When You Should Refinance Your Mortgage Loan

May 10, 2013

refinance mortgageThere are different times when you should refinance your mortgage loan, but contrary to popular belief lower interest rates are not the only reason. Sure, when interest rates hit new lows millions of homeowners flock to refinance their homes. But there are also times when you should refinance when rate is not the driving force.

When should you refinance your mortgage loan?

1. When mortgage rates are at least 2% below your current rate.

This rule was more important when interest rates were higher. But it served two useful purposes. First, it set a standard as to when you should be looking to refinance. If your interest rate was 10%, and rates were dropping, you would know to look more seriously once interest rates dropped to the 8% level.

The second purpose was probably to avoid serial refinancing. Back when interest rates were higher, and especially when they were in double digits, it wasn’t unusual for mortgage rates to swing by 1% or more in a short space of time. By setting the threshold at a 2% rate decline, you could avoid refinancing every time rates dropped by a point. Since refinancing often comes with hefty closing costs, refinancing too often could cost you more than you would save.

A 2% drop in rates is extremely unlikely when mortgage rates are already below 4%, so this rule has pretty much fallen into obscurity. But rest assured that it will be back when we return the higher rates.

2. When you can recover your closing costs in 24 months or less.

This one is the gold standard of refinance rules. It focuses on closing cost recovery. And as the name implies, it recommends refinancing only when the savings in your monthly payment will be sufficient to recover your closing costs in not more than 24 months.

For example, let’s say that you have a $100,000 loan, and you have an opportunity to lower the monthly payment by $150. If the closing costs on the loan are $5,000, it would take you proximally 33 months to recover them ($5,000 divided by $150). The refinance would not be worth doing.

Using the same example, if the closing costs were just $3,000, you would be able to recover them in 20 months ($3,000 divided by $150). That refinance would be worth doing.

Some homeowners – and many mortgage loan officers – might play fast and loose with this rule. For example, they may ask, “how long do you expect to be in the house?” If you say that you think you will be in the home for at least another five years, they might convert the 24 month rule into the 60 month rule. That is to say, as long as you can recover your closing costs within five years, the refinance will be worth doing.

On some level that may sound logical, but it really is a stretch. While it may be possible to expect you’ll be in a home for the next two years, the anticipation that you’ll be there for five years requires a fully functioning crystal ball. You may intend to be there for five years, but if you get a job in another city, or lose your job because of economic conditions, you may have to move much sooner. In addition, for any number of reasons you may also decide to refinance again within five years. In that case, at least part of your closing costs on the last refinance will go up in smoke.

Stay with the 24 month rule, and avoid morphing it into something longer. The farther out you go with projections, the less likely it is that they will be accurate.

3. When you want to pay off your mortgage early.

Here’s where we get into a consideration that has a lot less to do with rate. If you want to pay your mortgage off early, but don’t think that you have the discipline to make optional higher principal payments, you might want to refinance to shorten your loan term. This will force you to pay off your mortgage in less time than your current mortgage will allow.

If you are in a financial position to take on a higher monthly payment, you may convert your 30-year loan to a 15-year term simply so that you can pay it off quicker. The rate may even be a little bit higher than what you’re now paying, but you might opt to do it anyway.

There is yet another reason why rate is less of a factor when you are refinancing to a shorter term loan. Interest rate is less of a factor on shorter-term loans because more of your payment is principal.

4. When you need to get out from under a high payment.

This scenario is the exact opposite of the one above. You may have a 15-year mortgage that you are struggling to make your monthly payments on. Or you might be facing the prospect of a pay cut or a job loss. Whatever the reason, you might have a need to lower your house payment.

The quickest and easiest way to do that will be to refinance your 15-year loan into a 30-year loan. You will of course be extending the amount of time it will take to pay off your loan, but the reduction in payment could be the difference between keeping your home and losing it.

And for what it’s worth, yes, people actually do refinance 15-year loans into 30-year mortgages. It sounds like reverse logic, but sometimes you have to do what you have to do.

Have you ever decided to refinance based on any of these reasons, especially the last three? Leave a comment and tell us about it!

