Brinkcawley's Blog

The Power Of Mathematics And The Magical Refinance

brink cawley — Thu, 17 Sep 2009 14:54:04 +0000

You originally obtained a regular, 30 year mortgage loan. Now, it’s 10 years later. Under normal circumstances, you would have 20 years remaining. Even if mortgage rates are lower than your current rate, who wants to start all over with a 30 year, right? This is a very common misconception, even among people who have good math skills. You are very likely leaving thousands of dollars on the table. Here is how it works. Let’s say your original mortgage loan was obtained 10 years ago. You started with a balance of $400,000, at a rate of 7%. The payments were (and still are) $2661.21 a month. 10 years later, the remaining balance is $343,250 and you have 20 years left to pay. Suppose rates are now 6.25%. That’s not a huge difference, but even so, watch what happens. To refinance down to that rate, let’s assume $5,000 in costs, added to your current balance. Now you owe $348,250 and the new payments are $2144.24 per month, using the lower rate. The good news is that your payments are $517 lower per month. The bad news? You have to start all over with a 30 year loan, right? You’re going to pay even more interest, right? Nope. If you don’t need to have those lower payments, nothing could be further from the truth. How can that be? Here is the answer. All you have to do is make the OLD payments of $2661.21 month. (Pretend you never refinanced.) Now, here’s the math. Because your new mortgage rate is lower and because you are making the old payments, much more of that same payment is now going to principal. What does that mean to you? If you had kept your other loan, you would have 20 years remaining, as we discussed. Using the new plan, you only have about 18 1/2 years remaining until you fully pay off your loan. Not bad. Check out the summary below.

Keeping Your Current Mortgage Loan

•Your balance after 10 years: $343,250
•Current monthly payment: $2,661
•Years remaining until paid off: 20
•Total interest you paid: $250,700
•Payment savings: $0
•Interest savings: $0

Refinancing Your Mortgage, But Making The Same Payment

•New refinance balance, including costs: $348,250
•Continue making the old payment: $2,661
•Approx. years remaining until paid off: 18.50
•Total interest you paid: $237,900
•Payment savings: $47,900
•Interest savings: $12,800

Magic? When rates are lower, it can be. Imagine the savings if rates are even LOWER. The bottom line is that simply looking at the remaining time until you pay off your mortgage is only part of the puzzle. Don’t leave your money on the table unless you love overpaying. Stay in touch. There could be magic on the horizon. Forward this article to a friend! As always, if you need help or advice, just respond to this email.

Is It Time For A Second Mortgage?

brink cawley — Thu, 17 Sep 2009 14:35:54 +0000

If you need to borrow money, a second mortgage may be a useful source of needed funds. A second mortgage is simply another mortgage on your home, a loan secured against the property. The term “second” indicates that the loan does not have priority on your home in case you default. Instead, your first mortgage has priority and would be paid before any funds go towards the second mortgage. Although several second mortgages are available, the most common types are the home equity installment loan and the home equity line of credit, commonly called a HELOC. Either type may provide tax advantages. Seconds allow you the flexibility to take money and turn it into more money for yourself. For example, you can use the money to reinvest into your home (and increase its value even more) or to make other investments.

Deciding which loan is best for you depends on whether you need a set amount of funds in one lump sum (home equity installment loan) or a flexible amount over time (HELOC). The home equity installment second means you must take all of the money upfront. They usually have a fixed interest rate. With the HELOC loan, the money can be withdrawn in a series of advances made available by writing checks on the account. It’s like a giant credit card. With the installment loan, you will be required to make scheduled monthly payments, which will include principal and interest. With most HELOC’s, however, you are only required to pay monthly interest payments on the borrowed amount. This means your monthly payments will not reduce the principal amount owed on the loan. You can always pay additional funds toward the principle, which will lower the monthly interest payment and of course, the payments. After a period of years, usually between 5 and 15, you will be required to pay off the balance on a scheduled basis and at a fixed rate. Some home purchasers take out seconds to avoid paying mortgage insurance on the first mortgage.

A second mortgage loan may be easier to get than an unsecured personal loan because you are putting up your home’s equity as collateral. This gives the lender reassurance that if you default, they will have something to fall back on.

Home equity is often the largest asset a homeowner has. Financial success depends on knowing how to use it wisely. As always, if you need help or advice, just respond to this email.

