Forced Savings

One of the big banks has a voluntary program available that transfers $100 each month from your checking account to your savings account. In five years, the account owner would have over $5,000 because of a type of forced savings. 

Similarly, when a person buys a home with a standard amortizing loan, each month, a part of the payment is used to reduce the principal loan amount. Amazingly, over $4,000 would be applied toward the principal in the first year of a $250,000 mortgage at 4% for 30 years. In five years, the loan amount would be reduced by almost $25,000 through normal payments.

The other dynamic that is in play is that while the unpaid balance is being reduced, appreciation causes the value to increase. The difference between the two makes the equity grow even faster. Three percent appreciation on a $250,000 home would increase its value in five years by almost $40,000.

A 30-year mortgage of $250,000 will be paid for in 30 years. At an average of 3% appreciation, the asset would be worth about $600,000. If you continue to rent, the asset belongs to your landlord instead.

Many experts believe that the homeowner benefits from the forced savings of amortization and the leveraged growth that takes place in the investment. It has been observed in the tri-annual Consumer Finance Survey by the Federal Reserve Board that homeowners' net worth is considerably higher than that of renters.

At least consider a shorter one

Affordability and stability are reasons homebuyers choose a 30-year fixed rate mortgage. It makes the payment lower than a 15-year mortgage and the principal and interest portion of the payment will be constant for 30 years.

A common belief among homeowners for decades was that they would always have mortgage payment. The Great Recession has caused many individuals to rethink that concept and make plans to get their home paid for sooner.
For people who can afford it, shorter term mortgages will provide a lower interest rate and build equity faster. A 3.09% 15-year fixed-rate mortgage compared to a 3.87% 30-year loan will have a $562.42 higher payment.
The equity would be $66,903.04 greater on the 15-year term at the end of seven years. Even after you consider the higher payment on the shorter term, the equity difference is still almost $20,000 greater.


By choosing a 15-year loan, a borrower is committing to the higher payment for the term of the mortgage in exchange for a slightly lower interest rate. Another approach would be for the borrower to acquire a 30-year mortgage and make payments as if it were on a 15-year term. The slightly higher rate would allow the borrower the flexibility of not having to make the higher payment in the event he could not afford it on any particular month.

Discussion with your Insurance Agent

Insurance and homeowners go together like peanut butter and jelly. Lenders require fire insurance at a minimum for homes with a mortgage but many owners opt for a more comprehensive coverage with a homeowner’s policy.

However, comprehensive doesn’t mean that everything is covered. Filing a claim is not the time to learn that you don’t have the right coverage. Discuss the following issues with your insurance agent to get a better understanding of your policy and whether some adjustments might be in order.

• Flooding?
• Rising water? 
• Mold?
• Earthquakes?
• Pools?
• Termites?
• Certain kinds of pets or breeds of dogs?
• Limits on jewelry and cash?
• Deductible amount?

The whole concept behind buying insurance is to transfer the risk of loss that you cannot afford for an annual premium that you can. Price and coverage need to be considered when comparing policies. Call your agent and make sure you understand what you’re insured for and if there are alternatives available.

Cut Mortgage Insurance

Making additional payments toward the principal of your mortgage will do three things for the homeowner: save interest, build equity and shorten the term on fixed rate mortgages.

These things should be beneficial enough to justify the extra payments but another huge advantage is available to those who have private mortgage insurance on their loan. Mortgage insurance rates vary but can range from seventy-five to two hundred dollars a month on a $200,000 mortgage.

Lenders are required to automatically terminate mortgage insurance when the principal balance reaches 78% of the original value of the property. It is important for homeowners to monitor their balance because sometimes lenders may inadvertently fail to terminate the coverage.

Mortgage insurance is a necessary but expensive requirement for many people who are limited to a down payment of less than 20%. Eliminating the need for it can save thousands of dollars over time.

The Consumer Financial Protection Bureau, CFPB, issued a compliance bulletin on August 4, 2015.

Checking for Water Leaks

An unexpected, larger-than-normal water bill could lead a person to think that they might have a leak. Before incurring the cost of a plumber, it is fairly easy to run your own test.

Locate your water meter. They’re usually in the front of the house, near the street. In some cases, you might need a meter key to open it; they can be purchased at Lowe’s, Home Depot or other hardware stores.
Step One - Write down the numbers on the meters to get a current reading. Don’t use any water for thirty minutes. If the meter shows water usage during the test period, proceed to step two.
Step Two - Shut off the valves to all of the toilets. If you have a pool with an automatic filler, it has a similar device. Repeat the test again for the same thirty minute period. If the numbers haven’t changed this time, it indicates that the toilets probably need servicing.
If the numbers have changed during step two, it is an indication there may be a leak and it will need to be tracked down. This could be the time to call a plumber or plumbing leak specialist. Your water department may have a consumer help line that can offer suggestions also.

