College tuition

In part 1, if you missed it, start here at https://refi.com/dont-mortgage-your-future-part-1/.  We began to walk through the current cost of money and spending tomorrow’s money today.  We began to unpack the rising cost of college tuition.  Also, the best way for family’s to prepare for college in today’s rate and value environment.

Average Cost of College by Degree Type

The average cost of college for public colleges and universities is similar for bachelor’s, masters, and doctoral degrees. The greatest differences lie in private nonprofit schools, which illustrates how costly a doctoral degree is compared to a master’s and bachelors.

Research has found that the average cost of college for the 2017–2018 school year was $20,770 for public schools (in-state) and $46,950 for nonprofit private schools, only including tuition, fees, and room and board. Each year, school costs have continued to increase, even accounting for inflation. 

Each year expect to see public in-state or private tuition to increase an average of 6%!  That is a smart money term for tomorrow’s money.  College tuition should never be left to a “we will figure it out when we get there” moment.  Often it is too difficult to quickly navigate those waters.  Why?  Simply remember these questions from part 1:

  • What will your finances look like then?  
  • What will interest rates be?  
  • Value of your home? Will it be on the high end like today, or will values dip?
  • Employment. Could your employment change? Increase or decrease?  Loss of employment?
  • Counting on a scholarship? Don’t. In fact, due to COVID, universities are slashing scholarships by 40% over the next 5 years.
  • My business should be taking off, right? If you are counting on earning the money, that is great! However, what if?

Taking the value of today and assuming your child graduates in 4 years, how are you going to tackle the $187,800 investment?  $46,950 x 4.  Please note this covers tuition, room, and board.  Not fees (lab fees as an example) and books.  That can move the cost another 4% per semester.

So what is the solution?  Can you reasonably achieve your goal?  Will your child need loans? Will they need to get a job while going to school?  Will it involve retirement money?  Credit cards?  Second job?  Putting your business on hold?  The answer is none of the above!  We live in a historical moment of time that allows you access to money at a level so cheap, that we have never seen it before. In part 3 we will break down for you on how college and paying for college is right in front of you. 

Home prices are up — way up.

According to the Federal Housing Finance Agency, home values have increased by about $100,000 since 2012. Depending on your area, appreciation in homes is even greater!

This makes it a great time for real estate investors to utilize the equity in their rental properties. The cash can be used to:  

  • Buy another rental property
  • Make home improvements to drive higher rents
  • Payoff other real estate debt. Ensure you are running on the lowest possible cost.
  • Prepare cash reserves for the wave of homes that will inevitably come on the market.

With mortgage rates near record lows, it could be time for rental property owners to put their equity to work.

So How Do You Refinance Rental Properties?

Because investment properties are “non-owner-occupied,” there are special rules about refinancing and taking cash out. 

For instance, your credit score needs to be quite good, usually at least 680.

And your cash out refinance must leave you with at least 25% equity in the rental property and decent cash reserves in your bank account.

In addition, you can only use a conventional loan to complete a cash-out refinance on a rental property.

Instead, you’ll need a loan backed by Fannie Mae or Freddie Mac — the two major agencies that set rules for most mortgages. Don’t necessarily stress about how. Your mortgage professional will sort that for you!

Conventional refinance rules are in place making it possible for many landlords with investment equity to cash out on their rental properties. 

What About Rates?

As a property owner/investor you are in a unique position. You are concerned about cost, terms, and cash flows, for profit, which is different from the average homeowner.

Rates for a cash-out investment property loan tend to be on the high end for mortgage rates. 

Why? Because investment property rates are higher to begin with — about 0.5% to 0.75% above primary residence rates on average. 

Then, if you take cash out when refinancing, rates are usually a little higher still. This is because lenders take on more risk when a homeowner pulls equity out of their property. To be blunt, if something goes wrong with a property owner, they will ensure their primary mortgage is covered, not a rental property.

In the end, if you have been on the fence as a property investor, the rates today as you read this article are setting up to be the cheapest of your lifetime.  In turn, it is opening the door for real estate opportunities.  When money is cheap, the same line of thinking is in place when a property is under-valued.  You take action! 

 

Single family house on pile of money. Concept of real estate.

A home equity installment loan or a line of credit and a cash-out refinance are all ways to access the equity that has accumulated in your home. Let’s break it down so you can determine what makes sense for your financial goals and objectives.

Home equity loans, home equity lines of credit (HELOC), and cash-out refinances are three ways to turn your home’s value/equity into funds you can use to accomplish other goals, like paying for home improvements, consolidating debt, college fund, or starting a business.