Understanding Reverse Mortgages

brink cawley — Thu, 17 Sep 2009 14:30:57 +0000

The Basics:

A “reverse” mortgage is a loan against your home that you do not have to pay back for as long as you live there. No matter how this loan is paid out to you, you typically don’t have to pay anything back until you die, sell your home, or permanently move out of your home. Homeowners 62 and older who have paid off their mortgages or have only small mortgage balances remaining are eligible to participate in HUD’s reverse mortgage program. The property must be your principal residence. The program allows homeowners to borrow against the equity in their homes in a variety of different ways. (What is HUD? The Department of Housing and Urban Development is the Federal agency responsible for national policy and programs that address America’s housing needs, that improve and develop the Nation’s communities, and enforce fair housing laws.) Obtaining a traditional loan (a “forward” mortgage) requires that the lender check your credit/income to see how much you can afford to pay back each month. But with a reverse mortgage, you don’t have to make monthly repayments. Your income generally has nothing to do with getting the loan. You could have no income and still be able to get a reverse mortgage. With most home loans, if you fail to make your monthly repayments, you could lose your home. Reverse mortgages do not have monthly repayments, so you can’t lose your home by failing to make them. You can turn the value of your home into cash without having to move or to repay the loan each month. The cash you get from a reverse mortgage can be paid to you in several ways:

All at once, in a single lump sum of cash
As a regular monthly cash payment to you
As a “credit line” account that lets you decide when and how much of your available cash is paid to you
As a combination of these payment methods

Another feature is that the money paid to you is not taxable. This is because it is not income, it is a loan! The amount of cash you can get from a reverse mortgage depends on the program you select and – within each program – on your age, home, and current mortgage rates. With a reverse mortgage, you are taking the equity out in cash, so your debt increases and your home equity decreases. Reverse mortgages allow you to use debt to turn your equity into income. You are reversing the deal you used to initially buy your home. Then, you had income and wanted equity. Now, you have equity and want income. There are also no limits on the value of homes qualifying for a HUD reverse mortgage. However, the amount that may be borrowed is capped by the maximum FHA loan limit for each city and county. It varies from $172,632 in rural areas to $312,895 in many major metropolitan areas (and even higher in Alaska, Hawaii & the U.S. Virgin Islands) depending on local housing costs. The size of reverse mortgage loans is determined by the borrower’s age, the interest rate, and the home’s value. The older a borrower, the larger the percentage of the home’s value that can be borrowed. As always, if you need help or advice, just respond to this email.

What Causes Mortgage Rates To Change?

brink cawley — Thu, 17 Sep 2009 14:24:52 +0000

Did you know that one or more rate changes per day is normal? Most people do not know that. Rate quotes can easily change when you call back later that same day. In the lending business, a rate change can also include a change in the point cost for the same rate. In other words, a rate can be no points in the morning, then later that day cost ¼ point. That is a rate change to lenders. Did you also know that regular fixed mortgage rates are not directly affected by what the Fed chairman Ben Bernanke does? Mortgage rates change primarily based on: 1) the perception of inflation, 2) times of uncertainty and 3) the movement of money in and out of the stock market–that’s it. When a piece of news shows weakness or uncertainty in the economy, that helps rates fall. The opposite is also true. A drop in the unemployment rate, a rise in durable goods orders, a rise in the consumer confidence index–rates go up. These influencing factors can present themselves all the time, many without warning, affecting mortgage rates instantly. There is no “delay”. It doesn’t take time to “filter down” like some people think. Reading the paper for quotes doesn’t really work because the information is old by the time you read it. Radio, TV and billboards are not the answer because the details are always missing. They just want to get you on the phone. Competitive lenders can deliver nearly identical rates to each other. Most borrowers don’t ask the right questions and focus only on the interest rate. A professional will always be competitive and deliver what is promised.

