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.

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.

Future Plans

Without question, the last 2 to 3 months have reminded us that we need to expect the unexpected.  Whether it’s that you need to ensure cash reserves in the face of income loss, save for college, retirement protection, investments, or if you have plans of being an entrepreneur, we have tools at our disposal.

For the majority of Americans, our wealth is tied directly to our home. Bear in mind that as we’ve made our monthly payments, we got a return on our investment in the form of equity!  Depending on your circumstances, that equity is there for you to use in the form of cash-out refinance. You can use a cash-out refinance as a financial tool. Right now, your plan should be to build up your emergency fund and/or max contribution to a retirement plan.  Or replenishing lost retirement savings. Investing in a college savings fund.  Or for those that want to take it a step further, investing in the stock market or becoming a real estate investor. Let’s take a closer look at how you can use a cash-out refinance.

Expect The Unexpected

Financial wellness. We think of wellness often in nutrition, foods, and our bodies.  However, financial wellness is equally as important.  When you plan for the unexpected, you can deal with even the most stressful of events, with solid financial backing.

Remember the equity?  Yes, you can use this equity to ensure you are able to meet unexpected moments.  Now that the Fed has lowered short-term interest rates, what does this mean for you? Mortgage interest rates are lower.  Now that interest rates are lower you can accomplish two goals.  First, with a cash-out refinance, refinance your current mortgage to a lower rate and payment, cashflow!  Second, use that equity (cash-out) to put a plan and budget in place.

Emergency Fund

Regardless of your current circumstances, you must strategize to ensure you have a savings plan.  There is an old saying “too much month and not enough paycheck!” So how in the world do you save for an emergency?  Step one, we spoke about above.  Step two, debt consolidation.  Consider this scenario for a moment: If you have credit cards and student loans that cost you $800 per month in minimum or slightly above minimum payments.  You take those bills, use a cash-out refinance, and cut that in half or more?  Guess what, now you are saving about $400 per month for an emergency fund! 

Smart money experts recommend having at least 3 – 6 months of necessary living expenses available.  Cash, not credit cards.  Why?  Simple: as one example, in the event of another emergency, you can’t pay your mortgage with a credit card.  There is a reason they say “cash is king.”  While utilizing two methods staying at a maximum 30% level on credit card usage per month while also putting money away, you are emergency ready!

Building Retirement Funds

FACT and there is no other way to put it: tax-free money is the best money.  In fact, if you are a part of a company that has an employer 401k matching program, then tax-free and free money is the best money!  The trick is, you have to be contributing yourself.

As of 2019, the IRS allows you to contribute up to $19,000 per year to your 401(k). If you’re over 50, you’re allowed to contribute anywhere between $1,000 – $6,000 per year if your plan allows for catch-up contributions. The exact limit for these contributions is based on the type of retirement plan you have. 

Are you familiar with the “Rule of 72?”  It is called the Theory of Compounding Interest.  In essence, whatever number you divide into the number 72, is the number of years it will take for your money to double.  12% into 72 means your money doubles every 6 years.  Whatever number, as this is for hypothetical purposes.  In short, retirement in your 401k or IRA allows your money and interest to compound tax-free.  When is the best time to start?  Ask a financial advisor, but the answer is right now.

If you’re behind in building retirement funds, taking cash out of your home is a perfect way to ensure you can retire and retire on time! However, do not rely on a cash-out refinance alone.  A solid plan, by incorporating elements of the above is critical.

College Fund

We have dealt with 1000’s and 1000’s of people. There has not been a single person yet that has said; “Yes, I want my kids to be crushed with student loans.”  No parent wants that for their children.  It is also not something you can save for in just one year.

The cost of college tuition will not go down. In fact, it is one of the fastest rising costs in the US.  With that, you need to be ahead of the curve.  A cash-out refinance is a perfect solution to begin or fully fund a college education. 

These are just a few examples of what a cash-out refinance can do for you and your family.  How much equity do you have?  What is the right mortgage for you?  Will you qualify? Is the time right? Cash-out refinance is a powerful financial tool.  One that many people overlook.  You may have more equity and resources available to you than you even know.  Review this page, see what scenarios you connect with and what makes sense for you.

Most mortgages have terms of 15 or 30 years, but some spread payments across 40 years. These longer-term mortgages make it easier to borrow larger sums than you might otherwise be eligible to borrow, but these loans also have a few disadvantages. Consider the pros and cons of a 40-year mortgage carefully before making this serious long-term commitment.

Traditionally, taking out a new mortgage or trying to refinance (“refi”) an existing loan involved a trip to the bank. Fortunately, the rise of online mortgage lenders has made the process much simpler. There are now more products available, and more opportunities to find products you qualify for. Here are the top three ways using online lenders makes it easier to refinance your mortgage.

The last thing homeowners want is to spend more on their homes. When researching cash-out refinance rates, it’s important to determine whether the refi will actually cost more than other kinds of refinancing. There are many factors to consider when answering this question. Here are some things to keep in mind:

Refinancing may seem at first like a daunting process, but it doesn’t have to be if you approach it in an organized and methodical manner. Before you start sifting through mountains of paperwork and trying to compare mortgages, consider these top four things to do when you’re ready to refinance.