You get the cash by borrowing against your home equity, which is the difference between the current value of your home and the amount left to pay on your mortgage.  Certain loan to value restrictions may apply!

Although these loans are similar, they’re not the same. If you already have a mortgage, a home equity loan or a HELOC will be a second payment to make, while a cash-out refinance replaces your current mortgage with a new one — complete with its own term, interest rate, and monthly payment.  In short, it is separate from your current mortgage.

Home equity loans

A home equity loan lets you borrow a lump sum that you then pay back at a fixed rate and a fixed term. It’s technically a second mortgage, so you’ll make payments on it in addition to your regular monthly mortgage payments. However, it gives you peace of mind in a fixed rate and term.

Home equity line of credit (HELOC)

A home equity line of credit is also a second mortgage that requires an additional monthly payment. But instead of getting the cash all at once, you can borrow as needed during the draw period. Similar to a credit card.  Borrow what you need.  You are in control. You then repay what you borrowed plus interest during the repayment period. Unlike home equity loans, HELOCs usually come with an adjustable-rate, so your monthly payments will vary.  We would be happy to explain how the rate is determined.  What is powerful of the line of credit it gives you flexibility in future borrowing. Pay it back and credit becomes available again.

Please bear in mind, in the current environment, home equity products will have a quicker turnaround time, as opposed to a conventional mortgage refinance.

Cash-out refinance

A cash-out refinance replaces your original mortgage with an entirely new loan. The difference between the current loan amount and the new loan amount provides the “cash out.”  This is where you are using your equity!  And though rates for cash-out refinances are generally higher than for rate and term refinances (meaning you are not borrowing more money), your interest rate will still probably be lower than a home equity loan or HELOC rate.  The key to a cash-out refinance is that you are paying debt off! Especially while we are in this season of low rates.  The real advantage of rates today is to pay off debt and keep it paid off, including credit cards. That way you enjoy these real rate advantages long term, without a need to refinance again!

What makes sense?  What are the tax ramifications of one over another? Let’s connect.  Let’s look at your goals, timeframes, and objectives.  Then we will formulate a plan with you by what you are looking to achieve.  Click here to get started.

Are we on borrowed time?  As a homeowner it is a fair question to ask.  We are in many respects in uncharted waters in terms of interest rates.  It can give the industry this feeling that it will last forever.  As the English author Geoffrey Chaucer once said “All good things must come to an end.”  If that is the case, are we on borrowed time?

History lesson, since 1971.  Many homeowners do not remember the time when getting a mortgage at a high double digit interest rate was the norm.  To offset that, you could also get a savings account or CD (certificate of deposit) at 15% to 20% as well at that time.  However, when you look at the apex to today, you will notice two important items:

Freddie Mac

First, the data does not include where we are today.  Right now, some have the ability to get a mortgage in the 2% range!  This will be on the opposite end of 1982, when you were staring at 18%.  What can we ascertain from these two points of data?  Simple they are on the extreme.  Neither of these were the “new norm” for getting a mortgage during these periods of time.  Fair point right?  Is there much difference between the two?  Yes, and it is extreme.

In 1982 and through the entire 1980s, consumer spending was very controlled.  Credit cards, personal loans, installment credit was limited.  Yes, people had department store charges, but consumer spending and debt was in alignment.  Today?  

Their average consumer debt was $78,396 in 2019, a 58 percent increase from $49,722 in 2015. Millennials also carry an average mortgage balance of $224,500, the second-highest after Gen Xers, who have an average mortgage balance of $238,344. In terms of credit card debt, millennials’ balances are expected to climb.”  This according to bankrate.com

This means that people are owing more and spending more and creating more debt today, than any time in history.  So what happens when interest rates rise (and they will)?

Look at your own situation.  Ask yourself, are your debts being eliminated or rising?  Savings increasing or decreasing?  Is the equity in your home at an all time high?  Do you know?  What will your financial picture look like when the rates do rise?  Will it make sense to refinance then?

We are on borrowed time.  Not because of some geo-political reason.  It is a math reason.  Nothing stays flat, low, high, or the same forever.  When something is historically high like a stock, it is time to look to sell.  When something is historically low, like mortgage interest rates while maybe your personal debt is at a historical high, it is time to refinance your mortgage!  Time is of the essence, take action today.

Mortgages

When you visit your lender to get a mortgage for your home, they will tell you the maximum amount that you are allowed to borrow. But how do they reach this total and what factors do they take into consideration?

How do they determine that one borrower can take on a bigger mortgage than the next? This decision is made by mortgage companies by considering a wide range of factors, including your credit information, your salary, and much more.

