JAB Financial

Posted By tomc on September 1, 2009

By: Thomas Corley

In the past two years there have been five pieces of tax legislation that have included tax provisions targeting energy conservation. Through these tax incentives, the federal government is trying to change (socially engineer) the way people and businesses act with respect to energy use. Here is a summary of each one of the five tax incentives recently legislated:

The Energy Efficient Commercial Building Deduction (179D):
This came to us through The Economic Stimulus Act of 2008 and applies to commercial buildings, as well as multifamily residential structures with more than three above-ground stories. It provides a tax deduction equal to 60 cents per square foot for each of three categories ($1.80 deduction maximum) in which energy consumption is reduced from a “baseline” set forth by the American Society of Heating, Refrigerating and Air Conditioning Engineers. This standard is widely used by the commercial building industry. The taxpayer must secure an analysis from a professional engineer or licensed contractor along with a certification from this same professional. The certification is not required to be attached to the taxpayer’s tax return but must be maintained in a file and made available in the event of an IRS inquiry or audit. The three categories are:
Category #1 – Interior Lighting Systems
Category #2 – HVAC systems
Category #3 – Building Envelope (outer shell of building)
This deduction reduces the taxpayer’s tax basis for purposes of depreciation. In effect it equals accelerated depreciation. Like a first-year expensing of the associated energy-saving costs. This incentive expires at the end of 2013.

New Energy Efficient Home Credit (45L):
This is a federal tax credit of $2,000 available to home builders for each new home sold, which meets the definition of an energy-efficient home. An energy-efficient home must satisfy two conditions. Condition #1- It is certified to consume at least fifty percent less energy for heating and cooling than a comparable home constructed in accordance with older standards dictated by the 2004 Supplement of the 2003 International Energy Conservation Code. Condition #2 – The new home’s envelope (outer shell) must reduce energy consumption by ten percent or more than that of comparable homes. Again, a comparable home is one constructed in accordance with standards dictated by the 2004 Supplement. In addition to satisfying these two conditions, the new home must also meet a Federal Manufactured Home Construction and Safety Standards condition. A certification is required by an unrelated licensed professional engineer or a contractor. The certification is not required to be attached to the taxpayer’s tax return but must be maintained in a file and made available in the event of an IRS inquiry or audit. Unused credits may be carried back one year or carried forward twenty years. This credit is set to expire by the end of 2010. The credit reduces the home builder’s basis in the new home being manufactured for sale.

Residential Home Improvement Credit (25C):
This provision provides a thirty percent tax credit, up to $1,500, for qualifying residential improvements. Such improvement include insulation materials, exterior windows, skylights, exterior doors, oil water heaters and furnaces, central air conditioners, exterior doors, propane water heaters, hot water boilers, electric heat pump water heaters, metal roofs, stoves and circulating fans. These improvements must meet certain energy efficiency standards established by the IRS. You must check with the vendor to verify if the equipment used in the home improvement meets such standards.

Residential Credit For Certain Energy-Efficient Items (25D):
This provision provides another additional thirty percent tax credit for geothermal heat pumps, solar panels, wind energy systems, solar water heaters, small wind energy systems and fuel cells. There is no cap on the amount of qualifying expenditures. Qualifying expenditures include not only the cost of equipment but also the cost of labor to install the equipment. All improvements, other than fuel cell improvements, are available for new homes, existing homes, rental properties and second homes. Qualifying fuel cell improvements are eligible only for existing homes.

Accelerated Depreciation For “Smart” Electrical Systems (168):
This provision provides for accelerated depreciation of a ten-year life on smart electric meters and electric grid systems, which typically requires depreciation over a twenty-year period. Qualifying property includes property placed in service after October 3, 2008. Most taxpayers qualifying for this tax benefit will be utility companies, however, other non-utility taxpayers may qualify for “smart” meters which show energy consumption over time and allow taxpayers to monitor and adjust their power use.

Tom Corley is a Certified Public Accountant, a Certified Financial Planner, CLTC (Certified Long-Term Care) and President of Cerefice & Company, the largest CPA firm in Rahway, New Jersey. Tom works with clients helping them manage their money, retirement planning, college savings, life insurance needs, IRAs and qualified plan rollovers with an eye towards maximizing tax benefits and minimizing taxes. Tom is founder of the Rich Habits Institute and author of “Rich Habits”.

Category: Taxes, taxes & MORE taxes | No Comments »
Tags: Accelerated Depreciation For “Smart” Electrical Systems (168), Green, New Energy Efficient Home Credit (45L), Residential Credit For Certain Energy-Efficient Items (25D), Residential Home Improvement Credit (25C), Tax Incentives, The Energy Efficient Commercial Building Deduction (179D)

Posted By Joe on September 1, 2009

Congratulations! You’ve closed on the purchase of your new home. Now the fun starts! Of course you’re very excited and can’t wait to get moved in and settled. There is SO much to do, and it’s easy to go “overboard.”

As you spend the first week or two getting all your personal belongings moved in, you’re going to notice that you need a LOT of things you hadn’t planned on. If you purchased a new construction home, one of the first things most folks will need are window treatments… blinds or curtains, at the very least in the bedroom(s)/bathroom(s). I mean, do you really want to be putting on free shows for the neighbors? Maybe they’d complain and maybe not, but in any case… Maybe in your past place, you used a laundromat, but now you have your own laundry and need appliances? Did you have to take care of a yard before? Then maybe you need a lawnmower and some basic yard tools? If you’ve moved to a substantially bigger living space, it may seem empty and you need some furniture! Or maybe your present furniture just isn’t “right” for your new place.

When I moved in to my first new construction home (in FL), I found out (after closing, of course) that the builder provided NO light bulbs except the fluorescent bulbs in the main kitchen light! I promptly had to go out and spend almost $100.00 on light bulbs for the house! Do you have young children? You may want/need to buy cabinet door locking mechanisms so the young ones can’t get into the cabinets in the kitchen/baths. Or maybe those nice wall outlet plug-ins so the kids don’t get electrocuted playing with live sockets. If you’ve moved into a pre-owned home, it won’t be very long before you realize that there are some things that need repair or replacement. It always happens!

The main point that I’m trying to make here is that it is NOT CHEAP to own a home! There are and will be many expenses that you never thought of or expected. During the first few months that you are in your new home is the most dangerous time for you with regards to your finances and budget. You MUST be aware of the potential dangers of over spending, and at the same time, USE this time to adjust your budget to reality!

The biggest impact will be utility bills (electric/water/sewer/gas/trash etc.), quality of life bills (cable/satellite/phone/internet/etc.) and possibly HOA dues. Although you may have been provided estimates, you will not know the real costs until you’ve experienced a few months of paying them! Numerous other expected costs like gas for the car and transportation costs to go to/from work from your new location may also change drastically.

When we were in school, we were never taught about the costs of home ownership. Really, when you come right down to it, today’s public school systems don’t teach anything about finances and financial responsibility at all! Some education systems now teach about a checking account and how to write a check, but even that is obsolete with ATM and Debit cards combined with online bill payments. I see a time coming in the not too distant future when real paper money and checks no longer exist! They simply will no longer be needed.

So, BE CAREFUL my friends! Take the time required to anticipate the unexpected, to start preparing for unimagined expenses. During the first year you are in your new home, you should try to spend as little as possible and save as much as possible! Don’t be in such a hurry to spend money that you’ve worked hard for on things that are truly transient in nature. Believe and trust me that the saving you do now will more than make up for the present loss with far superior later years gains!

Budget, budget, budget; and always remember to PAY YOURSELF FIRST (SAVE!)!

Joe

Do you have any “happy endings” or “horror stories” you can share regarding your home purchase(s)?  Share your experiences and I’ll add them in the series!  If you enjoyed this post or the series, please leave a comment and feel free to forward a link to those you think could use this information. Thank you!