More Home for a Lower Cost of Housing

What if you could live in a larger and possibly newer home for less than you are currently? Would you consider moving? Do you want to hear more?

Interest rates, while they’re expected to go up, actually took a small dip and are still hovering at the 4% or below mark for a 30 year mortgage and almost one percent less for a 15 year term.

Let’s assume that you have a $225,000 mortgage currently at 6% which has a principal and interest payment of $1,348.99. With a 4% rate, you could have a $282,561 mortgage with the same payment. A $57,000 more expensive home could help you get what you need most such as more square footage or a different location or a newer home.

If you’re going to be making that payment for years to come, why not allow lower interest rates to help you get the features you want without having to necessarily pay a higher payment. Taking that logic a little bit further, let’s see how utilities can make a difference too.

A newer home could easily have lower monthly utility costs than your current home due to being more energy efficient. Construction materials, windows, doors, insulation, modern HVAC systems and energy efficient appliances all contribute to lower utility costs. A new home with these advantages could easily save a homeowner up to 25-50% on utilities for the same size home.

The concept is simple: get the most home you can for the amount you spend on the payment and utilities. It will take some investigation and your real estate professional can help.

Wait a Year...It Won't Matter?

There is a frequently quoted expression “more money has been lost from indecision than was ever lost from making a bad decision.” Regardless of the extent of its accuracy, most people can recall when procrastination has cost them money.

There are markets so short of inventory that buyers have become frustrated after losing bids for several homes and have decided to wait until more homes come on the market. In the meantime, the shortage of homes is driving the prices up more by the month.

There are buyers who can’t find what they want for the price they want to pay and think that waiting will somehow change things. In some cases, what they want just keeps moving farther and farther away from them.

The other dynamic in play is, of course, the mortgage rates. While they’ve remained low for several years, most experts agree that they’re going to rise; it’s just a matter of when. If you look at what positive increases in both of these would do, it becomes apparent that waiting will matter.

A $250,000 home purchased today on a FHA loan at 4% for 30 years will have a principal and interest payment of $1,151.76. If a buyer were to wait a year and the price increased 5% and the rate went up by 1%, the payment would increase by over $200 a month. In a seven year period, the increased payment alone would cost the buyer over $17,000.

Use the Cost of Waiting to Buy calculator to see how much it will matter based on the home you want to buy and what you think the prices and rates will do in the next year. 

Who is Your Champion?

The Super Bowl and World Series determine the football and baseball champions. Since there can only be one champion, the other team loses the competition. In feudal times, a knight might champion for the king or a patriotic, romantic or religious cause. Fierce competition can occur when buying or selling a home because each party wants to get the “best deal” possible. When the buyer and seller are not be equally matched, and they rarely are, it is important to have a champion on your side to fight for your cause.
The price of the home, the type of financing and concessions, personal property, closing dates and possession are just a few of the many things that can be negotiated in a contract. Since the seller wants to get the most for their house and the buyer wants to pay the least, their causes are diametrically opposed.
Even after the contract is signed, removing the contingencies can cause considerable negotiations. The inspections or the appraisal could be the source of reevaluating the terms and provisions of the contract.
Negotiating the sale or purchase of a home is definitely a competition and you need a champion on your side.

Make Your Offer Standout

If a seller was looking at two offers for exactly the same price on their home, there would still be things that could make one standout more than the other. If there happens to be more than two offers, things can really get sticky for a buyer. For that reason, it is good to craft the most attractive offer possible because even if you don’t have competition now, another offer could come in during negotiations and derail all your efforts to that point.

Anything that can give the seller the peace of mind that one contract will close on time and as agreed will make them more comfortable in accepting one offer over another. Buyers can consider putting up larger than customary amounts of earnest money and limiting the contingencies to only the most essential items.

The closing costs could be more expensive to the seller based on the type of mortgage a buyer is obtaining. One buyer may be asking the seller to pay part or all of their acquisition costs and the other buyer is paying their own costs.

The borrower who has a signed, preapproval letter will appear to have a greater certainty to closing than a buyer who only says they have talked to a loan officer. Some lenders' letters are considered “gold” and others may not be worth the paper they’re written on. The seller will depend on their listing agent to advise them.

In most cases, the seller will be taking all or part of the cash they receive from the sale of their home and buying another one. If they have to put a contingency clause in the contract based on their current home selling, it weakens their position. Conversely, it will strengthen a buyer’s position if they don’t have to make their offer contingent upon selling their current home.

Even shortening the inspection periods and offering to close early or possible lease the home back to the seller for a short time can be valuable negotiating factors.

Finally, don’t overlook the value of a personal hand-written letter that tells the seller why you want their home. An emotional connection has been known to make a difference for one set of buyers getting the home.

