Category Archives: mortgage

Choosing Your Home Loan

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Buying a house is super stressful for a million reasons, and one of the biggest ones is choosing your home loan company.  Your home loan will determine your monthly payment for the next 15-30 years, so it is obviously a pretty important piece to the home buying puzzle.

Plan Your Attack

You will need some basic information about yourself to receive home loan quotes.  The most common questions like if you have a job are going to be easy to answer, but you may not know all of your details off of the top of your head.  Try getting together your job history info, income info, and any of the same stuff you will need for a co-owner before even starting the search.  Also remember to keep in mind other details they will want to know, like if you have another mortgage already, and make a note to ask for any discounts for which you would qualify that could lower your loan interest rate.

Choose Your Weapon

Are you better with people or do you like to do a bunch online?  When you are contacting companies for quotes, keep in mind there are several methods.  If you like the phone, you can call directly and repeat the same information to several people to receive quotes that you can compare later.  If you rather not deal with phone calls, you can get a ton of quotes online.  There are even websites no matter what country you live in that will get you multiple home loan quotes to compare at the same time – for example, iselect helps to compare home loans in Australia.

No matter how you search, just remember to get multiple quotes for the same thing from multiple companies so that you aren’t limiting your options.  Spending that time now can save you a bunch of money every year.

After You’ve Chosen

If you are about to buy a house and know which home loan company works best for you, make sure you are officially approved before getting too attached to the exact home you want to buy.  It is usually a quick process but it may be frustrating since they may come back several times with requests for more info.

If you already own your home, remember to keep an eye on home loan rates every year or so.  If they fall a bunch, you could possibly refinance and save a bunch on interest.  Only you can protect yourself from bad deals by shopping around.  Good luck!

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Home Ownership And The Impact On Net Worth

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It’s been a rough few years for the housing market, to say the least.  We moved into our house in mid-2007.  The price we paid was roughly 15% lower from what the previous owners had paid several years prior, so we thought we were getting a steal.  Turns out the market had a lot further to fall.

Even though we put 20% down, we were precariously close to the point of being underwater by the time the bottom hit.  We never quite hit there, but that shows that the total ‘loss’ in value on the house was over a third.  That’s pretty staggering.

With all that, there were many pundits who became steadfast in their belief that renting was advantageous to owning a house.   For the last few years it was hard to argue as they could point out that their payments were not going toward a declining asset, not to mention they were not responsible for the maintenance and upkeep that homeowners had to take to keep their property current.

It was hard to argue, but I still believed in my heart that owning a home was the right choice.  At least for us.  If nothing else, it gave us roots.  It gave us something that was ours, that we could do what we wanted with and call our own.  Yes, the bank owned it but the bank was never going to live there.  We were.   As time went on, I began to learn things about the home and care about things that I likely wouldn’t had I just been renting it.

Through all that, the monetary benefits of owning a home were on hold.  But, lately, finally, they’ve began to show themselves.

And it reminds me that it’s a great time to be a homeowner.

Over the past nine months or so, Zillow has been reporting a positive uptick in the value of our house.   Zillow is just one measure that I use to estimate the value of our house, but it is in line with what I’m seeing.  I track the listings and sales in our neighborhood and surrounding neighborhoods, and the asking and selling prices have both been trending upward, while foreclosures in our immediate area have been cleared out.

Couple this with the fact that we owe less on our house with each mortgage payment, and the house has been the biggest contributor to our net worth increase since the uptick started.

Yes, even better than our 401(k) and investment accounts, which have done remarkably well over the same time.

One thing people often overlook when looking at how expensive a mortgage payment can be is that the portion of your payment that is applied toward principle stays with you in terms of net worth.  This isn’t the case with a rent payment.

If you have a mortgage payment of $1,500 and you are splitting it evenly between principle and interest, then only $750 comes off your net worth each month.  The other $750 stays with you.  It just gets moved from your ‘cash’ assets to your ‘property’ assets.

What happens if you’re making a $1,500 rent payment?  Every dollar is a reduction of your net worth.

When you’re a homeowner, any increase in value also goes into your pocket from  a net worth perspective.  Using the numbers above, say your house increases in value by $3,000 over the course of a year.   That averages out to $250 per month.  Combine that with your $750 ‘net worth’ transfer, and your property is increasing your net worth by roughly $1,000 per month total.

If you’re renting and that property value goes up, guess what you get?

Nothing.

Except another bill.

Now, we’re nowhere close to where we were even with our down payment.  So, there will be those who will point to the tens of thousands of dollars we’re still ‘in the hole’ as justification for having been a renter.

That’s fine.

But, I also know that even with a modest 2% increase in our home value as well as combined with the fact that every month will mean a bigger and bigger net worth transfer (as more of our payment is applied to principle), and I know we’ll catch up eventually.

It might take a few years, maybe even longer.  Maybe more than ten.

But, you know what? That’s fine with me.  If you’re a homeowner that’s doing it right, you’re in it for the long haul.  That’s a commitment that homeowners make.