The Dangers of Paying Off Credit Cards With Home Equity

March 2, 2015

When people accumulate a little too much credit card debt, there’s always a strong temptation to work out some sort of debt consolidation that will make the plastic go away in one fell swoop. On the surface this can seem like an excellent idea. But debt consolidation is really about converting debt from one type to another – without actually paying it off. There are all kinds of riskS to this maneuver, but especially when you use your house for the consolidation.

Here are five reasons you shouldn’t use your home equity to pay off your credit cards.

1. Increasing the Mortgage Puts Your Home at Greater Risk

Anytime you increase the amount of money you owe on your home, you also increase the risk of owning it. This is especially true if you use a home equity line of credit (HELOC) to payoff your credit card loans. A HELOC is really just a credit line secured by your house, and you’ll be moving your revolving debt from unsecured status to secured – by your house.

But that’s not the worst of it.

HELOCs typically come with variable rates, which is part of the reason they have lower closing costs than a traditional mortgage. Since the HELOC is secured by your home, the rate on it is generally lower than what it is for credit cards. But since it’s variable, it can change – meaning increase.

Nothing constructive will be accomplished if you consolidate a bunch of 10% credit card debt into a 5% HELOC, if two years later the rate on the HELOC is up to 10% – or higher. A large HELOC balance at much higher interest rates could threaten your ability to make the monthly payment on the home.

2. It May Not Be As Easy to Sell or Refinance Your Home With a Higher Mortgage

Whether your credit card debt is consolidated using a HELOC or a straight up refinance of your first mortgage, you will be increasing the indebtedness on your home. That will make it harder to refinance or to sell, should the need arise.

This can be a serious problem should the value of your property fall as it did in much of the country after 2007. A 25% drop in the value of your home could leave you “underwater” on your mortgage, if your indebtedness reached 80% of the original value. That could leave you trapped in the home, unable to sell or refinance it.

Even if values don’t fall, the increased indebtedness could leave you with less equity after a sale, and that would leave you with less cash to put down on your next home.

3. You’ll be Converting Short-term Debt to Long-term Debt

Credit card debt is short-term debt. But when you consolidate it on your home, it becomes long-term debt. You may be converting unsecured revolving debt to a 30 year mortgage on your home.

If your credit cards happened to contain – among other short-term purchases – last year’s summer vacation costs, then you will be paying for that vacation for the next 30 years. You may also be converting last years Christmas gift purchases, last weeks dinner at Olive Garden, and a whole bunch of Starbucks latte’s to semi-permanent debt. That’s a bad trade off, no matter how much you’re saving in interest costs.

4. Refinancing Your Mortgage Costs Money

Should you refinance your first mortgage to payoff credit cards, you will incur costs as a result of the refinance. These costs are generally between 2% and 3% of the new loan balance. On a $200,000 loan, you may pay $5,000 for the refinance. That means that the credit card consolidation was accomplished at a very high cost. For example, if the refinance was mainly to consolidate $50,000 in credit card debt, you will have paid 10% of that amount to make the refinance – up front!

The problem is compounded if you reset your mortgage term. For example, let’s say that you have 25 years remaining on your 30 year mortgage. In order to consolidate your credit cards, you refinance your first mortgage back to a 30 term. The payment may be lower than what you were paying for your old first mortgage plus the credit card payments, but you will have added an additional five years of payments to the back end of the loan.

5. One Debt Consolidation Will Beget Yet Another

We can categorize this this one under “moral hazard”. If you use your home to accomplish one credit card debt consolidation, you’ll use it again. That’s because the consolidation makes it easier to get into – and out of – credit card debt. Refinancing your home is a way to get out of credit card debt without actually having to repay the debt.

Anything that’s easy is something you’ll do again. Nothing is learned about the negatives of running up large credit card balances, because fixing the problem was so easy.

At least part of the reason so many people lost their homes in the housing and mortgage meltdown was because they engaged in serial refinancing for debt consolidation purposes. Sure, their homes increased in value over the years, but they consistently borrowed the equity out to cover non-housing expenses. Eventually, the perpetually rising mortgage balance outstripped even the sizeable gains in property value.

You have a chance to prevent that outcome, by not using your home as a debt consolidation scheme for your credit card debt.

Does it Always Make Sense to Pay Off a Mortgage Early?