Category: Home(s) and Real Estate | No Comments »
Tags: budget, first time home buyer, home, new construction home, new home, purchase

Posted By Joe on August 29, 2009

The other day, one of my Twitter followers asked me; “What should I invest in today?” At first, I responded jokingly; “IMHO – (the) best thing to invest in is something that will make money!” What a concept huh? I followed that response with; “What risk Lvl & how long?” If you are a “short term” investor, the information I’m about to provide will not bear as much fruit for you. If however, you are a “long term” investor (you believe in 401K’s, IRA’s and the like), then this information will be CRUCIAL to your financial future!

The first thing we need to come to grips with and understand, is debt. As long as you are carrying a debt load, you can’t truly build wealth. The more debt you carry, the less real wealth you can build. The reasons are really quite simple and straight forward; 1. the debt must be repaid at some point, and 2. the lender is charging you interest on that debt, which also must be paid (and continues to eat your future wealth in bigger & bigger gulps each month that you maintain that debt)! In essence, you are forfeiting future personal wealth (by paying interest) for immediate pleasure.

So let’s set a couple of foundation stones before we move forward… Any interest you are paying that can be eliminated, is EXACTLY THE SAME as earning (saving) that same amount of interest! You have to understand and agree that NOT paying that interest, is keeping that amount of YOUR money in YOUR pocket, which can then be used for real investment (essentially doubling your potential income via EARNED interest on top of the interest saved). The second thing we have to understand and agree on is that any material items that you own, are assets. This includes investments, cash, vehicles, personal belongings & most importantly, your home. To build wealth, we must build or acquire (and retain) assets. Oh, and did I mention, we also must OWN those assets!

Having said that, we now have to discuss assets a little more in depth. We like to say we “own” our cars, we “own” our belongings, we “own” our home. However, if those items are financed, we in fact do NOT own them, we are purchasing them based on anticipated future earnings, over time. The longer the time (and the higher the interest rate), the more of our potential future earnings we are “giving away” in order to have those items today. This is commonly referred to as the “time value of money.”

Contrary to what you may think/believe, though the rate is important, the time factor is much more critical. Let me illustrate:

I just went to bankrate.com and checked car loan rates for the Denver, CO area. Here’s what I found (I will get each quote from the same lender, but will not reveal the lender):

New car 36 month – 5.11% /48 month – 5.11% /60 month – 5.22% /72 month – None Presently Available.

Now, I went to my favorite amortization calculator to figure out interest paid for each:

car price $30,000.00 Financed $25,000.00

36 month – pmt/mo = $750.51 / total interest pd = $2,018.29

48 month – pmt/mo = $576.98 / total interest pd = $2,694.99

60 month – pmt/mo = $474.30 / total interest pd = $3,458.29

As you can see, even with the same rate, the amount of interest paid on the 4 year loan is almost 34% higher than what you would pay on the 36 month loan! In return for this increase in income to the lender, they will allow you a lower monthly payment and a 12 month extension in the amount of time allowed to repay the loan. What a deal! But the best deal by far (for the lender) is for you to take the 5 year loan! That way the lenders’ income is increased by almost 77%!

So that you understand, you are still paying back the $25,000.00 you borrowed for the “asset” (the car), no matter which loan you take. But, by doing so over 5 years instead of 3, you are increasing the amount of future income (loan interest) you must pay to the bank by almost 77%, or $1,440.00 dollars of your future income you will now have to give away to the lender! Now, conversely, if we took the 5 year loan, but paid it off over a 3 year period, we will have SAVED ~77% or ~ $1,440.00 of future income we would no longer have to pay the lender! AND, we would actually OWN the (now it IS an) asset 2 years earlier!

OK, I hope the illustration helped you to understand my point about time vs. rate when it comes to loans. Now the next big thing we need to get our brains around is that it works exactly the same way on our home mortgage!

Now for the answer to the original question, “What should I invest in today?” My answer abosoutely takes into account risk tolerance and the length of time for a return. The investment I’m about to recommend has ZERO risk, and can be used over ANY amount of time, the shorter, the better! The shorter the time you take to complete this investment, the higher the returns over time!

Invest in yourself! That’s right, YOU! If you have $$ to invest right now, pay off a credit card (or 2) and SAVE the interest you would have paid that lender. Or apply it toward the principal balance on your car loan, and save the interest you would have paid THAT lender. Or, apply it toward the biggest “asset” you don’t actually own… your home (mortgage)! and since your mortgage loan is over the longest period of time, it WILL provide you the best return on investment.

Let’s discuss the risk involved… There IS NONE! You will be saving interest you were obligated to pay over time in the future (out of anticipated income). And, even better, there’re NO taxes on the money you’ve now saved!

Let’s talk about return on investment… you could take the money and buy a savings bond and earn 2% (which is taxable) and have (virtually) no risk. You could put it in a CD at the local bank and make maybe 1-3% (also taxable), & have virtually no risk. You can invest in mutual funds and have little to moderate risk, and also no real guaranteed gain either. Other investments get riskier as you go, and remember, any gains are taxable!

Now, let’s take a look at what happens if we invest in our largest “asset,” our home, and apply extra cash to our mortgage principal: I’m going to simplify this as much as possible, so bear with me here. We’ll say that it’s December, right after Christmas and our next payment will be in January.

Let’s say you have a $200,000.00, 30 year fixed rate mortgage @ 6.0% interest. You have already been paying on it for 2 years so your next payment due will be payment #25 out of 360. The principal & interest part of your payment is $1,199.10/month. Payment #25 breaks down to $224.42 for principal and $974.68 in interest. If we make that payment as scheduled, but include a separate check in the amount of $2,543.91 (the next 11 months worth of principal payments), we will have eliminated $10,646.20 in scheduled interest (pmt #26-#36).

Now, this hasn’t eliminated our need to make monthly mortgage payments, and we will still have a payment due at the beginning of each month until the loan is paid in full. BUT, in making that one extra payment toward principal, we knocked 11 months off the remaining length of the loan. We have made very little negative impact on our mortgage interest tax deduction (would have been $11,620.88, will now be $11,422.86), and we have MADE (saved) $10,646.20!

Lets look at that from an investment point of view… We would have had to pay that money to the lender out of future income. We now no longer do. We paid the lender $2,543.91, which we would have had to pay anyway (over the next 11 months)! so, according to my math, we just made a 418% profit on that investment!! And the best part of it is that we don’t have to pay taxes on that money!

The biggest thing you have to remember is that you didn’t “give that money to the bank!” You applied that money toward an asset that you wish to have – your home, and it was money that you were going to have to pay at some point regardless!! You just did it earlier than scheduled, and saved yourself a substantial amount of future income you would have had to give to the mortgage lender in the form of interest! Had you NOT paid that money in advance, you would still owe it and have to pay it in the future, and you would have had to give the lender a real $10,000.00+ EXTRA, for that priviledge!

I tried to make the previous example simple. In reality, we all know life is complex. We don’t normally have chunks of extra money floating around that we can apply toward our debts. To top it off, the average American has some 14 odd credit (debt ) accounts in addition to their mortgage(s). As a result, most of us do nothing! We pay the minimum required on everything and continue to live under the impression that it’s “the only way.”

We can blame it on whomever we like; the schools for not educating us about the way money really works. We can blame it on our parents for not teaching us how to budget and not teaching us fiscal responsibility. We can even point to government and say “hey, they can do it, why can’t we?” It’s not easy. It’s hard. And it’s something we ALL have to learn and go through to get to the other side which is – financial independence.

There are some applications and products out there that can help you manage it all! You don’t have to fight as an underdog. If you have questions, talk to someone! Get those questions answered! Whatever you do, DON’T just wallow in defeat/despair/depression, and don’t hide your head in the sand! You CAN become debt free and start building real wealth. And it DOESN”T have to cost you an arm and a leg to do it! Drop me a line and let’s talk!

Thanks for reading! If you’ve enjoyed the article (or not) or have questions, please leave a comment. If you know someone who needs this information, right below there’s a selection button where you can send them a link to this article. Please do!