How Do You Get The Best Mortgage Rate? It is never about the best rate. It is about the best math. There is no other answer than that. So why isn’t the lowest rate the best deal? First, lower rates come with more points and fees, but that’s not the real issue either. There is a break even point to contend with when paying points and fees, tax deductions to figure out and your available cash. In the case of a purchase loan, points are tax deductible in the year that you pay them. That is good, but then again, so is the interest you think you are saving. With refinances, the points are usually only deductible over the full term of the loan. That could be 30 years, making the benefits to you and the break even point years down the road. So why do so many lenders advertise really low rates with all of those points and fees? Because they know most consumers look at the rate, not the math. That advertising strategy works really well. How about the lowest APR? Generally, the more points and fees you pay, the lower the rate and APR. True, but not the answer. Loan officers can take apart each rate and fee option to find out what the best math is for you, period. It only takes a few seconds for a professional to do it. As long as you qualify for various options, the final decision is yours. As always, if you need help or advice, just respond to this email.

Why Use A Realtor®?

brink cawley — Thu, 17 Sep 2009 14:19:34 +0000

A Realtor® or real estate salesperson is much more than the average salesperson. Their primary job is to help you buy or sell a home and represent your best interests. If you’re unfamiliar with the real estate “game”, the resources and expertise they provide is beyond most people’s initial understanding. Unless you are experienced in the biz, you will never know all of the pitfalls that can and do come up. Most of them will cost you more time, money and grief than the agent’s commission is worth. You may not even be aware of your “mistake” until after the transaction has closed. What they do is almost considered an art form. Even with all of the resources out there, primarily the internet, 4 out of 5 people still use an agent for a sale or purchase. The internet has enabled consumers to gain more information about the process and view some properties on line. Still, that’s the tip of the iceberg. Seeing all available properties and obtaining the most recent sales data can only be accessed by a licensed real estate agent who is a member of the local MLS. (Multiple Listing Service) Like an attorney, CPA or other professional, their skills and knowledge are highly desirable and well worth the price.

Whether you’re buying or selling, here is some of what they provide:

1 Accurate property pricing information.

2 Access to all available homes in your area.

3 The ability to list your home for sale on the MLS.

4 Access to literally a never ending supply of qualified buyers and sellers.

5 Local trends in the area.

6 School system information.

7 Accountability. They are responsible for their actions, providing you with a built in quality guarantee.

8 How to prepare your home for sale and get the best price.

9 How to prepare yourself as a buyer and get the best price.

10 Problem solving and negotiation skills.

11 Recommendations to financing professionals, home inspectors, insurance agents, contractors and the like.

12 Recommendations to other services in the community. These include schools, health care professionals, restaurants, veterinarians, cleaners, tradesman and a lot more.

For most people, buying or selling a home is near the top of the most important events in one’s life. Sure, some people are able to sell or buy a home without the services of a real estate agent. For sellers, that’s called a for-sale-by-owner, or FSBO. You attempt to figure out a price, then stick a sign out front. Next, wait to be contacted in person or by phone. Then, spend time dealing and negotiating with possible buyers, paperwork, and hope for the best. Will those buyers actually be able to qualify to buy your home? Most agents won’t show your home for several reasons. First, they won’t get paid. Second, FSBO’s are typically overpriced to begin with. Third, they will usually not work with a self-represented, inexperienced seller. Further, you won’t be able to use the MLS, which makes your home visible to all potential buyers.

Real estate brokers and sales agents are paid to sell properties. Depending on your area, that could be anything from farms to condos. They also find buyers the properties they’re searching for. Most spend endless hours assessing property values and searching through neighborhoods and cities. Why? That’s what it takes to best represent each client. It’s a full time job and only a professional can properly handle it for you. As always, if you need help or advice, just respond to this email.

How Do You Determine A Home’s Value?

brink cawley — Thu, 17 Sep 2009 14:09:34 +0000

Determining a home’s value is not an exact science and it’s never a fixed number. Very few people outside of the real estate business can accurately come up with a value. Why? Homeowner’s think their house is always “the best”. Appraisers look at a home based primarily on statistical data. Buyers and Realtors® have their own views. Depending on who you are, you may give more weight to different factors. So, will you have a wide variety of opinions? You bet. These are some of the factors to consider:

1.) The home’s square footage

2.) Quality of construction

3.) Home design, general appeal, amenities

4.) The home’s floor plan

5.) Proximity to transportation, schools and shopping

6.) Lot size, topography, landscaping, view

7.) In the case of a purchase transaction, what a seller and buyer negotiate also contributes to the value

8.) And of course, the most recent sales of similar properties nearby

A home’s estimated value is almost always determined by either an appraisal or a comparative market analysis. These are the most accurate ways to determine what the home is worth. An appraisal is a written analysis of the estimated value of the property. The appraiser’s job is to determine the approximate fair market value. A properly licensed appraiser who has good experience, expertise and is familiar with the area creates the appraisal. Anyone can order an appraisal, which typically costs $200 to $400. It will include a complete “breakdown” of the property and compare it to recent comparable sales in a “grid” format. Photos of both the subject and the comparables will be included. A full, formal appraisal averages between 12 and 20 pages, not including the photos. There is a ton of information included.