December 27, 2013

pay off mortgage earlyOne of the goals of those who long to be debt-free is to pay of the mortgage early. The idea is that once other debts are taken care of, it’s time to focus on paying down the mortgage.

There are a number of strategies you can employ to pay off your mortgage early, from switching to a bi-weekly schedule to aggressively making extra payments when you can. Some homeowners refinance to 15-year mortgages to pay off the mortgage faster and pay less in interest.

But is that really the best course of action?

While the idea of being completely and truly debt-free is one that pulls at the imagination, the reality is that paying off low-interest, tax-deductible debt isn’t always the most prudent course of action – at least from a strictly numbers standpoint.

What Else Could that Money Be Doing for You?

One of the first questions you have to ask yourself, as you begin considering how quickly you can pay off your mortgage, is what else the money can be doing for you.

Right now, you might have a very low mortgage rate. My mortgage rate is below 4 percent. However, in the past year, my annualized investment returns have been right around 11 percent. Averaged out over the last five years, my annualized returns are right around 6 percent. That means that paying down my mortgage debt only gets me – at most, since I’m not even considering the tax deduction – a 3.75 percent return on my “investment.” On the other hand, actually investing that money provides me with the potential for better returns, especially over time.

So, the interest I do pay on my mortgage is tax-deductible, which means that keeping the mortgage reduces my tax liability to some degree. And, at the same time, I have the potential to earn better returns by investing the money. Paying off credit cards as quickly as possible makes sense, since there are no tax benefits and you aren’t likely to earn investment returns that beat a credit card interest rate.

However, mortgage debt is a little bit different.

Choosing to Be Debt-Free

Of course, the financial possibility of better overall returns isn’t as important to someone who is more interested in being debt free. It comes down to priorities. For some, the principle of the true debt freedom and true home ownership (although there are arguments that it’s not true “ownership” as long as the government can nail you for property taxes) is more important than the potential for investment returns that might not actually materialize.

Before you decide which path you will take, it’s important for you to carefully consider your situation and your own priorities. I would rather invest the money than worry too much about paying down my mortgage early (the same is true of my student loans – interest rate below 2 percent).

However, if something happens to my income, I run the risk of foreclosure if I don’t have my mortgage paid off. There’s a certain amount of security in feeling as though you truly own your home.

What do you think? Would you rather pay off your mortgage early or invest the money? Leave a comment!

Buyer’s Title Insurance and Why You Should Have It

December 24, 2013

For Sale By Owner Real Estate Home Open House SignVery few people are familiar with title insurance, and even fewer with its optional component – buyer’s title insurance. There are all kinds of insurance policies, but this one never rears its head until you are either buying or refinancing a home or another type of real estate.

Title insurance is one of those quiet types of insurance coverage, that no one pays much attention to until something goes wrong. If it does, and you have coverage, everything will be fine. If you don’t, you could be stepping into a financial disaster with catastrophic financial consequences.

What is Title Insurance?

Title insurance is a type of insurance that will protect the financial interests of either a property owner or a lender in a piece of real estate. It is meant to protect against title defects, liens and other liabilities. It can also protect against lawsuits by paying off liens or various challenges to the property ownership, or title.

Title insurance is required by a lender any time you finance a real estate transaction. This can mean either a purchase-money mortgage or a refinance. The basic title insurance policy is a lender requirement, and it will protect primarily the lender’s interest in the title. It will also protect your interest as the property owner but only on a secondary basis. That’s where things can get complicated, but we’ll dive deeper into that problem in a minute.

Whenever you engage in any real estate transaction, the lender will require that a title search be performed on the property. The search will investigate the chain of property ownership going back many years, as well as search for the existence of any recorded liens on the property. But as thorough as title searches are, they can miss something here or there.

That’s where title insurance enters the picture. Title insurance insures against the possibility that certain liens or ownership claims may have been missed by the title search. Even if they have, title insurance will insure that the property carries a clear title to ownership of the property, so that it can’t be interfered with as a result of an undiscovered claim.

What is Buyer’s Title Insurance?

As the owner of the property, title insurance has one basic limitation: it primarily protects the lender from undiscovered liens or claims. This is referred to as lender’s title insurance because it specifically names the lender as the primary beneficiary of the policy. Ultimately, you will be protected by the policy as well – at least eventually.