Here Are Some Of The Common Ways That Lenders Determine How Much You Can Borrow:

  1. Percentage Of Gross Monthly Income

Many lenders follow the rule that your monthly mortgage payment should never exceed 28% of your gross monthly income.

This will ensure that you are not stretched too far with your mortgage payments and you will be more likely to be able to pay them off. Remember, your gross monthly income is the total amount of money that you have been paid, before deductions from social security, taxes, savings plans, child support, etc.

  1. Debt To Income Ratio

Another formula that mortgage lenders use is the “Debt to Income” ratio, which refers to the percentage of your gross monthly income that is taken up by debts. This takes into account any other debts, such as credit cards and loans. Many lenders say that the total of your debts shouldn’t exceed 36% of your gross monthly income.

The lender will look at all of the different types of debt you have and how well you have paid your bills over the years. By using one of these two formulas, your mortgage lender calculates the size of a mortgage that you can afford.

Of course, there are many other factors that need to be considered, such as the term length of the loan, the size of your down payment (if applicable), and the interest rate.

Remember that when factoring in your income, you usually have to have a stable job for at least two years in a row to be able to count your income. If you have a side business or side income, be diligent in tracking that income.  In short, be able to source it!  If you want to increase your chances, you could consider paying down your debts.  This may sound counter-intuitive.  However, even in the case of a refinance that will include debt consolidation, your ability to effectively manage debt plays a role in the credit decision. 

House exterior

Refinancing rental property assets has become synonymous with several compelling benefits. At the very least, it can unlock a multitude of wealth-building opportunities, including the ability to lower interest rates and monthly payments, improve loan terms, and earn additional cash flow. That said, far too few new investors are aware that this strategy even exists. For one reason or another, there’s an entire contingent of investors that don’t even realize the opportunity they are missing out on.

Despite the many reasons one may have for refinancing rental property assets, it’s not without its own caveats. To be perfectly clear, rental property refinancing does coincide with an inherent degree of risk. Therefore, it’s critical for investors to not only comprehend their purpose for refinancing, but to also weigh the risks versus the rewards. Done correctly, and for the right reasons, refinancing a rental property can be a great move.

When Should I Refinance My Rental Property?

The best time to refinance your rental property is when the value of the property is high and interest rates are low. It’s all about leveraging your assets! The most common reasons to refinance are to:

  • Lower your mortgage rate — Save Money! Just because you are making it, saving it is equally important.
  • Pay off your loan faster — You could save upwards of $100k with the right refinance!
  • Purchase new investment properties.  Leverage your assets.
  • Upgrade a current investment property.  Build even more equity and charge higher rents on Airbnb or VRBO.

That being said, now is a great time to consider refinancing a rental property. A lot has changed in a relatively short period of time. In particular, those who bought before Covid hit will most likely find today’s rates much lower than at the time of their initial purchase. 

Benefits Of Refinancing Rental Property Assets

There are countless reasons to refinance investment property, but the best reason is always going to be the one that furthers your own exit strategy. That said, any of the following benefits represent a good reason for refinancing rental property:

  • Refinancing rental property assets may allow some investors to switch from a variable interest rate to a fixed rate.
  • Refinancing a rental property at the right time could easily lower the amount investors owe in interest over the life of the loan.
  • In lowering the amount investors owe over the life of a loan, they will also be able to lower monthly obligations.
  • Refinancing a rental home may help investors change the length of the loan they are committed to.
  • Once investors exhibit an acceptable loan-to-value ratio, the lender may remove private mortgage insurance charges from monthly payments.
  • A cash-out refinance may allow investors to take out a loan on their home.
  • Strengthening cash flow of investment income.

You are making all the right moves as a property investor.  You know how to market and advertise your property.  You are booked till 2021.  You managed Covid-19 and have come out the backend in a profitable position.  Now take advantage of rates and terms that will leverage your asset and income even further.

Mortgage hacks under 30

Under 30 Mortgage Hacks

Often, banks, credit unions, and brokers focus on the “mature” homeowner.  That homeowner that is married with children.  They are talking about upgrading their home for a bigger size.  Paying college tuition for their children.  Buying a retirement property.  However, what about you the 30 and under homeowner?

