Personal Finance Resources

I wanted to give y’all some basic tips to financing that home you’ve been wanting to buy. Getting a mortgage these days is not quite as easy as it used to be. With the fallout of the sub-prime loan market, banks are getting back to the basics in lending, i.e. people with strong credit, some cash, and a stable job. On the whole, we have been spoiled in being able to spend everything we make each week, and still being able to obtain financing on a house. I for one am glad that this has happened, for many reasons, such as this will teach people to be responsible with their money, it will limit my competition in buying properties, it will create more demand for rental properties, and it will provide some better tenants as well.

But real quickly here, I wanted to give you some basic pointers so that you will know and be prepared for the bank or mortgage company is going to want to see when you apply for your mortgage:

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As a fellow real estate investor, sometimes deals come along for multiple rental properties, and getting a blanket mortgage for those properties is an ideal situation. I just came over from doing some property rehabbing at one such unit today. The deal involved two duplexes that were several blocks away from each other, that had the same owners. So we negotiated the purchase of these properties (a great deal by the way, some 1% - 1.5% rent to purchase price ratio, after repairs) and set off to our banker to get a loan.

Working with a Great Mortgage Broker / Banker

Again, one of the key fundamentals to doing any legitimate business is having strong relationships with business to business units. Your mortgage broker or banker, any contractors, property managers, etc. must be of very high quality and at the cheapest possible price. I stressed quality first, because in today’s world the best price is often accompanied by some very unscrupulous business practices. Get references, and test your relationships before you do big deals with them. It might be a little more effort, but it is worth it, as you will see in a moment.

Getting the Blanket Mortgage

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Yesterday, I talked about Buying Mortgage Points and the potential money that could be saved using this loan structure. I received a comment basically stating that you would be better served by investing the money you would have spent buying mortgage points into something else that would yield a better return on your money. While this is true, yesterday’s post was geared toward buying the points, and then financing those points back into the loan. This is where the real benefit of buying mortgage points pays off. In this scenario, you are not spending any extra cash up front. You are merely restructuring your loan to provide the lowest possible overall cost.

But not only the comment I received on that post, but I also was researching and found that most people who buy mortgage points (and pay for them up front at the closing table) often do not keep there house long enough to reach the break even point, and therefore don’t justify the cost of buying the points. After seeing that, I felt inclined to extend the example I presented yesterday, and give you a formula to find out just how long it will take to “break even” on the cost of buying points. Here’s a quick recap on the example:

PMT on $100,000 at 6.5% = $632.07 (Principle and interest only, based on a 30 year loan)

PMT on $100,000 at 6% = $599.55 (Principle and interest only, based on a 30 year loan with 2 points)

So that is a difference of $32.52 per month. But the 2 points cost you $2,000 at the closing table. Therefore, we can determine how many months, and the corresponding years it will take to recapture the initial $2,000 investment.

$2,000 / $32.52 per month =  61.5 months / 12 months per year = ~5 years

So what that means is that you will need to own your home for at least 5 years just to get back the $2,000 you invested in your home. So if you are considering buying points up front, make sure you plan to stay in your home longer than the break even point. Otherwise, as I suggested before, ask your lender about financing the points back into the loan, and you will start saving money immediately on the loan (in most cases, be sure to follow my calculations and verify the numbers with your lender). If you are wondering how I came up with the payment calculation, just use the PMT function in a spreadsheet program like Excel to determine the payment. Here are the variables I used:

Rate:  6.5%/12
NPER: 360
PV: -100,000

Stay tuned for more great personal finance help and resources to come.