Besides, as I  noted above, I don’t do it for the money.  I don’t have any inclination of moving over the next few years, so the gain or losses are strictly on paper.

It’s just nice to know that those gains are finally happening in our favor.

Has the real estate crash scared you off or have you seen it as an opportunity to buy a home for your residence or as a rental?

 

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Why Aren’t People Talking About These Early Mortgage Payoff Considerations?

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One of the more popular topics in the personal finance blogging realm of late has been whether it is advantageous to pay off your mortgage early.  I’d say about half of the people out there believe that it’s a good idea, with the other half in the camp of ‘don’t bother’.

Some of the common things that are usually discussed are:

  • Rate of return – Most who look from a pure numbers standpoint argue against paying your mortgage off early when considering that you could be investing that ‘extra payoff’ money and getting a higher rate of return.
  • Interest savings – Every dollar you pay off saves interest for the remaining life of the mortgage.  Few argue that this is a bad thing, but again, it comes down to whether that savings could be offset by a higher ‘return’ elsewhere.
  • Personal feelings – Few would argue that there’s a weight placed on getting rid of this debt.  How important this is depends on each person and is something that only each person can decide.

These are all important considerations, but if you’re thinking only of these, you’re missing out on some very important things you should be thinking about.  Consider these:

Retirement factor

I’m a big advocate of paying your mortgage before you retire.  Every retirement calculator ever made essentially asks the question: “How much money do you need every month when you retire?”  Take away the mortgage payment and that amount goes way down.

Flexibility Before Retirement

Here’s where I think it gets interesting.  Say you can pay your mortgage off early well before retirement.  This gives you a lot of options in your remaining working years.

It stands to reason that, for most people with a mortgage, this means that you’ll want to earn tomorrow at least what you’re earning today in order to continue paying the mortgage and live the lifestyle that you’re accustomed to.

But what if you wanted to expose yourself to more options, and what if those options included a lower salary?

If you’re making $60,000 per year with a $1,000 mortgage payment today, and that payment went away, you could live the same as you do today on a salary of $48,000.

Why would anyone want to do that?

Turns out, some people would.

What if you were at a point in your career where you wanted a less stressful job?   Few people ever take a step back, but I believe it’s because most people simply can’t afford to.  Ask someone who’s working 10-hour days and has been doing this for 30 years whether they  might want a true 8-hour a day job, and I’m guessing there are a lot who would say ‘You bet’.  Companies could retain people with loyalty, skills, and keep them happy.

Or it could work another way.  If you are looking to get into a new area, or even a new career altogether, having that flexibility from paying off the mortgage could allow you to do so.  What if you could leave your $60,000 job to take a job in a brand new field that started you off at $45,000?  (You could consider a fast online loan while waiting for the back pay to come in).  Chances are, using my numbers above, you could swing the extra $3,000 in savings after the $12,000 in mortgage payment went away.

What if this led to a quick advancement where you were making $100,000 inside of a couple of years.  In this case, the flexibility of taking a lower paying job could actually net you more income in the long run.

How sweet would that be?  Chances are, many with a mortgage might never know, because they’d be unwilling or, lets’ face it, unable to take that initial jump.

Think of all the flexibility and opportunities that getting rid of the mortgage could afford you.  Doesn’t it seem a little too overly simplistic to think about only the rate of return or whether you could invest that money in the stock market?  If you are thinking of only those things, I guarantee you’re not seeing the full picture.

What do you think of my intangible benefits?  Any others you can think of?

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Mortgages Shouldn’t Be A Minefield

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If you’re stepping into the world of mortgages for the first time, the lingo used to describe all the different kinds of lending agreements available to you can be more than a little confusing. What are the benefits of a fixed rate versus those of a variable rate? What is a rate cap? And how can you determine which one of these is best for you? Here are the answers to all your basic mortgage questions in one short and simple guide.

Fixed rate. Fixed mortgage rates are most beneficial for homeowners who plan to stay in their homes for longer periods of time. Though fixed rate mortgages tend to have a slightly higher interest rate, the trade-off is knowing exactly how much interest you will pay on your home loan for the entire length of the term. If you struggle with budgeting your mortgage payment, this is a good option.

Adjustable rate. An adjustable rate mortgage (often called a “standard variable rate mortgage” outside of the United States) is one that is subject to fluctuations based on the standard interest rate for your lender. These kinds of mortgages can seem like a great deal at first because they often boast lower interest rates. However, those rates can change over time, meaning that you could end up paying more for your mortgage than you planned to.

Adjustable rate mortgages are good financial tools, however, if you sign on to them through a discounted rate and plan to upgrade to a newer home after a few years; this kind of arrangement allows you to take advantage of lower interest before the discounted rate term is up.