Under 30 Mortgage Hacks #1

FACT, you have the best of all worlds.  For one, you are building a portfolio faster than any other generation.  You are experiencing historically low-interest rates, which allows you to become more aggressive in your financial approach.  What are goals you can accomplish?  Let’s review some of our Under 30 Mortgage Hacks:

  1. Retirement.  Yes, we understand retirement is many years off.  However, consider this illustration.  It is called the theory of compounding interest. Get the details here.  That is the clinical definition. Here is a simple one:

Rule of 72: Whichever number you divide into the number of 72, will be the time it will take for your money to double.  12% or 72 divided by 12% equals 6.  That means at an average interest rate of 12%, your money doubles every 6 years.

This is such a powerful concept to commit to. You will make your years of 45 to 60 stress free. Imagine, if you refinance your mortgage in one year’s time, you save $5,000.  At the end of the first year, you invest that $5,000.  Let’s also say you are 28 years old.  At the age of 68, you have saved $1,200,000.00!  Off of a one-time investment of $5,000.

Mortgage Hack #1: If you refinance your mortgage, that allows you to begin to save your money for retirement or the long term. That is smart money!

Under 30 Mortgage Hacks #2

Let’s stick with the theme of retirement.  If you are a W-2 employee, in many cases you are missing out on free money.  YES, you heard that right!  Free money, in two ways.

  1. In your 401K if you contribute to your retirement, that money is not taxed.  What does that mean?  The government lets you have free money in the form of fewer taxes.
  2. Company match.  On the surface you may think, the company will match my contribution up to 6%.  That is 6% for free, plus the tax money! That is a huge amount of money over the course of your life.

Mortgage Hack #2 – If you can refinance your home to free up monthly cash flow to make yourself money, you are going to be light years ahead of other homeowners.

Under 30 Mortgage Hacks #3

Speaking of making money.  You have heard the expression “work smart, not hard.”  What that really means is, smart people put their money to use.  This is the perfect time to think about becoming a real estate investor.

Anytime there are dramatic changes in the economy, inevitably there are changes in the housing market.  No matter how favorable times are, the opportunity to buy and sell a property is there.  They say it takes money to make money.  Now you have the money.

Additionally, don’t settle on just a single source of income or a single property.  You can get a cash out refinance that will allow you to purchase a rental property.

Mortgage Hack #3 – Smart money makes money.  Becoming a landlord does two amazing things to your bottom line.  You are taking the monthly cash flow and reinvesting and your building equity into yet another property.  

Smart Money for 30 and under homeowners opens you to a world of options in cash and asset accumulation you never thought possible.  However, you were smart enough to become a homeowner, now be smart enough to use your home as a financial tool

Mortgages photo

Making smart financial decisions at times requires you to work from the finish to start.  To do everything backward to ensure you are getting exactly what you want.  So as a smart mortgage customer, please finish this sentence:

“I want my mortgage payment to be ___________.”

Sounds simple enough.  This is something that the automotive industry has been using for decades.  However, theirs is for all the wrong reasons.  In the mortgage industry, this happens on the front end of transactions (purchase) often leading to the wrong product, term, and even the wrong home.

However, as a current homeowner, it’s now time to pick your plan it’s time to pick your mortgage payment.  Do you have the ability to do that? Of course you do.  Banks, lenders, brokers should not be picking this for you.  They don’t have the full scope of your financial situation, you do.  Or at the very least you will.

“I want my mortgage payment to be ___________.”

Now it is time to work backward:

  • By having this mortgage payment_______ and paying off _______ I can save towards _______ and fund _______ I accomplished _________________.
  • By having this mortgage payment and paying off _____ I can save towards ________ and fund_______.
  • By having this mortgage payment and paying off_____ I can save towards __________.
  • By having this mortgage payment I will payoff ____________.
  • I want my mortgage payment to be ____________________.

The goals can be many.  From retirement to debt-free living to ensure your children have no student loans.  All of these goals and many more can be accomplished by asking one single question and starting backward (at the goal) and come back to the sentence you just completed.

“I want my mortgage payment to be ___________.”

There are many tools that will help you get there!  To get there, it is breaking things down to the smallest detail.  Down to the number of bags of Doritos you buy on a monthly basis.  Goals financial or otherwise have to be broken down to the smallest detail to fully be reached.  Then, you commit to that goal.

There is an old saying, “the devil is in the details.”  Let get into that detail here <CLICK HERE FOR YOUR FINANCIAL ROADMAP>

Home photo

In part 1, we covered the basics.  In other words: we covered the normal reasons as to why you would refinance your home. Now, let’s jump into the tier two reasons.

6 Reasons to Refinance Your Home #4

Let’s pay this mortgage off:

In a previous post, we covered the ABC’s of the “cost” of your home.  In many cases, with rates being where they are, it’s now time to get serious about owning your home free and clear.  Making a simple change from 30 years to 15 years can save you tens of thousands, if not a hundred thousand plus!  