And that’s the basic problem. While the lender’s policy will protect the lender’s interests, your ability to sell, transfer or refinance the property could be delayed until the insurance company and the challenger of the title reach a settlement. How long can that take? It’s an open question and depends largely on laws in your state.

That’s where buyer’s title insurance enters the picture. Buyer’s title insurance will name you as the specific beneficiary of the policy. In the event there is an undiscovered lien or title challenge, your buyer’s title policy will free you to sell, transfer or refinance the property despite the existence of the cloud on title.

Buyer’s title insurance generally costs several hundred dollars, and is payable on a one time basis, but for each loan you take on the property. There are no recurring premium charges.

Why You Should Have It

Since most homebuyers try to minimize the amount of money they have to pay to buy a property, and most people who refinance want to maximize the amount of money they take out of the deal, they typically refuse buyer’s title insurance. It’s a buyer’s option, but not a lender requirement.

At the closing table, the closing attorney or escrow agent will recommend the coverage to the borrower, and it is entirely up to the borrower to take it or waive it.

If you’re given the choice, you should always take it. Dollar for dollar, buyer’s title insurance is one of the most cost-effective types of insurance policies you can buy. Spending just a few hundred dollars at closing could save you – literally – tens of thousands of dollars later.

The Potential Nightmare Without It

Let’s assume that you buy or refinance a house, but refuse the buyer’s title insurance option at closing. Five years later, you decide to sell the property, but a claim against the title comes up. Your lender will be covered because they are the primary beneficiary of the title policy on the property.

You however will not be covered, at least not directly. Because of this, you may be unable to sell the property. The title claim will mean that you will be unable to deliver clear title on the property which will block a legal transfer.

Had you taken buyer’s title insurance, you’d be able to sell the property even if the lien wasn’t immediately satisfied. Your coverage will be your ‘out,’ and enable you to move on without further delay. The insurance company can battle the title challenge through the legal system for however long that might take, but it will no longer be your problem.

Next time you’re sitting at the closing table for a home mortgage, and the closing attorney or escrow agent offers buyer’s title insurance, take it. The few hundred dollars you will pay for it will be some of the best money you ever spent.

Do you have buyer’s title insurance? Did you know about it? Leave your thoughts in the comments section!

When Should You Start Paying Off Your Mortgage Early?

November 14, 2013

MortgagePaying off the home mortgage is a major goal for a lot of people. Once the mortgage is paid and the home is owned free and clear, all kinds of possibilities open up in both finances and in lifestyle. The largest expense in the household budget is gone, there’s more money for everything else and retirement is closer than ever.

With all the benefits it has, it would seem that paying off your mortgage as soon as possible should be a high priority. And that would be the case if there weren’t other financial goals that you might want to accomplish first.

Why Paying Off Your Mortgage Shouldn’t Be Top Priority

Paying off your mortgage early has tremendous benefits, no doubt about it. But for a few reasons, it doesn’t need to be a top priority.

Consider the following:

  • Since mortgages have definite terms, even if you didn’t try to pay it off early, it would still go away. It may take 15 or 30 years depending on your term, but as long as you make your payments faithfully and don’t extend the term on refinance, it will disappear.
  • If your mortgage is a fixed-rate loan, there’s no risk of the payment increasing.
  • Since mortgage interest is tax-deductible, the effects of the payments are reduced.
  • Paying down a mortgage provides no immediate benefit; the loan payment will remain fixed until the loan is paid in full no matter how much you pay it down along the way.

For these reasons, you might want to look at some other priorities first.

Build a Well-Stocked Emergency Fund

You shouldn’t even consider paying off your mortgage early unless you have a well-stocked emergency fund. It isn’t just that you’ll need to have the cash in the event of near-term emergencies, but it’s also because having such an account will make it easier to begin accelerating the payoff of your mortgage.

No matter how sound your plan is to pay off your mortgage, financial challenges will arise while you’re trying to make that plan a reality. A solid emergency fund will make that more doable by easing some of the financial stresses that you’ll encounter along the way.

Establish and Keep Feeding Your Retirement Plan

Paying off your mortgage early is an outstanding retirement strategy. You’ll eliminate your largest single expense and free up your home in the event you want to sell it in exchange for a more suitable home for retirement, or just to have extra capital for retirement investing.