A comparative market analysis is an informal estimate of market value that a real estate agent or broker determines based on comparable properties that have recently sold. If a new bank loan is required to purchase a home, the majority of the time the bank will want something from an appraiser. Regardless of what the buyer, seller or Realtor® determine as the value, the final say so is the appraiser’s. On the other hand, a buyer or seller may not agree with the appraiser’s value for other reasons. Unless all parties agree, you could have problems closing the transaction. To make things even worse, different appraisers can see values differently. In the case of a disputed value, it’s often beneficial to get a second opinion. That will cost someone more money, but may help to solve the issue. With condos or planned community properties, it’s a bit easier to determine value. The first is because the place you look is within the project itself because it will likely contain nearly identical properties.

Can you determine a property’s value through the internet? The internet is a great source to get a rough idea of value, but that’s all. There are simply too many variables to take into consideration. If you don’t have that kind of experience, you are going to miss the number. A professional Realtor® is always the best place to start. As always, if you need help or advice, just respond to this email.

Should You Rent Or Buy?

brink cawley — Wed, 16 Sep 2009 14:21:54 +0000

Maybe you’ve asked yourself, “Why would I buy a home and make higher payments when my rent is much lower?”. Good question. For some, that is the best way to go. Every situation is different. Sometimes the best way to figure it out is to get out a piece of paper and a pencil. Make two columns: Rent and Buy.

RENT

Generally lower payments.
Little or no responsibility.
No repairs.
Generally easier to move from location to location.
No need to worry about a drop in home prices
You get to retain your cash

BUY

Full tax deduction of your mortgage interest and property taxes paid by you. The government makes part of your payment.
Appreciation of home value over time.
Freedom and quality of life. You can do what you want because that place is yours!
A source for emergency cash or credit.
For many people, their equity represents most of their retirement money.

NOW HERE’S THE MATH

On the average, homes appreciate about 5% a year. Average is the key word. If you are worried about home prices over the next year or two, don’t buy a house. In some years prices will rise, in others, go down. On the average over time, figure a 5% increase. The figure will vary from neighborhood to neighborhood, and region to region. 5% may not seem like very much. Sometimes stocks appreciate much more, and you could earn over 6% with the safest investment of all, treasury bonds. The beauty of home ownership is that your money is highly leveraged, unless you pay cash for the home. For example, let’s say you bought a $200,000 house with 10% down and got a 90% loan. That means you put $20,000 down. At an appreciation rate of 5% annually, a $200,000 home would increase in value $10,000 during the first year. That means you earned $10,000 with an investment of $20,000 based on the new home value of $210,000. This is because the 5% increase was on the $200,000 of the home, not the $20,000 you put down. Your annual “return on investment” would be 50%. ($10,000 is 50% of $20,000) Of course during that time, you are also making mortgage payments and paying property taxes, along with a couple of other costs. These are expenses and you have to deduct those. But since the interest on your mortgage and your property taxes are both tax deductible, the government is essentially paying part of your costs. For example, assume your initial loan balance is $180,000 with an interest rate of 6%. If your first payment were January 1st, your taxable income would be $10,800 less at the end of the year due to the tax benefit. Paying the property taxes reduces your taxable income another $2,000 or so, depending on your location. Your taxable income in this example is reduced by $12,800.

So what is the bottom line with all of these numbers? If your combined tax bracket is 28% (talk to your tax preparer on that one), you get $3,584 “cash back” at the end of the year. Only homeowners get this benefit. The other benefit, as mentioned above, is appreciation. Your property gained $10,000 in value. That’s your money! Renters don’t get anything, but their landlords do. All of these numbers have the positive effect of reducing the real cost of homeownership. Over time, buying a home is one of the best investments you can ever make.