Amortization

The word describes the process of accounting that will repay a loan over time. Residential buyers will most commonly be required to have an amortized mortgage.

When amortizing a fixed rate mortgage, the payment remains constant for the entire term but the allocation of what goes to principal and interest changes with each payment that is made. Since an amount of each payment retires the principal, the interest due on the next payment is calculated on the unpaid balance after the previous payment was made.

This means that an increasing amount is applied to principal on each payment while the amount owed in interest decreases. If normal payments are made each time, on time, the loan will be completed paid off at the end of the term.

You can see in the example of a mortgage of $200,000 at 3.25% for 30 years that it has a fixed principal and interest payment of $870.41. There is $541.67 due in interest with the first payment and the remainder is applied to principal leaving an unpaid balance of $199,671.25. Since the interest due in the second payment is based on a lower principal, a little more is applied to principal.

If you’d like to have an amortization schedule for a mortgage, click here and enter the information about the loan.

Basic Legal Documents

Many times, young adults feel “bullet-proof” and don’t consider the urgency to get involved or spend the money to take care of certain legal aspects of their lives because they think they’re going to live forever.  Since no one is guaranteed longevity of life, if you want to be in control of who gets what and who is in charge now based on an untimely incapacitation or death, it is important to investigate these basic legal documents.

Will – This is a legal instrument that specifies your desires to care for your minor children and to distribute your personal property after you die and who will manage the process.  Anyone who has property and minor children needs a will.

Living Will – This legal instrument specifies your intentions regarding end of life decisions or to designate an individual to make those decisions on your behalf.  Many times, a person who had been diagnosed with a terminal condition or who is facing a serious surgery or hospitalization might feel a sense of urgency to have this document.

Power of attorney – This document allows you to appoint someone you trust, not necessarily an attorney, to handle important legal and financial matters for you if you are unable to make decisions for yourself.  The time limit can be for a specified period of time or indefinitely.

Trust – This arrangement involves an entity called a Trustee who takes control and manages property for someone else’s benefit called a beneficiary.  When property is placed in a trust, the trust becomes the owner of the property.  There are different types of trusts and a qualified advisor can explain and recommend which type would be best suited for your situation.

HIPPA Release Form – The Health Insurance Portability and Accountability Act, known as HIPPA, was created by Congress to protect the privacy of a person’s health information.  Health care providers are prohibited from discussing any aspect of your medical information with anyone who is not directly involved in your care.  To allow friends or family who do not have legal responsibility for you to have access to this information, this release form is necessary.

Most of the issues affecting these types of documents are determined by state law.  Since they are legal documents, it is recommended that you seek sound financial and legal advice.

Are You Ready?

For whatever reason you’ve delayed buying a home, it may be time to reconsider that decision based on today’s conditions and what is expected to happen in the future.

Rents are continuing to increase to the point that in most markets, it is significantly less expensive to own than to rent.  Even after you factor repairs into the equation, the low interest rates, principal accumulation due to amortization, appreciation and tax savings lower the monthly cost of housing.
Low inventories coupled with strong demand cause a rising effect on prices.  Another reason for higher values is that builders, especially in certain price ranges, have not ramped up new home starts to keep up with the demand.
Recently, the Federal Reserve announced that they intend to start raising rates. Most experts agree that higher interest rates are a foregone conclusion; it is just a matter of when it will happen.
A $300,000 home today could cost considerably more one year from now.  With a 20% down payment, if prices go up by 3% and the interest rates increase by .5%, the principal and interest payment at 3.625% would be $1,094.52 for 30 years compared to $1,198.05 at 4.125%.

The question is not necessarily “can you afford the additional $103.53 more per month that you’d have to pay for the home during the 30 year term?”  More importantly, “How would you feel about having to pay more because you weren’t ready to make a decision and what would you have spent it on if you didn’t have to pay a higher payment?” 

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FHA or Conventional?

Buyers with a minimum down payment are generally faced with the decision of whether to get a FHA or a conventional loan.  With the new 3% down payment program on conventional loans, it may become more confusing which loan to pursue.

The two loan programs have mortgage fees that can differ greatly.  FHA has a 1.75% up-front mortgage insurance charge in addition to the monthly mortgage insurance charge which was recently lowered by .5%.

FHA’s mortgage insurance is a fixed amount where conventional mortgage insurance providers’ fees are determined by individual companies and according to the credit score of the borrowers.  A borrower with a good credit score will be charged less than a borrower with a marginal credit score.

Mortgage insurance on conventional loans can be cancelled when the equity in the property reaches 20%.  FHA mortgage insurance in most cases, is paid for the life of the mortgage.  Once a borrower has a 20% equity in their home, to eliminate the monthly FHA mortgage insurance, they would need to refinance the home with a conventional loan and would not be eligible for any refund of the up-front fee paid at closing or added to the mortgage.