Joe

Category: Investments, Money & Assets | No Comments »
Tags: assets, best investments, debt, home, interest, invest, loan, longterm, mortgage, ownbuild wealth, personal wealth, short term

Posted By Joe on August 29, 2009

We’ve talked about the loan and we’ve talked about credit. Now it’s time to talk about the reality of home ownership (before you get there).

Owning the residential property that you live in is VERY different than renting it. You will be taking on many new responsibilities and many more expenses than what you have to deal with when renting. Unless you are buying a brand new home, if anything goes wrong, YOU have to pay to get it fixed! Nobody is going to replace things that wear out; you have to cover those expenses. Updates and upgrades? You cover them too!

A very famous line that you must have heard at some point is “Why rent when you can own for “about” the same cost or less, and get the income tax advantage?”

OK, let’s take a look at this in today’s market. There is a glut of homes on the market right now and there have been for the past several years. As a result, there is a corresponding increase in rental availability. Rents are cheaper than they were in the recent past. OK, you can’t write off rent on your taxes but you can write of mortgage interest and property taxes (but for how much longer I wonder? That’s another subject). For right now, you can read another post I did that covers this topic on another Blog of mine (if you wish) Your Mortgage & Taxes.

What we really need to talk about is budgeting. I know; it’s a fun subject that we all just love! Let’s be honest, we hate budgeting and we don’t do it because it’s hard! It takes a lot of time and effort and it’s very complicated math because so many things change every month! Some of us (you) are math majors and love your Excel spread sheets, some of us (you) are CPAs and love your Quicken/Quickbooks software. I’m sorry, but I think if we all can be honest, it’s really a pain in the butt! It’s a LOT of work. And today’s home computer software is designed so that only a professional can really understand/use it.

Many first time buyers get into trouble right off the bat because when they purchase that home, they no longer have to pay rent and can go almost 2 months before they have a mortgage payment! So, after they move in and realize all of the things that they “need,” they spend that extra money rather than setting it aside to apply to the mortgage. When that first mortgage payment comes due, they are already in a paycheck-to-paycheck situation. Then, if something breaks or goes wrong, well, they just charge it to their credit card(s). Before too much time has gone by, money is tight!

When they qualified to purchase the home, the lender qualified them for the largest loan they could get, and it’s not really an American tradition to “buy down.” We tend to buy the maximum we can “afford” (or more!). This nation and its people have a very big problem with debt right now… That too is another subject. The point is, generally within 6 months after purchasing a home, the buyers debt ratio has climbed to a point where they would no longer qualify for that same loan!

There is a web based system that I believe is going to be the salvation of American home owners with respect to eliminating their mortgage and debt. That’s not the purpose of this article, but I believe that anyone purchasing a home should look into this system as soon as possible after they close. At that point, it is easiest to establish a new routine such as budgeting, and this system automates almost everything to make it simple, fast, and easy. I have links on this Blog that you can follow for more information. It’s called the Money Merge Account, offered by United First Financial. As a first time home buyer or as a long time home owner, you really should take a look at this system!

So the key element to plan for prior to closing on your new home is to NOT spend money freely after you move in. Wait several months for the dust to settle so you can see where you really stand. If you plan for this ahead of time, it will make the initial steps of your home owner’s journey so much easier!

Joe

Category: Home(s) and Real Estate, Mortgages & Financing | No Comments »
Tags: credit, first time home buyer, loan, mortgage, own, property, rent, rental, renting, rents, residential, taxes

Posted By Joe on August 26, 2009

This is a continuation of my previous post, and in this one I intend to help you avoid a LOT of potential mistakes that you can make between now and closing. Most folks just don’t realize that making that first home purchase (or ANY home purchase) is fraught with potential deal killers. Again, I want to help you avoid making the most common mistakes!

When you first started out on this mission of home ownership, you talked with two very important professionals; the Realtor and the Mortgage lender. There are many things that you can do between now and the time you close that will cause the whole purchase to “blow up” and go away. As usual, most will deal with the money… financial issues, but not so much from a cash perspective… what we need to worry about now is from a credit perspective.

When you did your loan application, the lender took a “snap shot” of your financial and credit situation to qualify you for the loan. If you are buying a resale home, you should close fairly quickly so there’s less time to make a potential mistake, but if you’re buying new construction, it could be months or even a year before your home will be complete for you to close the purchase. That’s a long time to keep that “snap shot” from changing!

Many first time home buyers think that because their loan is conditionally or final approved, that they are set and can go on with life. That is so NOT the case! I have had clients who quit their jobs right before closing (well, no job/income, no mortgage!), I have had clients go buy a new car (their debt just increased which raised their ratios and they are no longer qualified for the loan), I’ve had clients run their charge cards up or open several new credit card lines (again, it raised their debt ratios and they no longer qualified), Buying new furniture because it was no interest and no payments for 25 years! The list goes on and on…

In years gone by, when this kind of thing happened, we had sub prime lenders we could go to and hopefully save the loan. Of course because of the negative changes, the clients’ interest rates and often terms changed for the worse because of this, but at least they still got a loan and continued to purchase their new home. This is no longer the case! Sub prime lenders are so rare today as to be virtually nonexistent. If you screw up the qualifications for the loan you were initially approved for, you just lost your new home!

From what I’ve already described, you should have some idea of what NOT to do. This will really be a short post because the rules are very simple:

DON’T DO OR CHANGE ANYTHING THAT WILL OR MAY NEGATIVELY IMPACT YOUR EMPLOYMENT, INCOME, ASSETS, DEBT, OR CREDIT BETWEEN NOW AND CLOSING!

If you have any question or doubts, PLEASE contact your lender and discuss your thoughts BEFORE you move on them!

Here’s an example that’s really quite common. You’ve been working in this salaried position for 4 years (you MUST have a 2 year employment history in the same line or field of work to qualify for a mortgage loan). Your employer has just opened some field jobs that are commission based vice salary, and by taking the position, you have the potential to double your income. If you switch jobs from salary to commission, you just started that 2 year counter all over again! You just lost your loan! Change to self employment? Same thing! You just lost your loan! If you used your spouse’s income to qualify, the spouse can’t change anything either!

Here’s another innocuous thing that can potentially lose you your loan: Your loan and terms are based very heavily on your credit scores. Did you know that every time you apply for credit, it knocks 5 points off your credit score? Between the time you applied for the loan and the scheduled close, let’s say you go out and look at new cars, and maybe stop at some furniture places. If any of those places you were “window shopping” at pull your credit, your score just took a hit, whether you bought anything on credit or not! Enough hits to your score can drop you below the minimum score allowed and you just lost your mortgage loan!

Even if the score didn’t drop below the minimum, you could STILL lose the loan because the lender can see that there’s a good chance that you are going to go get additional credit/loans AFTER you close! Today, lenders are NOT going to accept that risk!

Your credit documents (bank statements, pay stubs, credit report, etc.) are only good for 1-3 months depending on the lender and type loan you are doing. Many if not most lenders today are going to want to update all that documentation right before you close. They want to be as sure as they can be that they are not doing a risky loan. They can’t “afford” any more “bad loans” on their books. They will make sure that you are still a qualified borrower before they hand over that large “investment” they are making in you. Remember from previous posts, the bank is purchasing the investment… You are purchasing a HUGE debt!

OK, hopefully this information has helped you. If in doubt, DON’T DO IT!

Enjoy your new home!

Joe

If you’ve enjoyed the series so far, and know of anyone who might benefit from this information, please click the link below to forward this post to someone who needs it! Thanks!

Category: Home(s) and Real Estate, Mortgages & Financing | No Comments »
Tags: credit, credit scores, debt, first time home buyer, home, home ownership, home purchase, investment, lender, loan, mortgage, realtor, self employment

Posted By Joe on August 26, 2009

Before you get started on this post, be aware there are several amortization tables included as part of the post. As a result, the post is rather LONG! Yes, there is also a bit of math involved, but nothing too difficult. I hope you find the information valuable!