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Ever thought about buying mortgage points when you go to your lender to buy a home? You should. Buying mortgage points is a fantastic and easy way to reduce the total amount of interest paid to the bank over the life of a home loan. I have been involved in more than one deal where the buyer has purchased points, and does not regret it later. Among other things, buying mortgage points offers the following benefits:

• Points are tax deductible.
  This has to be done on a depreciation schedule, but nonetheless, it is another item you can add to your itemization schedule for your taxes. This is above and beyond the deduction that you get for mortgage interest every year.
• Points cut down the interest rate you pay on a loan.
  In the deal I have done, it seems that buying one point is about the equivalent of reducing your interest rate by about 1/4 of a percent. Thus, if you are quoted a rate of 6.5%, you would be buying it down to 6.25%. The banks have a formula on how they come up with the percentage equivalent of the point bought, so it vary depending on your lender.
• Often, points can be financed.
  In other words, if you were to buy a point on a $100,000 loan, you can roll the cost of the point back into the loan, thereby increasing your loan amount to $101,000. I will explain in more detail in a moment.

Buying Mortgage Points Example

Now that I have covered some of the benefits of buying mortgage points, I would like to go through an example so you can see how this works in the real world. Let’s look at a $100,000 loan amount with two points (often banks will limit you to only 2 points - I guess because they will lose too much money if you buy more ).

$100,000 * .02 = $2,000

Each “point” is priced at 1% of the loan amount. So in this case, it will cost you $2,000 to buy two points. So let’s see how that will affect your mortgage payment. Let’s say that you were approved for a 6.5% loan and the bank took 1/4 of a percent off the interest rate for each point.

PMT on $100,000 at 6.5% = $632.07 (Principle and interest only, based on a 30 year loan)

PMT on $100,000 at 6% = $599.55 (Again, principle and interest only, based on a 30 year loan)

So that is a difference of $32.52 per month, which is $11,707.20 over the life of the loan. Neat huh?

But what if you don’t have an extra $2,000 at closing to be able to pay for these points. Well, as I mentioned before, ask your lender about financing the points as well. If they did, here is what the principle and interest payments would like for the same 30 year loan amounts.

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If you are on the fence about when to refinance your home mortgage, then consider these several factors. I have done a lot of real estate investing and property management, and have a good deal of knowledge when it comes to mortgages as well. There are many things you need to be careful to consider other than just a better interest rate when it comes to refinancing your home. First, ask yourself these questions:

• How long do I plan to stay in the home?
• Do I plan to use this home for a second home or investment property after I leave?
• Am I looking to get cash out of the new loan, or am I looking for a lower payment?
• If I am looking to get cash from a refinance, what will I use it for?
• When is the best time to capture the lowest possible rate?

Length of Time in Your Home
These, among other questions are good starting points before shopping rates, etc with your local lenders. The most important question is how long you are going to be staying in the home. If your kids are graduating high school and you are planning on moving, refinancing is not a good option for you. Even if you can get your closing costs down to $2,000-$3,000, you are still having to pay for 2 sets of closing costs - 1 when you refinance, and another when you sell the house. The fees to procure a new loan are just too high if you do not plan to own the house for very long.

On the other hand, if you plan to stay in the home a long time, then look at the potential savings this new lower rate will provide. You have to consider more than just the monthly savings, because you are getting a new 30 year loan, and so your payments are going to be extended by the same number of years as you have already been paying on your home (if you have been paying on your house for five years, and you get a new 30 year loan, the total amount of time paying on the house is now 35 years).

Keeping the Home After You Move 

If you plan to keep the home after you move, you should consider refinancing for a lower rate. My philosophy in holding rental properties is to get the most amount of money possible in rental income every month. Some investors look for appreciation over time, but I want to see results right away. So to me, the risk involved with an investment property (tenants and damages, vacancy, etc) merits getting paid as soon as possible. Over time, the rental unit will gain equity, and can still be sold later for a profit. So when it comes to long term second homes and rental properties - yes, go for the lowest payment possible. The renter is paying all of the interest anyway, so interest charges don’t really matter in this case.

The Dangers of Cashing Out Your Equity 

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Reverse mortgages are a great way for retirees to supplement their income using the equity in their home. The simplest way to define a reverse mortgage is to think of it as the opposite of a traditional home loan. When a homeowner executes a reverse mortgage, the bank will pay them for the equity in their, and recapture it later when the home is sold. The homeowner can choose to take the money in one of three ways:  either by a lump sum, a line of credit, or monthly payments. Most often, the homeowner chooses to receive monthly payments from the bank. This increases their monthly income, and can close the gap on any deficiencies in their budget.