If a borrower has a low credit score, FHA may be the better choice because conventional underwriters may have a higher minimum score.  FHA loans also tend to be more lenient than conventional loans when a borrower’s total monthly debt exceeds 45% of their monthly income.  FHA tends to allow borrowers a shorter time frame after foreclosures and bankruptcies.

The decision-making factor is which mortgage will provide the lowest cost of housing including payment and all loan fees.  A lot of information is necessary to make a good decision and typically, the borrower isn’t able to acquire it on his/her own.

A trusted mortgage professional is very valuable in not only providing the information but guiding the borrower through the entire process.  Your real estate professional is uniquely qualified to make such a recommendation. 

Invisible, Odor-free and Potentially Hazardous

Most people’s first introduction to Radon is during the inspections of a home. It can be as much a surprise to a seller as it is a buyer. Radon is an invisible and odor-free, cancer-causing radioactive gas.

Radon can get into a home through cracks in solid floors, construction joints, cracks in walls, gaps in suspended floors, gaps around service pipes, cavities inside walls and even the water supply.

It is estimated that one out of every fifteen homes in the United States has elevated radon levels. The EPA recommends that you test your home which is the only way to find out if you and your family are at risk. If the level found is 4 picocuries per liter or higher, the EPA suggests that you make repairs or install a radon reduction system. Even lower levels can have health risks.

The EPA’s interactive map is available to find state and county information but still recommends that all homes should test for radon. More information can be found from the EPA in A Citizen’s Guide to Radon.

Test kits are inexpensive and can be purchased at stores like Lowe’s or Home Depot if you choose to do it yourself. If levels indicate a high enough level, you can contact a qualified radon service professional for another test or to mitigate your home. You can get information on identifying these professionals at www.nrpp.info and www.nrsb.org. 

1/2% Could Make a Big Difference

Over 50% of homebuyers don’t shop to find the best interest rate for their mortgage.  While a buyer wouldn’t rarely purchase the first home they look at, they will accept the rate and terms offered by only one lender.

While the borrower and the property affect the rate and terms that a lender may offer, it is not to be said that all lenders will offer the same terms and rates to the same buyer.  Credit score, home location, home price and loan amount, down payment, loan term, interest rate type and loan type all affect the interest rate but different lenders can interpret this information differently.

Shopping around to compare rate and terms for a mortgage is a reasonable exercise considering that a half percent lesser interest rate could not only lower the payment but the cumulative interest that is paid while that loan is outstanding.

Some borrowers don’t shop the mortgage because they are concerned that having their credit checked multiple times could adversely affect their credit score.  The credit bureaus take this into consideration when several requests are made by the same category of lender in a short period of time.

Check to see the difference 0.5% could make in the mortgage you’re considering by using the calculator provided by Consumer Financial Protection Bureau.  Contact your real estate professional for a list of trusted mortgage professionals to consider.

Home is Worth the Sacrifice

There are many reasons people want a home with the most frequent responses being a place of their own, to raise their family, share with their friends and feel safe and secure.  These are all strong motivations fueling the American Dream of owning your own home.
The motivation is so dominant that buyers are willing to make sacrifices to have their dream come true.  According to the 2014 National Association of REALTORS® Home Buyers and Sellers Survey, 72% of first-time buyers cut spending on luxury or non-essential items.  They also cut spending on entertainment, clothes and even cancelled vacation plans.
The value of getting their own home is more important than the immediate gratification of things that are considered less important.  While qualifying guidelines were increased last year, there are still more buyers purchasing homes at near record-low mortgage rates.

Converting a Home to a Rental

A simple decision to rent your current home instead of selling it when moving to a new home could have far reaching consequences.

If you have a considerable gain, in a principal residence and you rent it for more than three years, it can lose the principal residence status and the profit must be recognized.

Section 121 provides the exclusion of capital gain on a principal residence if you own and use it as such for two out of the last five years.  This would allow a temporary rental for up to three years before the exclusion is lost.

Let’s assume there is a $100,000 gain in your principal residence.  If it qualifies for the exclusion, no tax would be owed. If the property had been converted to a rental so that it didn’t qualify any longer, the gain would be taxed at the current 20% long-term capital gains rate and it may incur a 3.8% surcharge for higher tax brackets.  At least $20,000 in taxes could be avoided by selling it with the principal residence exclusion.

Depreciation, a tax benefit of income property, is determined by the improvement value at the time of purchase or at the conversion to a rental whichever is less.  If the seller sold the home and took the exclusion and then, bought an identical home for the same price, he would be able to have 60% more cost recovery and avoid long term capital gains tax.

It is always recommended that homeowners considering such a conversion get advice from their tax professional as to how this will specifically affect their individual situation.