Mortgage rates are the lowest they’ve been in quite a long time. Most of this is due to the financial crisis in mortgages and real estate that the country has been experiencing over the past several years. The lower rates have also come about through government intervention and stimulus to/for the economy. Regardless of how the present situation came to be, with 30 year fixed rates in the 4-5% range, MANY people are chomping at the bit to refinance. As always, most folks are seriously rate conscious and that’s ALL they focus on. I talked at length about this in a previous article: Refinance or not to Refinance, That is the Question. Please take a moment to review this article as the present article will build from there.

You MUST understand that refinancing is in the BANK’S best interests, NOT YOURS! I will show you why in this article

If you are presently in a high interest rate, variable rate, or interest only loan, then it MAY be time to consider a refinance. However, if you choose to proceed with a refinance, you should ALSO plan to recover the cost of doing so as quickly as possible! The links I’m about to give you will allow you to SEE what you can do with the savings AFTER the refinance. This is really the first step to becoming completely debt free, including your mortgage! You must understand that the ONLY reason and way that a refinance makes sense is if you intend to allocate additional money toward principal with the monthly savings.

The tool we’ll need to use is an: Amortization Calculator with ability to see/print amortization tables

(You can use your real numbers here if you wish. Please be sure you’re sitting down when you do/look at this!) Let’s say that you presently have a 30 year (360 months) mortgage that started @ $200,000.00, @ 7% interest that you started paying in Nov 2006. These basic numbers show that your monthly principal & interest (P&I) payment on the existing mortgage is $1,330.60/month. We will further assume that you’ve already been paying on this mortgage for 2.5 yrs (30 months), so you have 27.5 years (330 months) left to go on your existing mortgage. This is what your amortization table looks like right now:

I suggest you print out the amortization table(s) for easier comparisons later.

Loan Amount: $200,000.00 ~ Term of the Loan: 30 years ~ Interest Rate: 7.000%
Monthly mortgage payments: $1,330.60 ~ Total interest paid over the life of the loan: $279,017.80
Payoff: October 2036
2006
# Nov: Principal: $ 163.94 Interest: $ 1166.67 Balance: $ 199836.06
# Dec: Principal: $ 164.89 Interest: $ 1165.71 Balance: $ 199671.17
Totals: $ 328.83 $ 2332.38
2007
# Jan: Principal: $ 165.86 Interest: $ 1164.75 Balance: $ 199505.31
# Feb: Principal: $ 166.82 Interest: $ 1163.78 Balance: $ 199338.49
# Mar: Principal: $ 167.80 Interest: $ 1162.81 Balance: $ 199170.69
# Apr: Principal: $ 168.78 Interest: $ 1161.83 Balance: $ 199001.91
# May: Principal: $ 169.76 Interest: $ 1160.84 Balance: $ 198832.15
# Jun: Principal: $ 170.75 Interest: $ 1159.85 Balance: $ 198661.40
# Jul: Principal: $ 171.75 Interest: $ 1158.86 Balance: $ 198489.66
# Aug: Principal: $ 172.75 Interest: $ 1157.86 Balance: $ 198316.91
# Sep: Principal: $ 173.76 Interest: $ 1156.85 Balance: $ 198143.15
# Oct: Principal: $ 174.77 Interest: $ 1155.84 Balance: $ 197968.38
# Nov: Principal: $ 175.79 Interest: $ 1154.82 Balance: $ 197792.59
# Dec: Principal: $ 176.81 Interest: $ 1153.79 Balance: $ 197615.78
Totals: $ 2384.22 $ 16244.25
2008
# Jan: Principal: $ 177.85 Interest: $ 1152.76 Balance: $ 197437.93
# Feb: Principal: $ 178.88 Interest: $ 1151.72 Balance: $ 197259.05
# Mar: Principal: $ 179.93 Interest: $ 1150.68 Balance: $ 197079.12
# Apr: Principal: $ 180.98 Interest: $ 1149.63 Balance: $ 196898.14
# May: Principal: $ 182.03 Interest: $ 1148.57 Balance: $ 196716.11
# Jun: Principal: $ 183.09 Interest: $ 1147.51 Balance: $ 196533.02
# Jul: Principal: $ 184.16 Interest: $ 1146.44 Balance: $ 196348.85
# Aug: Principal: $ 185.24 Interest: $ 1145.37 Balance: $ 196163.62
# Sep: Principal: $ 186.32 Interest: $ 1144.29 Balance: $ 195977.30
# Oct: Principal: $ 187.40 Interest: $ 1143.20 Balance: $ 195789.89
# Nov: Principal: $ 188.50 Interest: $ 1142.11 Balance: $ 195601.40
# Dec: Principal: $ 189.60 Interest: $ 1141.01 Balance: $ 195411.80
Totals: $ 4588.20 $ 30007.53
2009
# Jan: Principal: $ 190.70 Interest: $ 1139.90 Balance: $ 195221.10
# Feb: Principal: $ 191.82 Interest: $ 1138.79 Balance: $ 195029.28
# Mar: Principal: $ 192.93 Interest: $ 1137.67 Balance: $ 194836.35
# Apr: Principal: $ 194.06 Interest: $ 1136.55 Balance: $ 194642.29
REFI Totals: $ 5357.71 $ 34560.44

You have already paid down $5,357.71 in principal. You have also paid $34,560.44 in interest! Having been in the mortgage business for many years, and knowing how mortgages work, we’ll say that you are about to refinance to get the lowest rate possible (without paying extra points to buy the rate down). It is reasonable in todays mortgage environment to get a loan @ ~4.75% if you are paying the costs of doing the loan. The costs to do a refinance will be ~ 3% of the loan amount but for nice round numbers, we’ll say your costs will be exactly $5,357.71. Since you don’t want to bring that money to the table, we’ll add it to your new loan. So your new loan will once again be starting at $200,000.00. Here is what your new amortization table will look like:

Loan Amount: $200,000.00 ~ Term of the Loan: 30 years ~ Interest Rate: 4.750%
Monthly mortgage payments: $1,043.29 ~ Total interest paid over the life of the loan: $175,586.08
Payoff: April 2039
2009
# May: Principal: $ 251.63 Interest: $ 791.67 Balance: $ 199748.37
# Jun: Principal: $ 252.62 Interest: $ 790.67 Balance: $ 199495.75
# Jul: Principal: $ 253.62 Interest: $ 789.67 Balance: $ 199242.12
# Aug: Principal: $ 254.63 Interest: $ 788.67 Balance: $ 198987.50
# Sep: Principal: $ 255.64 Interest: $ 787.66 Balance: $ 198731.86
# Oct: Principal: $ 256.65 Interest: $ 786.65 Balance: $ 198475.21
# Nov: Principal: $ 257.66 Interest: $ 785.63 Balance: $ 198217.55
# Dec: Principal: $ 258.68 Interest: $ 784.61 Balance: $ 197958.87
Totals: $ 2041.13 $ 6305.22
2010
# Jan: Principal: $ 259.71 Interest: $ 783.59 Balance: $ 197699.16
# Feb: Principal: $ 260.74 Interest: $ 782.56 Balance: $ 197438.42
# Mar: Principal: $ 261.77 Interest: $ 781.53 Balance: $ 197176.65
# Apr: Principal: $ 262.80 Interest: $ 780.49 Balance: $ 196913.85
# May: Principal: $ 263.84 Interest: $ 779.45 Balance: $ 196650.01
# Jun: Principal: $ 264.89 Interest: $ 778.41 Balance: $ 196385.12
# Jul: Principal: $ 265.94 Interest: $ 777.36 Balance: $ 196119.18
# Aug: Principal: $ 266.99 Interest: $ 776.31 Balance: $ 195852.19
# Sep: Principal: $ 268.05 Interest: $ 775.25 Balance: $ 195584.15
# Oct: Principal: $ 269.11 Interest: $ 774.19 Balance: $ 195315.04
# Nov: Principal: $ 270.17 Interest: $ 773.12 Balance: $ 195044.87
# Dec: Principal: $ 271.24 Interest: $ 772.05 Balance: $ 194773.62
Totals: $ 5226.37 $15639.51
2011
# Jan: Principal: $ 272.32 Interest: $ 770.98 Balance: $ 194501.31
# Feb: Principal: $ 273.39 Interest: $ 769.90 Balance: $ 194227.91
# Mar: Principal: $ 274.48 Interest: $ 768.82 Balance: $ 193953.44
# Apr: Principal: $ 275.56 Interest: $ 767.73 Balance: $ 193677.88
# May: Principal: $ 276.65 Interest: $ 766.64 Balance: $ 193401.22
# Jun: Principal: $ 277.75 Interest: $ 765.55 Balance: $ 193123.47
# Jul: Principal: $ 278.85 Interest: $ 764.45 Balance: $ 192844.63
# Aug: Principal: $ 279.95 Interest: $ 763.34 Balance: $ 192564.68
# Sep: Principal: $ 281.06 Interest: $ 762.24 Balance: $ 192283.62
# Oct: Principal: $ 282.17 Interest: $ 761.12 Balance: $ 192001.44
Totals: $ 7998.55 $23300.28