But nothing can replace a well-funded retirement plan when it comes to retirement planning. It’s the foundation of all retirement planning, and needs to be a priority. One of the reasons it has to be a priority ahead of paying off your mortgage is that time matters heavily in retirement investing. The earlier you can begin investing, and the more you invest early on, the better off you will be. It’s all about the time value of money, and you have to get that working in your favor.

Before beginning to accelerate paying off your mortgage, be sure you have your retirement plan (or plans) well underway. In addition you’ll need to be able to balance both continued retirement plan contributions along with your additional mortgage payments.

Getting Ready for College

This one could go either way. Much like retirement planning, you’ll want to begin funding your children’s college education early to take advantage of the time value of money. On the other hand, if you plan to free up the equity in your home as a means of paying for your children’s college, then paying off the mortgage would get the nod.

Pay Off Lesser Debts

It makes little sense to pay off a long-term debt like a home mortgage when you have substantial unsecured loans, like credit cards and student loans. Credit cards have the additional risk of having variable interest rates. Since the potential for those rates to go substantially higher is real, you should pay those off before taking on a more stable debt like a mortgage.

Student loans are usually substantial, even if rates are lower than they are for credit cards. One of the reasons you want to pay these off ahead of a mortgage is that if you encounter financial difficulties, you can usually sell your home to pay off the mortgage on it. With student loans, there’s nothing that can be sold to pay them off.

The other issue with student loans is that if you have children and you plan for them to attend college, you certainly should want to pay off your own student debts well before they begin attending college and are in need of funds for the same purpose.

Auto loans are less of an issue. They’re secured, generally for shorter terms (five years or less), carry fixed rates, and are a way of spreading the cost of an expensive asset over several years. Paying off your mortgage ahead of these will be a greater benefit.

Always remember as well, that any loans you pay off will free up more of your income to use to pay off your mortgage. That fact alone should give paying off non-mortgage debt a priority.

It’s not that paying off your mortgage early isn’t important, but rather that some other financial goals might be even more so. In addition, prioritizing some other goals can also make the early pay off of your mortgage so much easier.

What do you think of setting other financial goals ahead of paying off your mortgage? Would you change any of these priorities?

This article was originally published October 19, 2012.

4 Mortgage Refinancing Mistakes

October 2, 2013

mortgage refinance bankingThinking about mortgage refinancing? You’re not alone, with some of the best mortgage rates available in history many people are debating whether they should spend the money and refinance.

The benefit of refinancing comes from borrowing at a lower mortgage rate so you can either lower your payments or reduce your loan term, either way saving thousands of dollars over the life of your home loan.

However, there are some pitfalls to watch out for; here are some of the mortgage refinancing mistakes you will want to avoid:

1. Paying high closing costs.

When you refinance, you are essentially getting a new mortgage to replace your old mortgage. This means fees; origination fees, administrative fees and other closing expenses.

Many people simply pay them, adding them to the cost of the loan and reducing the savings benefit of refinancing your home. Instead, shop around and compare costs between various banks and credit unions. Check out this article on how to lower your home loan closing costs.

2. Not getting a big enough discount on the rate.

Many people refinance because rates have dropped but then find that the difference in the interest rate wasn’t big enough to really save them money. If there is only a small difference, the closing costs can erode the savings you are getting.

If you don’t stay in your house for five to seven years after you refinance, this small difference can actually result in you losing out over all. The generally accepted rule of thumb is that the new rate should be at least a full percent lower than your current rate, and you should be planning to stay in your home for a few years.

3. Waiting too long for a good rate.

It is tricky trying to predict how low mortgage rates will go. In some cases, you might wait too long, and then find that you missed your opportunity. At this point, mortgage rates are unlikely to drop very dramatically again in the near the future. Waiting for even lower rates could mean that you miss out altogether.

Look at the current rates, and then look at your mortgage rate. If you will be saving more than one percent, it might be worth it to just go ahead and refinance now. Rates are not likely to head another full percent lower, but if they head higher, you will have missed out.