Other Benefits of the Reverse Mortgage

In addition to being able to supplement your income while in retirement with the equity in your primary residence, there are also some further key benefits to you:

• You will never owe more than your home is worth.
  In the event that property values decline and your balance is greater than the appraised value of the home, mortgage insurance will cover the gap. This is a great feature to provide stability for the borrower and their heirs.
• In additional value will be paid to your beneficiaries.
  That’s right, after you pass on, and your heirs sell the home, just like a regular mortgage, if the sales price exceeds the loan amount, then they will get the additional money.
• The income from the reverse mortgage does not count as taxable income.
  So as you supplement your income with this type of loan, you don’t have to worry about paying any additional taxes on the gain.
• Income from a reverse mortgage will not count against any Social Security or Medicare benefits.
  Sometimes if you get a job during retirement, and you income exceeds a certain amount, you can lose some or all of your all of your Social Security and Medicare benefits. Not true in the case of the reverse mortgage. The proceeds do not count against any quotas that these programs may have.

Some Downsides to a Reverse Mortgage

The reverse mortgage is a loan, and does acquire interest. So be sure to get a Truth in Lending statement from the mortgage company or bank you are working with to be sure of exactly what will be owed at the end of the reverse mortgage, what your interest rates are, etc. The rates on these loans should be good, considering you have good credit, etc.

Another issue with the reverse mortgage is that you must own the home free and clear of any other liens. If you have an existing mortgage, that mortgage will have to be paid off upon closing the reverse mortgage.

Last, I just don’t like having debt. I currently have a regular mortgage on my house and would like to not have the payment. With a reverse mortgage, you don’t have to pay the money back until death, however I just would like to be completely free and clear of debt, period.

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I noticed some of you that found my free amortization calculator were interested in being able to input additional payments to see how it would shorten the life of your mortgage. So I took the time to come up with the additional calculations to automate the process for you. This amortization calculator is still based on a standard 30 year mortgage with monthly payments, however I added a column called “Additional Payment”. In my example, I defaulted the additional payment column to $50, and as you can see, on a $90,000 loan amount, the additional $50 takes the 30 mortgage down to about 23 1/2 years. Not bad for a little bit more paid each month. Now, in order for this to work for you, you must instruct the bank in writing with each additional payment that you intend for the entire amount to go towards principle only. Without this instruction, they may apply a part of it to interest, just like your regular payment. Here’s a quick look at the first ten payments in this amortization tool:

All you have to do with this amortization calculator is input your original loan amount and interest rate, and then input your additional payment amount in the appropriate column. This calculator is flexible, e.g. you can enter a different additional payment amount each month if you wish, and the calculations will automatically adjust. Have fun with this, and sign up for my RSS feed for updates to all the latest and greatest at this personal finance blog.

You may download the Amortization Calculator with Additional Payments Applied .xls free of charge.

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I am going to make this short and sweet today, but I was in talking with a bank Vice President today, and he told me about a way to get a better rate on your house without refinancing the traditional way. Now as a seasoned investor and now real estate agent, you would think I would already know about this, but I didn’t! And since I didn’t know about this, I figured my readers may not know about it either, are you ready for this?!

Negotiate with Your Current Mortgage Home Lender!

What, you ask? I thought that I had signed a 30 year note and the interest rate was set in stone. That is exactly what I thought too. That is why I go to great lengths to ensure that I get the very best rate, sometimes buy points, etc. to obtain the very best deal on a home loan while I am in the process of closing a deal. But you can negotiate.

Think about it from the lender’s point of view. Yes I like that I have a mortgage here that is paying me above the market rate. And I am very happy that I have an owner that is paying faithfully on the loan. I do not want to lose this customer.