I’m sure you’re wondering why, since this is a brand new loan, did I show you the new table out to 30 months. Well, the explanation is really quite simple. You see, when you refinanced, you started all over from scratch and wiped out the previous 30 months worth of pricipal you had paid on the old loan. You have to start paying that interest ALL OVER AGAIN! Because you DIDN’T pay for the loan when you refinanced, but instead, added that cost to the new loan, you will actually pay $23,300.28 in interest for that new loan, PLUS the $5,357.71 in refinance costs, which were added to your loan amount! So really, the cost of that refinance was a total of: $28,657.99

But we’ll let that slide for the moment… Let’s move on… That damage is done, but, you have the new lower interest rate loan. Your old P&I was $1,330.60/month. The new P&I is $1,043.29, or a difference of $287.31 per month. Now, if you’re like 87% of those who refinance, you’ll take those savings and spend them, making no dent in your existing debts, or applying those funds to principal (to try and recover the money you’ve already spent/lost by refinancing in the first place).

IF (and this is a BIG IF) you apply those savings to principal monthly, THIS would become your new Amortization table:

Loan Amount: $200,000.00 ~ Term of the Loan: 30 years ~ Interest Rate: 4.750%
Monthly mortgage payments: $1,043.29 ~ Total interest paid over the life of the loan: $175,586.08
Additional $287.31 applied to principal each and every month
Payoff: May 2028
# Total Interest:$ 104412.25 (As given)
# SAVINGS: $ 71173.83 Total Interest Saved, 10.92 Years shorter loan

2009
# May: Principal: $ 538.94 Interest: $ 791.67 Balance: $ 199461.06
# Jun: Principal: $ 541.07 Interest: $ 789.53 Balance: $ 198919.99
# Jul: Principal: $ 543.21 Interest: $ 787.39 Balance: $ 198376.78
# Aug: Principal: $ 545.36 Interest: $ 785.24 Balance: $ 197831.41
# Sep: Principal: $ 547.52 Interest: $ 783.08 Balance: $ 197283.89
# Oct: Principal: $ 549.69 Interest: $ 780.92 Balance: $ 196734.20
# Nov: Principal: $ 551.87 Interest: $ 778.74 Balance: $ 196182.34
# Dec: Principal: $ 554.05 Interest: $ 776.56 Balance: $ 195628.29
2010
# Jan: Principal: $ 556.24 Interest: $ 774.36 Balance: $ 195072.05
# Feb: Principal: $ 558.44 Interest: $ 772.16 Balance: $ 194513.60
# Mar: Principal: $ 560.66 Interest: $ 769.95 Balance: $ 193952.95
# Apr: Principal: $ 562.87 Interest: $ 767.73 Balance: $ 193390.07
# May: Principal: $ 565.10 Interest: $ 765.50 Balance: $ 192824.97
# Jun: Principal: $ 567.34 Interest: $ 763.27 Balance: $ 192257.63
# Jul: Principal: $ 569.58 Interest: $ 761.02 Balance: $ 191688.05
BREAK EVEN OR “EQUALIZATION” POINT
# Aug: Principal: $ 571.84 Interest: $ 758.77 Balance: $ 191116.21
# Sep: Principal: $ 574.10 Interest: $ 756.50 Balance: $ 190542.10
# Oct: Principal: $ 576.38 Interest: $ 754.23 Balance: $ 189965.73
# Nov: Principal: $ 578.66 Interest: $ 751.95 Balance: $ 189387.07
# Dec: Principal: $ 580.95 Interest: $ 749.66 Balance: $ 188806.12

At the break even or “equalization” point, your outstanding principal balance is approximately where it would have been at the same time on the original loan. By applying that small amount of extra toward principal, you have also knocked almost 11 years off your new 30 year mortgage and have saved over $71,000.00 in interest you would have paid the bank on this new loan.

The total interest scheduled to be paid on the original loan was, over the life of the loan: $279,017.80
The total interest remaining to be paid on the original loan, at the time of refinance: $244,457.36
The total interest scheduled to be paid on the new loan w/no prepayment of principal: $175,586.08
The total interest scheduled to be paid on the new loan WITH prepayment of principal: $104,412.25

The Interest savings from the refinancing will be ~$68,871.26; the difference between the remaining interest to be paid on the original loan, and the total interest due to be paid on the new loan. That is assuming that you remain in the home, with that loan, without taking any equity back out of the home, for the next 30 years. The additional interest saved by applying the monthy payment savings directly toward principal was another $71,173.83, for a total interest savings of $140,045.10!

OK… You applied the savings from the refi back toward the new mortgage loan. What if you actually had several hundred dollars of free cash each month, or recieve a small inheritance, or get a pay raise? Where would you put those extra dollars?

Now let’s make things a bit more complicated… What if you had 7 or 8 credit cards with balances, several student loans, a couple of car loans, and a store card or two, all with interest rates of between 9-24%, would it be better to apply those extra dollars towards something there rather than the mortgage? Now we’re getting into factorial math, and the possible payoff combinations are in the millions!

This is where the Money Merge Account from United First Financial comes into play! It was designed specifically for this exact situation! It will do the factorial math FOR you, and tell you exactly what to pay to whom so that you achieve the MAXIMUM savings of interest possible!

Remember at the beginning of this post I said that “You MUST understand that refinancing is in the BANK’S best interests, NOT YOURS! I will show you why in this article.” Well, here’s the “why”

All of these potential savings that I’ve outlined will ONLY happen if you stay in the home and pay on that note until it’s paid in full. Most folks move every 3-5 years, and when they move, they spend the equity they receive from the sale and once more, have to start all over again from scratch when they purchase their NEXT home! It’s a never ending sequence until late in life, when it finally becomes apparent that you will never actually own a home! You’ve been paying the bank all these years for what? Why to keep them in business of course!

Take care until my next post! I hope the information I’ve provided to you has been valuable.

Joe Brady

Category: Mortgages & Financing | No Comments »
Tags: amortization, interest, mortgage, P&I, principal and interest, rate, rates, real estate, refinance, refinancing, tables

Posted By Joe on August 26, 2009

Let’s review first: You found out that you ARE qualified, and you know exactly WHAT you are qualified for. You’ve taken the time (with your significant other if you have one) to determine what it is that you really want and have decided to settle for no less than that. You’ve listed out your “must haves” your “should haves” and your would “like to haves.” If you are honest with yourselves and honest with your Realtor, everyone will win in the process to come, and all will be happy with the out-come. That’s the goal!

Now we’re going to start the actual process! I want you to do this RIGHT the first time! I want you to do this with your eyes wide open so you can see many of the potential potholes BEFORE you drive into them!

The first thing we need to talk about (near and dear to everyone’s heart) is: THE MONEY! Yep, because a LOT of money is going to change hands here. Not necessarily at the closing table (100%+ financing is pretty much a thing of the past in today’s lending environment), but over the coming years.

I want you to remember; above ALL else, the single most important number in this whole evolution is APR! That’s right, the Annual Percentage Rate (APR). It’s extremely important! Here’s why: The APR figures in not only the interest you’ll pay over the life of the loan, but the COSTS of doing the loan as well. So, if you have a choice between a 5.75% loan with an APR of 6.375% and a 6% loan with an APR of 6.125%, the 6% loan is the better loan to take.