4. Taking cash out with a refinance.

One of the biggest mistakes that people make with mortgage refinancing is to get a cash out loan. In this type of refinance, you get a loan for more than you owe. For instance, if you owe $170,000 on your home, but it is worth $205,000, you might refinance for $180,000. You pocket the $10,000 difference between what you actually owe and what you borrowed. (Of course, closing costs can erode what you actually end up with.)

Cash out refinances can be an issue for several reasons. First of all, you are adding to your debt. Another concern is that your cash out refinance could put you above the 80% loan-to-value ratio, and result in the necessity of paying private mortgage insurance, which adds to your costs. Some people like to do a cash out refinance and pay off consumer debt, but if you are not careful, this could land you in even more trouble – especially if you just run up the balances on your newly paid credit cards.

In the end, it’s better to avoid a cash out refinance if you can, and just stick to refinancing what you actually owe on your home mortgage.

What are some other mistakes people make when they refinance? Leave a comment!

This article was originally published September 15th, 2010.

5 Ways to Pay Off Your House Early

September 24, 2013

pay off your housePaying off your house is probably something that you’d love to do but like many of us you don’t have the funds to make it happen. Today we’ll look at some ways that you can make a dent in the amount you owe on your home loan and pay off your house early.

Paying it Off

For most homeowners your mortgage represents the largest outflow of cash from your budget every month. We like to think about all the things we could do in life if we didn’t have to pay to keep a roof over our head. Imagine how fast you could ramp up your retirement savings, build a college fund, or save up for a big vacation. In addition to the increased cash flow, having your house paid off also comes with a sense of security – that you own your home and not the bank.

One tax note to be aware of on your quest to pay off your mortgage. For many of us homeowners the interest we pay on our mortgage is what enables us to itemize our deductions. If you pay off that loan you might have to start taking the standard deduction.

5 Ways to Pay Off Your Mortgage Early

Here are some ways you can pay off your mortgage early and reap financial benefits from not having that payment.

1. Extra Principal Payments

The easiest way to pay off your mortgage faster than normal is to simply include additional money on every payment you send in. The additional money will go straight toward the principal of your loan rather than to paying the bank interest. Over time this will slowly pay down your mortgage faster than your original financing term.

Check with your lender to see how they treat additional payments. Most banks automatically apply additional payments to any outstanding fees. How they handle extra payments after that can vary so be sure to note on your extra payment that it should be applied to your principal.

2. Bi-Weekly Mortgage Payments

A second way to send in additional payments is to coincide your mortgage payment with your pay cycle. Since many people are paid bi-weekly you simply send in half of a mortgage payment on each pay day.

This doesn’t seem like it would save you any money, but you’ll end up paying an extra month’s worth of payment every year. This is due to how the calendar year plays out. Most people know there are 4 weeks in a month, but over 12 months that is just 48 weeks. That means throughout the year there are a couple of times where you will get a 3rd check in that month even though you’re paid bi-weekly. If you send a half payment in on those pay days you’ll end up making two additional half payments (to bring us up to 52 weeks in a year). It’s an easy way to “trick” yourself into paying off your mortgage faster.

3. Refinance to a Shorter Mortgage Term

Another way to pay your mortgage down faster is to refinance to a shorter mortgage term. If you’re three years into a 30-year mortgage and refinance to a 15-year mortgage you’ll save money over the life of the loan. Granted your payments will be higher every month, but the shorter term combined with the higher principal payments will save you a lot of money in comparison to your previous mortgage.

4. Refinance to a Lower Interest Rate

Even if you don’t change the length of your mortgage in terms of the number of years you are still better off if you refinance to a significantly lower interest rate. The lower interest over the life of the loan will pay for any refinancing costs you have out of pocket and still save you thousands of dollars in interest.

5. Recast Your Mortgage

In contrast to paying a little extra each month, a mortgage recast is usually used to pay off a big chunk of your loan at once. When you recast your mortgage your bank actually reamortizes your loan based on the remaining term left on your loan and the new loan balance. Your interest rate remains the same but because you’re paying interest on a lower balance, the amount of overall interest you pay goes down.

If you’ll remember from the amortization tables in the mortgage calculator post, since you’re paying less interest your monthly payment will drop. Ideally this will free up money each month you can use to make extra principal payments. Another benefit of a recast is that it can help you get rid of private mortgage insurance (PMI) if the lump sum you pay puts you over 20% down on the value of your property.