6 Reasons to Refinance Your Home #5

I want to utilize my equity:

FACT, equity can be the ultimate savings account.  For many homeowners, they don’t realize the access they have to the money they can use for major purchases or expenses.  In addition, your equity in a first mortgage possibly is the cheapest money you will ever have access to. 

Let’s dive into that:
If you have a major transaction coming up, such as college tuition, home healthcare, buying a second home, investment capital, wedding, or starting a business, people often consider other avenues for cash:

  • 401K
  • Credit Cards
  • Retirement money
  • Cashing out life insurance

Now, not to go down a rabbit hole of losing interest and value. The fact of the matter is you may have a negative tax consequence and you are also losing a potential tax deduction.  In future posts, we will break this down in more detail. But in many cases with the examples above, it is a lose-lose-lose situation.

The potential tax-deductible money in your home is the best way to acquire cash for major purchases.  Equity is buying power!

6 Reasons to Refinance Your Home #6

I want to pay off debt.

On the surface, you may think this is a no-brainer: that as a homeowner you have the ability to consolidate your debt and pay it off through a refinance of your mortgage.  In a recent survey done by Yahoo Finance, it showed only 22% of homeowners knew they could pay off their car, credit card, student loans, installment loans, personal loans, and more by refinancing their home.

Your home is a financial tool.  A refinance of your home can be utilized to achieve a number of financial goals.  These are only 6 examples of these goals; there are many, many more.  That is why the focus should not be on a rate, product, or service.  The focus should be on: what will my home refinance achieve?  Once you can answer that, the goal is accomplished.

 

White and Brown House

If you’re a homeowner, you might be hearing everyone, from your neighbors to news anchors, and everywhere on social media talking about refinancing. So, should you be considering it too? There are many situations in which refinancing your mortgage may be the right move ⁠— let’s go over the 6 reasons to refinance your home.

WAIT, before we go through the reasons, let’s jump back and review the two types of refinances you will consider:

Rate & Term Refinance

The concept of the rate and term refinance is simple.  You are taking the current payoff of your mortgage and choosing the term.  30 years, 15 years, or 10 years.  This is a great way to take advantage of low rates to possibly decrease the term and overall cost of your mortgage.  It offers the flip side if you are just seeking payment flexibility. If you want a lower payment, you can refinance to a lower rate and longer-term.

Cash-Out Refinance

Cash-out refinance gives you the ability to potentially consolidate some if not all of your debt into one single payment.  You may still take advantage of all of the above.  Namely, a lower rate and term flexibility.  In addition to paying off debt that is not tax-deductible, you can use the cash-out portion to fund major purchases.  

6 Reasons to Refinance Your Home: #1

I want to lower my monthly payments:

If rates have dropped since you got your last mortgage, you may be able to refinance into a loan with a lower rate. Why? You can reduce the amount of interest and lower your monthly payments. The result?  You’ll also pay less over the life of your loan. You can check today’s rates or more specifically, your rate to your situation here.

If it is not about the rate, what would be another reason? Are you going through a future career change? Starting a business? If you run into a situation that will lead to a decrease in income, you may be able to lengthen your loan term to pay off your loan more gradually. In switching from a 15-year fixed mortgage into a 30-year mortgage, you can make lower monthly payments.  This would be known as a cash flow tool.

Another big one!  PMI or private mortgage insurance.  Maybe you have achieved that benchmark of 20% equity in your home.  Now you can possibly get rid of that high-cost insurance!  Achieve the best of both worlds.

6 Reasons to Refinance Your Home: #2

My credit score has improved:

If your credit score has gotten a significant boost, you may also be able to refinance and get a better rate. We pay for our credit.  Both good and bad.  It is how lenders mitigate their risk!  However, many homeowners are overpaying on their mortgage because of past credit.  If you have been working hard, taking care of past issues, then seen your credit jump 20+ points and stay there, it may be time to refinance. 

6 Reasons to Refinance Your Home: #3

My adjustable rate mortgage is getting ready to move:

The ARM (Adjustable Rate Mortgage) is a powerful tool in the purchase or a refinance of any property.  However, because of the nature of the product, it is market-driven.  You can go from secure to payment fluctuation that your life and finances are simply not ready to handle.  Also if rates are low on the fixed-rate side, it makes total sense to lock and secure payment for the next 15 or 20 years.

This concludes part 1 in the 2 part series on the 6 reasons to refinance your home.  Come back as we talk about the 3 other reasons that most homeowners miss out on.