So when you call in to the lender, and tell them you are unhappy that you are paying more than the market rate of interest for your loan and are thinking of shopping around for a new lender, you put yourself in an excellent situation to negotiate with your current lender.

So what’s the benefit of negotiating when I can just refinance with someone else?

The benefit is, you may be able to negotiate for the market rate of interest, and if so, all that has to happen is an amendment to the deed of trust and an amendment to the mortgage documentation. So that means that you only have some very minimal document fees to incur, which will probably only amount to a couple hundred bucks, instead of possibly well over $1,000 to refinance the home. Also, it is far less hassle to do it this way, as you will not have to have another appraisal done, another survey, wait for three weeks, and then have to go to the title company and close on the new loan. You save time, money, and hassle. Very nice benefits indeed.

If this information benefited you, would you consider signing up for my RSS feed? It’s free, and you can stay up to date on the latest information that comes out on Personal Finance Resources.

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I have done several real estate deals now, all involving some type of mortgage or commercial loan. I have only worked a deal once (that I can remember) where I allowed the mortgage broker to charge an origination fee. Origination fees are absolutely garbage and are just additional money that the broker or agent gets to keep.

If you think this is where mortgage agents and brokers make their primary money, you are sore mistaken. They get a spread when they sell the loan to the larger institutions, usually get an application fee, and other minor fees for processing the loan. So if they are charging you an origination fee on top of all of that, get out of Dodge, it is not a company or broker that you want to be dealing with to obtain your mortgage.

The one advantage to some mortgage brokers that charge origination fees are that they should have some pretty good incentive to provide timely, precision service (the one case that I can remember working with one that charged the origination fee provided terrible service, and was the most despicable transaction I have ever been privy to). However, there are many mortgage agents out there that will provide good service without the origination fee. My banker will actually show up in person to a closing, which is unheard of in today’s market, and he didn’t charge an origination fee either. Do your due diligence, and you can find someone local that will provide you this level of service.

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If you are looking to build your own house, and don’t have the cash to finance the construction, you will probably be considering a home construction loan. The following are facts about home construction loans, and the two basic ways that lenders handle this situation:

1. Standalone Home Construction Loan
   A standalone home construction loan is the simplest construction loan you can get. You will probably have a substantial down payment, a heavy interest rate considering the risk involved in building a home and the things that can go wrong, with a balloon payment at the end of construction to pay off the balance.

   In this scenario, there are probably two lenders, and you will need to close two loans, the construction loan with the first lender, and then the permanent loan with the second lender. This is not typically what people want to do, because there are two sets of closing costs, the general headache of dealing with two lenders, getting qualified separately for each, and much more paperwork.

2. Combination Home Construction-to-Permanent Financing
   For most people that want to build their own home, this is the more logical way to go. In this scenario, there is only one lender, and one qualification process. The lender will approve you for the construction loan, and probably will only charge small interest only payments during the construction phase of the project. There will likely be a “draw” process by the particular lender’s policies and procedures to pay the contractor incremental payments during construction. Check with you lender as to how stringent they are with the draws. How often can you draw? Do they have to inspect before releasing funds? Both are good questions to get answered before choosing a lender.

   After the construction phase is complete, there will be an automatic conversion to permanent financing. Usually all that is left after the last draw will be the final closing, where your permanent loan will be put in place. From there, it is just like any other home mortgage, so be sure to get all the details from the lender as to term, interest rate, down payment, etc. Try to ask as many questions as possible before getting involved with a lender to be sure you don’t miss something important.

These are the two typical ways that lenders loan money to people wishing to build there own home. But be careful, as lenders are not construction experts, and do not really help you build your house. You need to be very sure of the contractor you hire to build your house. Spend some time checking references, and looking at other homes that the contractor has built or is in the process of building. Get to know them, because contractors have some of the worst reputations compared to other industries when it comes to getting what you pay for. One last note, you need to make absolutely sure that you do not give the contractor the final check until ALL of the work is complete. Once you have paid them the last bit of money left on the contract, they are gone, and I mean gone for good. Until next time…

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