There are some limitations on this strategy. Not all banks are willing to recast a mortgage so if yours doesn’t allow it then it won’t work for you. Most banks will have a minimum amount that you can recast and typically they’ll charge a several hundred-dollar recast fee. Some banks have limits on the number of times they’ll recast your mortgage.

What are some additional ways you can pay off your mortgage early? Leave a comment!

This article was originally published on May 4th, 2011.

Real Estate Investing: Creative Financing

September 6, 2013

real estate investingIf you have ever met a real estate investor, you know they are from a different breed. When you talk to them, they look as if they know something you don’t. The truth of the matter is they do. They have taken the leap into this world and have found that the hard work truly pays off.

For those that are not involved in the business, the biggest question they have about it is, “How can I do this if I don’t have any cash to put down?” There are many ways to answer that question, but here are a few to get you started.

Seller Carry Back

This is a form of “owner financing” where the seller acts as your bank or mortgage company. They agree to carry the note on the property you are purchasing. The owner/seller owns the property free and clear. This arrangement works for both parties as the income is taxed differently than rental income. They don’t want the property, but they don’t mind receiving a monthly payment on it. Generally, there will be a time limit for when the note must be paid in full – typically, between one and five years.


This subject-to method comes from the phrase “subject to existing financing.” In this situation, the buyer gets the property on the condition that the existing financing stays in place. The buyer will have the title transferred in their name, but the loan stays in the seller’s name. The buyer basically takes over the payments on the existing mortgage. Knowledgeable investors use this method so they do not have to use their cash flow to get into the property. They will than flip out of the property at a gain or refinance the loan into their name at a favorable rate. This is a well-known method of investors that focus on buying pre-foreclosure properties. The seller is usually willing in this situation, because they have to get rid of the property immediately.

Seller Second

This is another option that is used quite often in real estate investing. The term “seller second” means that the seller of the property will provide a second mortgage to complete the deal. Typically, this second note is used to cover the required down payment. For example, the investor finances 80% of the property, but does not have or want to lay out the 20% down payment. They get into the property without using any of their cash, while the seller gets the majority of their equity in the deal. You must make sure that your loan allows a second mortgage. For the majority of companies, this is not a problem, but you will find some that do not allow it.

Lease Option

This is basically a “rent-to-own” option. It allows the buyer to get into the house for little to no money down, as well as the right to buy the property down the road. In an agreement like this, the future price of the property is fixed at the time the lease option is signed. Generally there is a payment made up front to purchase the option. In some cases, the monthly payment will be larger than normal, with the excess used to purchase the option. Occasionally, the option money can be applied toward the down payment for the later purchase of the property.

Just four ways, but very important ones to get the beginning real estate investor out there and on the hunt. So get out there, because the market is ripe for the picking. This your opportunity to take of the rest of your life.

What methods sound best to you? Leave a comment!

4 Moves to Consider Before Interest Rates Rise

July 2, 2013

interest rates riseThere are expectations that interest rates could rise soon. With the Federal Reserve announcing earlier this month that it will begin tapering asset purchases, and with Treasury yields starting to creep up, the signs are there for some higher interest rates.

While there is no way to completely predict what will happen next with the markets or with monetary policy, there are some things you can consider now in order to prepare for what might be higher interest rates later:

1. Don’t lock in your CDs for too long.

If rates do rise, that is likely to mean higher yields on your cash products. High-yield savings accounts should see rates creep up (especially online accounts), and CDs should also see some improvement.

As a result, it might not be in your best interest to lock your money up into a long-term CD. If rates are expected to rise in the next two years are so, you’ll want to be free to take advantage of that situation. A CD ladder can help, but think twice before you lock in today’s low rates.

2. Consider refinancing.

Earlier this year, my husband and I refinanced our house. I’m glad we did, since the average 30-year rate is already almost 75 basis points higher now than our current rate. If you’ve been dithering about refinancing, now might be the time to take action. Generally, if you can refinance to a rate that is about 1% lower than your current rate, it is considered worth it.

If you can lock in today’s near-record-low rates now, you’ll be in better shape for the future.