Now, before I go into specifics, you must understand that you can’t compare apples and oranges… If one is a 30 year loan, then the other must also be a 30 year loan. The loan amounts must be the same. APR is factoring the costs over the life of the loan. So basically, if you have the lowest APR with the lowest rate, you’ll have the best loan (Please read the next paragraph!). What nobody tells you is that the TRUE APR IS GOING TO INCREASE, because in virtually every case, you will NOT pay the loan off over the full term! You will either refinance at some point ( DON’T DO IT! SEE WHY!), or you’ll sell the home and move, which will necessitate paying that loan in full before the full term is up. As a result, the costs involved will have been paid over a much shorter time frame, which drives the APR up.

The next important warning again relates to comparing fruit. Now that you’ve found the lender with the lowest interest rate and the lowest APR, the NEXT thing you have to determine is; did that lowest of the low “forget” to include some of the common closing costs associated with doing a loan? Of course we all know this would “never” happen intentionally… One of the requirements placed on all lenders is they MUST give you a Good Faith Estimate (GFE) of the settlement charges on the loan. If you see a fee on one GFE that is not on the other GFEs, you need to question this! Some lenders will completely “leave off” the title fees (for example) from their GFE because they are not “lender” fees. So, they aren’t technically lying, but they’re also not technically being truthful either! By not disclosing the title fees, it makes the stated APR significantly lower than it will really be. You will have title fees because the title company needs to be paid as well. If the lender says they are paying them (ANY fees!); GET IT IN WRITING! If you have doubts, review the GFEs with an independent, knowledgeable person!

There WILL be other costs in this transaction that are NOT included in the APR calculation. These can include such things as the money to cover your initial home owners insurance (HOI) and to set up your escrow account for property taxes and HOI, initial Home Owner’s Association (HOA) dues, and numerous other things that can be involved with owning a home. I think I may have mentioned in a previous post that there are a lot of costs involved with home ownership…

The big thing with these costs is: some you DO have control over, and some you don’t. For example; YOU choose the insurance company that will provide your homeowner’s coverage. Hopefully you will shop around (I may do another post on this later – remember: compare fruit!) and get the “best” policy for you. Once you’ve chosen your insurance provider, those costs will remain the same no matter what lender you use. Your escrow for HOA and taxes will also be the same no matter what lender you use. I guess the biggest thing here is this… Make sure if the costs are going to exist, that they are included on the GFE. That way you’ll be looking at a more “real” estimate, and won’t get a huge surprise right before, or worse – at, closing.

Another thing that you need to look very closely at if you’re buying a new construction home is the “builder’s concessions.” Most larger builders have their own mortgage companies and in return for you doing your mortgage through that builder, you get (sometimes huge) price breaks on the home. I can’t cover that in adequate detail in this post, but WILL get into it in a later post.

Now, there’s one other BIG surprise I don’t want you to get. This won’t happen until you’re already moved in and think you’re all settled into a monthly mortgage payment routine. It could come sooner… or it could come later, depending on when (what month) you close, and how efficient your local taxing authority is. This is called the “Escrow Adjustment.” Now, this normally isn’t a huge deal if you purchased a “used” home, because that home has already been given an assigned tax value by the taxing authorities. It may adjust up or down some in the future depending on what the property was previously appraised at compared with what you have now established its worth at when you purchased it. The taxes will increase or decrease in the future based on what property values do and property tax rates do.

The real killer is when you purchase a new construction property. I’ll try to keep this as simple as I can. Please bear with me…

Prior to you purchasing that beautiful new home, the land that it is now sitting on was taxed by the county as “raw land” or “agricultural land” or “unimproved land.” I think you get my drift. When the builder applied with the county to build these homes for sale, they arranged to NOT have to pay taxes on the land at residential rates, simply because most build-outs take years to complete and they couldn’t afford to pay those higher taxes and still make a profit on the home sales. So, the land tax is at a VERY low rate UNTIL the home is sold TO YOU! Now I’m going to do an example based on reasonable numbers, but to get the REAL numbers in your case, you’ll need to talk with your Realtor, or better yet, the county where this new home will be built, to get the REAL tax numbers.

We’ll say in this example that you are going to buy a $250,000.00 brand new home. We’ll say that the county tax on “raw land” is .1% and on residential properties, it is 1.00% of the value. Typically, 15-20% of the purchase price of the new home is the cost of the land that it sits on (we’re talking a new home sub development, not a property w/acreage). So now we can compare property taxes each way. The raw land @ $50,000.00 value with a property tax of .1% gives annual property tax of $50.00. The new home @ $250,000.00 value with a property tax of 1% gives annual property tax of $2,500.00. A bit of a difference there, wouldn’t you say? Hmmmm I wonder if that’s why builders and local government get along so well…

OK, so here’s where it gets painful. By law, when the title company sets up your escrow account for taxes, they can NOT estimate your monthly property tax escrow amount on some future value. They MUST use the established value of the property based on historical property taxes. So even though you KNOW the property taxes will be ~$208.00 per month and the title company KNOWS this as well, they can NOT set your escrows up for that amount!

Even if your lender used that amount on the GFE that was provided, when you go to closing, the amount escrowed for property taxes will be much lower, and can be SIGNIFICANTLY lower. Here’s what’s going to happen: we’ll say you have a $200,000.00 loan @ 6% fixed for 30 years. Your principal & interest (P&I) payment to pay off that loan will be $1,199.10 per month. We’ll say that your HOI will be $900.00 annually or $75.00 per month, and your taxes SHOULD be $2,500.00 annually or $208.33 monthly. When you combine all of these numbers, you come up with a PITI of $1,482.43 per month. This is what you planned on and this is what the lender estimated.

When you go to closing, the title company will have estimated your taxes. Depending on what time of the year you close, and because of the raw land portion, they will estimate your monthly property tax at say $125.00. Now… If you close in February, that means you will pay $125.00 per month into the escrow account for taxes as part of your monthly mortgage payment starting on April 1^st. The title company will collect 2 months of those taxes from you at closing to establish the escrow account. So, you start with a balance in the escrow for taxes of $250.00 and will pay 9 months (the remainder of this calendar year), or $1,125.00 more into the account and at the end of the year, you have $1,375.00 in the escrow account.

Now you’re not going to complain TOO loudly because you thought you would have a $1,482.43 per month PITI (mortgage) payment, and here you are at closing and the payment they’re showing you will only be $1,399.10. You’re thinking “Hey, This is GREAT! It’s worked out better than we could have hoped!”

Now, the county at some point during this year will re-assess the property taxes on that new home from raw land to residential. Since builders have slowed down substantially over the past few years, and virtually all counties are starved for tax dollars, I’m pretty sure they catch it immediately. As a result, your property is going to be taxed at $208.33 per month from February on. So, at the end of the year, the tax bill will REALLY be $2,291.63 (+ the few dollars for the month of January that the builder reimbursed you for at closing). So, we have what’s called an escrow shortage, in this case of $916.63.

So, some time in January, the lender is going to let you know this via mail and give you a couple of options. You can pay the shortage in a lump sum, and your monthly mortgage payment will only go up by one twelfth of that amount or $76.39 per month ($916.63 shortage/next 12 months) so you don’t have the same shortage at the beginning of the NEXT year. OR, they will let you break that amount up over the next 12 months and your mortgage payment will go up $152.77 per month for the next year to make up the shortage AND ensure you don’t have the same shortage next year.

So you have the option of coming up with $917 right now AND your mortgage payment goes up by $77.00 per month, or not coming up with the cash (which you probably don’t have) and your mortgage payment will go up $153.00 per month. Folks, this will be an 11% increase in your mortgage payment for the next year. That corresponds to an 11% DROP in expendable income next year. Do you think this might alter your lifestyle a bit? It might hurt some? Most likely.

