit to save a couple of dollars, you could be hurting your chance of getting an important loan at a good rate until the middle of next year.
2. Avoid Overspending
Spending affects credit. 30% of your credit score is made up of how you manage your debt, and when your credit card balances exceed 30% of their available limit, the credit scoring system red flags you and your score goes down instantly. The logic behind this is that if you suddenly max out your credit cards, it looks to the system as though you are in financial trouble. Only charge if you can pay the balance in full before the next statement date. Plus, overspending and overcharging will also cause you to carry larger balances longer. It is best to keep your balances low at all times.
3. Pay Your Bills On Time
Payment history is 35% of your credit score. One 30-day late can cost you 50 points or more. December is traditionally the busiest time of the year. Active calendars filled with work and social commitments for family and friends and the frenzy of the season can preoccupy you and cause you to be late in paying your bills. Make staying on top of your bills a priority. Put all of your bills in a file and make sure you pay them on time. In doing so, you will save points on your credit score and ridiculous late charges as much as $39 or more. Additionally, when you are late in paying your bills, you nullify any preferential finance rate and your account will default to a dramatically higher interest rate. A ding to your credit score, a high late fee, and a huge increase in interest rates are all big incentives to make sure you are on time with your bills. I recently got a call from a customer who had been late, but not 30 days late and the rate jumped on his card to over 30% annually!
4. Take the Time to Plan and Prepare Your Gift Giving
We all do it. We walk into a store ready to buy a specific item and end up getting lured into a spending vortex. Panic spending because the store does not have the item you went in to buy; deciding that if you buy this item for this person, then you have to buy this item for another person; succumbing to the temptation of the latest must-have gadget. You can prevent this well-woven retailer trap by doing your research online. By preparing before you even darken the automatic doorstep of the alluring retail establishment, you can determine where you can purchase specific items and for what price. In doing so, you can avoid the retail traps and retain control of your spending (and your sanity). Online shopping sites have grown tremendously in popularity. Traffic to those sites is up more than 30% from just last year. There is a wealth of information on the web. In fact, www.pricegrabber.com lists all of the hottest holiday items and tells you who sells them and for how much. Remember, if you pay your credit card bill prior to the statement date, it will help your scores. www.froogle.com is another great site to find the item for less.
5. Manage Your Credit Wisely
Keep track of your credit card balances and keep them as low as possible. Studies show that as consumers increase their credit card balances, they become increasingly apathetic about their balances and even about adding new debt. By tracking balances, you will maintain a sense of control over your credit score and your finances. Write out a chart of who you owe, how much you owe, and what the minimum payment is. It will help you to get a handle on your bills, and help start planning how to pay them off.
No Matter What, Budget For A Home Inspection
The purchase price of a house is just the beginning of the costs of homeownership. There will be insurance bills, closing costs, moving expenses, furniture purchases and so on. Beware of carpal Tunnel syndrome in the hand closest to your wallet.
Home Inspections are one of those home buying expenses you can avoid but probably should not. Depending on where and what you are buying, pest, radon, mold, or lead paint inspections may or may not be critical. Some will be the sellers responsibility rather than your own (especially true of septic inspections). But please find enough money in your budget to employ a reputable housing inspector (locally in CT. from $250-800) to do a visual inspection of your home before you sign the final contract. This is as important for a new house as it is for one being resold!
They have offices nationally, visit their web site at: http://www.npiweb.com/
American Society of Home Inspectors: http://www.ashi.org/customers/default.asp
Home Inspections are one of those home buying expenses you can avoid but probably should not. Depending on where and what you are buying, pest, radon, mold, or lead paint inspections may or may not be critical. Some will be the sellers responsibility rather than your own (especially true of septic inspections). But please find enough money in your budget to employ a reputable housing inspector (locally in CT. from $250-800) to do a visual inspection of your home before you sign the final contract. This is as important for a new house as it is for one being resold!
There are two reasons to have a qualified home inspector look at your new home. The first is obvious: You want and need to know the current condition of the house you are buying and whether there are any time bombs ticking away, ready to blow your budget right out of the water.
The second is less obvious but just as important. A good home inspector will teach you about your house; what the systems are, how they work, and how to keep them working. The level of confidence a home inspector can instill in a home buyer, especially one without any construction knowledge or innate do-it-yourself skills will be worth the cost involved.
As a professional full- time loan officer I am a strong believer in home inspections. Here in Connecticut we are lucky, home inspectors must be licensed, but in many states that is not the case, anyone can put out a shingle and advertise as a home inspector. A true home inspector should be someone with experience as a home builder, construction experience or engineering experience. A true home inspector is" worth his weight in gold".
What ever you do, don't rely on "Uncle Al's" inspection, get someone you are not related to and who does not have a financial incentive in the outcome of the transaction to inspect your new home.
They have offices nationally, visit their web site at: http://www.npiweb.com/
American Society of Home Inspectors: http://www.ashi.org/customers/default.asp
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