3. Think about moving out of bonds.

If you are considering whether or not it’s time to shift your asset allocation, now may be the time to move out of bonds – at least temporarily. If you can reduce your exposure to long-term bonds, and move into short-term bond funds, you could avoid some of the long-term bond fund losses that might be coming. Then, later, as rates start rising (and prices drop – usually prices and rates have an inverse relationship with bonds), you can shift back into long-term bonds.

4. Pay down high-interest debt.

One of the best investments you can make in your finances is to pay down high-interest debt. This is especially true right now. While rates are comparatively low, make as much progress as you can on your consumer debt. If you can consolidate to a relatively low fixed rate, it might be worth considering.

Once interest rates start rising again, your high-interest debt will become even more expensive and even more difficult to pay off. You’ll make better progress now if you can attack some of your high-rate debt while your payment will have a bigger impact on your principal.

Bottom Line

Consider your financial situation, and think about what would happen if rates started rising. We’re probably going to see a little more stock volatility in the near future, so it might be worth it to be ready to buy on dips, or just stay the course with dollar cost averaging. Additionally, rising interest rates will affect borrowers and savers alike, although the results are likely to be different.

Think about the changes that will come to your own situation, and adopt strategies to reduce the impact rising rates are likely to have on your budget and your portfolio.

Are there any additional moves you should consider as interest rates rise? Leave a comment!

5 Websites that Help Homebuyers

June 7, 2013

homebuyersWith the power of technology getting faster and smaller, every industry has had significant changes. The real estate business is no exception. According to a recent survey completed by the National Association of Realtors (NAR) and Google, real estate related searches on Google have grown 253% over the past four years.

These searches have helped potential homebuyers find real estate agents, research specific communities, take virtual tours of homes and learn about rates and other options as well. Purchasing a home is the largest investment most people make in their entire lives. It is worth spending a little time to utilize the resources that are available to educate yourself before you even walk out the door to go see your first open house. Here are some websites that will help guide you in your pursuit to purchase a home.

1. HUD U.S. Department of Housing and Urban Development

This government website gives you the basics on everything from looking for loans to home inspections. It has resources for buyers to learn their rights in the process, video tutorials to help educate and a list of home-buying assistance programs that everybody should check before buying a home. Have any questions? You can call and speak to a Housing Counselor too (some charges may apply).

2. City-Data.com

If you want to learn about a specific area, this is the website to do it. They have taken data from multiple sources to give you everything including average household size, median household value, population statistics and unemployment. Maybe you are Lithuanian and want to see if there is a neighborhood with a large population of people from that country. This website can help you find that.

3. SchoolDigger.com

The quality of a school district or specific school will tell you a lot about the potential value of the properties in the area and whether you want to raise a family in a nearby neighborhood. According to the website, they have had over 26 million visitors and can provide information on over 120,000 schools in the U.S. You can compare performance, test scores, student/teacher ratios, and enrollment among other items.

4. Mortgage Loan.com

For a one-stop resource on mortgages, this website has it all. There are consumer guides and articles to teach you, financial calculators to figure out what you will need and rate maps and comparison tables for you to see what the landscape looks like. You can keep up to date with mortgage news and also read lender reviews. If you are looking for a first mortgage, a home equity loan or to refinance, this is a great place to start.

5. Realtor.com

You’ve done the research. You figured out which town, neighborhood and school you want to buy a house near. Now you need to find that house. Realtor.com can help you start that search on your own, but it can also help you to find a real estate professional that knows the area and the houses you want to see. You can search for a realtor using filters to help you find the most qualified. Their profiles will give you an introduction on what type of business they handle.

Don’t want to use a realtor just yet? You can search home listings (for rentals too) yourself. You can look at current home listings and foreclosures, as well as recently sold homes to get an idea of prices. You can filter by size, price, features, amenities and more. Find out what open houses are coming up and watch the videos to see the houses before you step out of the house.

As with any other investment, you can handle a lot of this research yourself. The use of a realtor, however, is very helpful if you do not know the area you are looking to buy in. They are local residents that know the area. They can give you insight that a website cannot. They can also help homebuyers sift through hundreds of house listings to pinpoint the ones that fit their wants and needs.

Regardless, this list can get you started on your pursuit to purchasing a home. Good luck and be sure to leave a comment about your quest for a new home!

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