So, you have 2 choices BEFORE you close on that new home. You either keep that money difference in a savings account and earn yourself some interest until the escrow police catch up to you, then pay the lump sum. Or, you send that extra money in to the lender to be put in the escrow account each month so you don’t have the shortage in the first place.

OK, enough on this post regarding money. I hope this will save you BUNCHES!

Joe

Category: Home(s) and Real Estate, Mortgages & Financing | No Comments »
Tags: APR, closing costs, first time home buyer, GFE, HOA, interest, loan, mortgage, qualified, rate, real estate, realtor, taxes

Posted By Joe on August 25, 2009

We talked about “qualified” in a previous post: First Time Home buyer #1: Are you qualified?

OK, so we’ll say that you’ve now been in contact with both of the professionals and have found out that you ARE qualified for a loan, and that the Realtor is a good personal match for you (you get along well together) and you’re going to start looking at/for your future home. Though you may have that perfect home pictured in your mind, if the Realtor is any kind of true professional, he/she will be asking a LOT of questions to find out what type of home will truly work best for you. There are 2 main items of concern that must be identified first; what is the price range you are qualified for and what “kind” of home will that price range be able to purchase. Right now, you’re probably asking “what do you mean ‘what kind of home’?” Before we get into that, we need to discuss the three most important rules of real estate: location, location, location.

A relatively new 3 bedroom, 2 bath home in a nice location with a bit of yard could cost as little as $60,0000.00 (or less – Detroit, MI) or as much as $500,000.00 or more (Los Angeles, CA). I think now you understand what I mean. Your global location and the location of the property you are looking at within that global location, will dictate the price range of the property. Your Realtor will be able to determine what kind of home you’ll be able to buy based on your financial qualifications. It might be a house, a townhouse, a condo, or you may not be qualified to buy at all, even though you are qualified for a loan.

Right now today, it is definitely a buyer’s market. What that means is that there are substantially more homes for sale than there are buyers to buy them. As a result of this there are some “pretty good deals” available if you are buying and have time to look around. What I’d like to remind you of though is this: If housing prices continue to fall, that “good deal” you get today may be very much overpriced 6 months from now. What that means is 6 months after you close the purchase, the house may be worth substantially less than what you paid for it. I don’t want to scare you with that information, but I DO want you to be aware. Sorry, but it is a statement of fact. What the value will do depends on many things including the area of the country/state/county, and local area where the home is located (there’s that location word again) as well as economic conditions locally and nation-wide.

Your Realtor should be able to help guide you through this maze. If you are NOT getting straight answers, or things you are hearing seem a little stretched from reality, you might want to seek another opinion. Remember, this is a huge “investment” you are making and you don’t want to be wearing rose colored glasses! You want and need to hear the truth even if what you are hearing is not what you want to hear. You may love that little home you’re looking at, but if it’s in a declining area and you don’t plan to live there forever, you could easily lose your shirt in that purchase!

I just used that term “investment” again. You may remember from a previous post, I talked a bit about the home your purchasing being a debt, not an investment. As an investor, you must learn to not “fall in love” with what you are investing in. If it is a true investment, then your only concern should be its performance AS an investment. If you invest in a stock and it’s not performing as you expect or anticipated, what would you do with that stock investment? You would sell it, right? Of course! Well, that’s not so easy with a house, especially in today’s housing market.

The point I’m making here is that when people buy a home to live in, especially their first home, it becomes an emotional purchase, NOT an investment purchase. Yes, in the back of your mind, you’re expecting and hoping that the home will increase in value over the years, but really, nobody can promise that will happen! Keep that in mind. Make sure that you are buying the home for the right reasons and with the right expectations. If you screw up, it’s normally NOT the Realtor’s fault. The Realtor provided you exactly what you asked him or her to provide.

Some other things you need to look at as far as “what” are you qualified for are should you look at new homes, or “used” homes. Many home buyers think they can buy a “fixer-upper” and repair it over time to earn/gain “sweat equity” in the property. This way after they have it all repaired, they can “flip” it, or sell it at a profit, and move to the next “flip” property. Most people who attempt this fail miserably because they under estimate the cost of time and materials involved. Even if you’re not intending to flip the property, whatever you think the cost will be quadruple it… time AND money!

Other thoughts are: we can afford more home if we buy used vice new. There are good and bad points to everything, including this decision. If you’re not going to be happy with out-dated materials and functional items in the home, DON’T buy it! If you (really) don’t mind squeaky floors and doors that don’t close correctly, or a lack of electrical outlets in the rooms, poor lighting, etc. then go ahead and buy it. Be SURE you can “live” with your purchase. If you can’t or aren’t sure, MOVE ON, keep looking.

Whatever you are qualified for, there should be options within that category that you can investigate in and around your area.

One other thing you should keep in mind. Be honest with yourself (and your partner) and your Realtor about what you really want. You may be thinking about an acre of land for that garden and swimming pool, but if you OR your partner aren’t “into” yard work, you might want to think a little more on it before you buy it. If you like a little breathing room and don’t want to be “crowded/surrounded” by other people, you may want to discuss that condo or town home. Sit down and really think out what’s important as far as location and specific needs in the property you buy.

Good luck and I know you’ll find what you want! Make sure you really want what you find! Learn some facts about mortgages and refinancing here.

Stay tuned for more articles to come.

Joe

Category: Home(s) and Real Estate | No Comments »
Tags: first time home buyer, investment, loan, location, mortgage, purchase, qualified, real estate, realtor

Posted By Joe on August 24, 2009

Congratulations! It’s been a long road to get to this point, hasn’t it? We’ll talk about this!

You’re planning to finally attain the “American Dream” (we’ll discuss this later also).

You’ve spent many years getting educated and learning about life. You got a good job thanks to your formal education, and are earning a pretty decent income. And hey, you plan on advancing in your career in the future, to make even more money, right? You moved out on your own and became independent. You’ve probably been renting an apartment of some type or maybe even a house. You’ve built a decent credit history that shows that you pay your bills on time. Perhaps you’ve gotten married and maybe even started a family. And now you’re about to make the single largest “investment” of your life (to date). As far as being an “investment,” we’ll get back to that later as well.

Let’s look at the term “qualified.” From the Merriam-Webster online dictionary: 2 entries found.

1. qualified

2. qualify

Main Entry: qual·i·fied

Pronunciation: kwä-lə-fīd

Function: adjective

Date: 1558

1 a: fitted (as by training or experience) for a given purpose : competent

b: having complied with the specific requirements or precedent conditions (as for an office or employment) : eligible

2: limited or modified in some way <qualified approval>

So, now that we’ve established the definition of qualified, let’s go just a bit further. When discussing purchasing a home, the two main “qualifications” that virtually everyone focuses on are; “how’s your credit?” Are you “competent” to receive a loan for the purchase? Have you shown through past credit history that you are

a. ABLE to repay the loan – do you have sufficient income?

b. WILLING to repay the loan – Have you paid all other prior obligations on time?

And; “how big a loan can you get?” Are you “eligible” for the size loan you are requesting? If both of those “qualifications” are met, you will get a “qualified” approval for the loan to buy the home.

So you start the journey; you talk with a Realtor and explain that you want to buy your first home, or you talk to a mortgage lender to see how much of a loan you can qualify for. If you start with the Realtor and that Realtor has some (any) experience, the first thing he/she will want to do is get you “qualified.” Of course that Realtor is going to do a (time consuming and sometimes frustrating) job for you and wants to make sure they will get paid in the end. If you’re not “qualified” for a mortgage, then they will expend a lot of time and effort for nothing. If you start with the mortgage lender, he/she will want to find out as much as they can about your financial and credit history so they can qualify you for the largest loan possible. Aside from the time and effort expended by all the players here, there are emotions involved with this undertaking as well. Nobody wants to intentionally hurt anyone else’s feelings or pride, and nobody wants to start a process (job) that will end in failure for all involved.

Now it’s time to review the long road you’ve taken to get to this point. You spent years educating yourself to get the present job you hold. In many occupations you will continue to get advanced education in your field for many years to come. In many cases the advanced education you seek will in turn lead to a better paying job. How much education did you receive to move into your first rental? What did they teach you about this in high school or college? How much education have you received on home ownership?