Another kind of adjustable rate that could serve your financial interests is a capped rate. This will ensure you that though the rate varies on your mortgage, it will never go above a certain amount. Borrowers with capped interest rates also sign a contract referred to as ‘cap and collar’, which more strictly dictates the activity of the variable rate by asserting that it won’t go below a certain amount, either. This kind of mortgage can be a financial advantage when interest rates are high but a hindrance if they should ever fall.

Going green. They’ve been around for several decades, but the trend of green mortgages is really beginning to take off in the U.S. This kind of mortgage may make you eligible for a lower interest rate, but the most significant perk is that it has the potential to save you money in the long run. With a “green” mortgage, formally called an energy efficiency mortgage or an energy improvement mortgage, your lender will increase the size of your loan to finance energy efficiency improvements to your home. While the loan amount is initially bigger, the lender calculates the savings that you’ll make on your monthly utility expenses as additional income, which means that you’ll have more money to pay off your home loan.

These are the basics, but there’s more knowledge to dig into! You can find out more about different mortgage rates at Rate Supermarket.

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Why I’m Glad I Have Someone Do Our Taxes

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I’ve been lucky enough to have someone do my taxes for as long as I’ve ever had to file them.  How did I get so lucky? Because my dad has been lifelong friends with the guy that does them, and he’s always treated our family very well.

I’ve never questioned his ability, but whenever I see something I don’t understand on a tax return, I ask about it, for the simple sake that I want to understand things.

We re-financed our mortgage last year, so when I was estimating our tax return, I entered the closing costs, but when our tax return came back, this wasn’t on here.  Only a small portion was.

I knew he was correct.  He always is.  So, I didn’t sweat it and in fact I waited until after tax season was done before I dropped him an e-mail asking why the closing costs were nowhere to be found.

He wrote back explaining that for a re-finance, the deduction is spread out over the original term of the loan. Our deductible closing costs were roughly $1,200 for the 15-year mortgage, meaning that we’ll see roughly $80 written off each year for the next 15 years.  In fact, there was $20 written off in 201, which makes sense given that we re-financed with three months left in the year.

(FYI: For an original mortgage on the property, you can write off the entire closing amount for the year in which the closing took place.)

Good to know!

When it comes to doing taxes, I know that I could likely enter the big stuff.  But, honestly, it’s the little stuff like this which makes me really, really glad that we have someone do our taxes.

And not just any someone, but someone we completely trust.

Do you  have someone do your taxes?  Did you know about the re-finance amortization requirement when it comes to writing off the closing costs?

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The Wrong Thing To Focus On When Re-Financing

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We re-financed last year as have many homeowners who are taking advantage of historically low rates.

One thing that I’ve seen in some of the discussions about re-financing is a focus on the wrong thing.  See if you can spot what’s wrong with the following hypothetical statement:

“Our current 30 year rate is 6% but we’re able to get our re-financed 30-year loan at 4.25%.  This will save us $350 per month!”

On the surface, this looks like great news all around.  Lower interest rate, saving more money, what could possibly be wrong?

Simple: The focus on the monthly payment is misguided.

In this scenario, you’re going from an existing 30 year mortgage to a new 30 year mortgage.  This means it’s thirty years from the re-finance date, meaning that your total time of paying the bank is thirty years plus however long you already spent on the original thirty year note.  If you’ve been paying for five years, that means you’ll be working on this loan for thirty five years.

On top of that, part of the ‘monthly savings’ that the hypothetical homeowner is so happy about comes, not from the lower rate, but from the fact that they’re spreading the remaining balance over additional years (in the example above, thirty years versus twenty five years).

When you’re re-financing, it’s my advice to look at how much time you have remaining on the existing mortgage, and strive to shorten it, or at worst, keep it the same.

In the example above where the homeowner has already paid five years on the original note, their new mortgage should be no greater than twenty five years.  Ideally, they should go for a fifteen year note.

This could mean that the homeowner might have to pay more than they did every month.  If you’re looking at only the bottom line, many will rule this out, even if they have the income to do so.  But the benefits are tremendous: You’ll apply a ton more toward principle and you’ll get done paying the mortgage that much earlier.  And your interest rate will be lower.

In the example above, going to a fifteen year mortgage might end up costing the homeowner an extra $150 over what they’re paying today.  If they can afford that, though, they shave a total of ten years off of the time that they pay on the house, and they pay a fraction of the total interest cost.

Now, if your payments are already stretched to the limit, fine.  Go ahead and get the thirty year re-finance, but instead of banking that extra money from the lower payment, keep your payment the same as what you were paying.  One hundred percent of that extra payment goes toward principle, so you’ll end up paying the mortgage off way faster, keeping with my goal not to exceed the term of your original loan.

In the example above, sticking with a 30 year note but plowing that ‘saved $450′ right back into the mortgage could have them paying the new loan off in, say, twenty years.  Add the five years from the original note, and they’re paying for a total of twenty five years, still way ahead of the original thirty year loan.

That’s five years less of stress!

If you’re in the market for a re-finance, great.  Just make sure to focus on the right numbers!

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