The one qualification that virtually nobody asks or even thinks about is; are you qualified to own (not purchase…) a home? You’ve never owned a home before, so there’s no past history to base a decision on. We can look at your rent history (and the lender will), but from anyone’s perspective, it’s really not the same. How much education have you received on finances and investing (including tax implications!)? How much education have you received on debt management? Have you ever had formal training on how to successfully budget finances? How much education have you received on home maintenance/upkeep/repair? These are all key knowledge ingredients to successful home ownership.

When the lender took all your financial information to qualify you for the loan to buy the home, all he/she was looking at was your credit history and ratios; numbers on a piece of paper. If your credit is acceptable and the numbers worked, you get the loan, if they don’t work, you either get a smaller loan where they will work, or you don’t get a loan at all. I can explain the credit system and go into detail on the ratios with you if you wish, just send me an Email with your questions. Or maybe I’ll do a future article here on my Blog about it.

Having said all this, one of the biggest weaknesses in home ownership knowledge is the COST involved! If you’ve never owned a home, you just don’t know, but once you buy a home you’re going to find out! We have all heard the saying that home ownership is the “American Dream.” This phrase was coined after World War II, when the economy was booming, and everyone seemed to have a decent job and it was everyone’s goal to own a home of their own. A place they could call their own. A sanctuary from the world. And the list of expletives goes on.

This was all wonderful back in the economy of those days. The future was looking better and better. Everything was smelling like roses. People were employed with companies “for life,” and expected to be taken care of in retirement in return for their loyalty and service. Parents “knew” and wanted their kids to have a better life than they had. Back then the “dream” was expected and attainable for most. Since then, a lot of things have changed! You know this as well, so I won’t go into all the details here. In the past 2 decades, many people who thought they were living the dream have found out it just isn’t so. And many things have led us to the predicament we are presently in. One of the biggest is a lack of knowledge and training! I’ll provide some of that in future posts.

It used to be that when you were buying a home, it was considered an “investment.” OK, the physical home IS an investment (but for whom?). It is generally the single largest “investment” we will make in our lives. We all hope (expect?) that it will become more valuable over time. Of course this isn’t always true, and the biggest thing we all forget is that in the beginning, for MOST of us, it’s NOT an investment, it’s a DEBT! You DON’T own that “investment,” the LENDER does! And you will pay that lender more than twice the amount you borrowed (the value of the home today) before it becomes yours!

Back when the term “American Dream” was originated, people took out mortgage loans to buy their home and then paid the mortgage off as quickly as they could so the home really did become theirs. It really was an investment that could grow in value over time. Over the past ½ century though, this changed somehow and is rarely ever the case now. People today buy a home with the expectation of NOT paying it off and hoping that the value will increase to a point that it will pay itself off (hasn’t that little expectation been dashed!). Or, they anticipate that they will only be in this particular home for a short period of time so paying it off is never the goal in the first place. THIS IS WRONG THINKING!

If you plan to “own” a home, now or at some point in the future, then OWNERSHIP, should be the goal! To achieve that goal, you MUST pay off the loan(s) as quickly as possible to truly achieve home ownership. It doesn’t matter if it’s “this” home, or the “next” home, or the one after that. From the time that you make your 1^st mortgage payment on that new first home, you should be planning to pay additional principle toward that loan as often, and with as much money, as you possibly can! This is where budgeting comes in to play. There is a simple way to make budgeting work for you – Your homeowner budgeting solution. I will cover budgeting in a future post.

This does TWO very important things. It BUILDS your equity in the ownership of the home, and it saves you potentially HUNDREDS of thousands of dollars you would have paid the lender in interest on their investment! When you buy a home with a mortgage, the lender is the one that has the investment. They are making huge amounts of money FROM YOU that you are paying them on that mortgage loan. The home buyer (different from owner) has no investment, but only a HUGE debt!

With a typical 20% down payment, you own 20% of the value of the home, but the bank owns 4 times that amount! Were you to need to sell that home right after purchase, the costs of selling the home could easily wipe out 50% or more of your 20% equity, but the bank will lose none of theirs! They will get all their money back, plus all the fees you paid initially to get the loan, plus any interest that has accrued since you closed/purchased the home, Plus any costs or fees associated with paying that mortgage off. Do you see what I’m trying to show you? Even 2 years down the line, if the housing market stays flat (as expected), you will lose almost as much.

OK, enough for this post J I don’t want to wear out your eyes! Stay tuned for further education in coming posts. To ensure you’re notified when they come out, please sign up and register for Blog updates!

Joe

Category: Home(s) and Real Estate | No Comments »
Tags: american dream, approval, credit, credit history, educated, education, first time home buyer, home, investment, loan, owner, ownership, qualification, qualified, ratios, realtor

Posted By Joe on February 10, 2009

OK, first I need to say that I am not in the insurance industry (yet). But over the years, I have had a LOT of misconceptions about life insurance that I am just beginning to dispel. I used to think that life insurance is like gambling… You are gambling that you will die before statistics say you will. The insurance company is gambling that you will out-live your statistical expectation. Since the insurance companies are among the biggest and richest companies, I would have to say that they are winning the bet You know, it’s almost like Vegas. The odds are always in favor of the dealer. Statistically, the casino’s will never lose. Of course, it’s only fair that companies make a profit, after all, if they didn’t, they wouldn’t be around very long, now would they?

I do in fact have life insurance. I’m coming to realize that the amount is really insufficient to cover my family’s needs should I die before I’m statistically “supposed to.” I should look into that, but then in true Russian Roulette fashion… I won’t be the one to get the bullet… Someone else will! After all, I’m never gonna die! Right? Wrong! Much as I hate to admit it, we’re all destined to that eventual fate. It’s just a matter of when (and how, if you want to get that detailed). So, there really is a good reason to have life insurance for the average person (95-98% of us). It’s protection “just in case” we don’t make it to our statistical old age. In case we die before we have the chance to build our estate to take care of the family we leave behind.

I need to do more research (I think I’ll go to school and get my insurance license). But from what I’ve been told, insurance is better than money in the bank, because when you die, that money goes (un-molested) to the beneficiaries designated by the policy holder. No Probate court, no lawyer fees, no inheritance taxes, and basically NO LOSS of the total funds at all! And best of all, I understand that most insurance companies will do an immediate payment of funds after the death, and the remainder is paid out very swiftly, so there’s no waiting (for years in many cases because of court battles). If all this is in fact true, then we all really need to re-think our position on life insurance! I’ve even heard that wealthy people who are “in the know” choose to fund their insurance plans almost before anything else. Again, I need to check into all this. Would anyone care to comment on these issues?

Since life insurance is supposed to replace the estate that we all hope to build before we die, and it provides huge tax and court advantages over having a large estate in the first place, maybe we should all just get large life insurance policies and forget about trying to build an estate! Too funny, right? Well, yeah, when you think about it, the life insurance policy won’t pay the monthly bills, put food on the table or provide us the things we want and need while we’re still alive. I guess that maybe there’s a happy medium here someplace.

Another vehicle I’ve heard of, but don’t fully comprehend is annuities. I’ve heard some bad things about them. But if they’re so bad, then why are they still around and why do people still buy/use them? I need to do some more research into that as well.

You know, I can remember a time, not too long ago (OK, so maybe it was quite some time ago) when I knew everything and had all the answers! My parents even agreed with me. They called me a “know-it-all” LOL. I’ve come to realize that the older I get, the dumber I get! Even with all that I’ve learned over my half century (or so), it seems I know less and less as time goes by. Maybe there is something to that “continuing education” thing as we go through life?

Enough on the subject for right now. I hope there’s some smarter folks out there than I am to help me make some sense of all this! I look forward to learning!

Are you building better tomorrows?

Joe

Category: Life insurance? I'm never gonna die! | No Comments »
Tags: building better tomorrows, die, estate, gambling, inheritance, insurance, life insurance, taxes