business, finance, savings, property ladder or mortgage loan concept : wood house model on computer laptop

As homeowners and families, there are plenty of large financial decisions we are faced to make.  One of the biggest decisions?  College.  College (and the real cost of college) stare parents in the face of a huge six-figure investment they must be prepared to make.

Often parents realize the cost far too late in the process for traditional college savings.  Then when they have to borrow money, it becomes out of necessity instead of making the best financial decisions.  So, this begs the question:

With the cost of money being at its lowest level in a lifetime, is now the time to borrow?

You may be saying, “but my son or daughter isn’t ready yet!” They may be a year or two away. That is fair, however there are bigger questions to ask right now: 

  • 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?

There are questions abound in terms of what your financial status will be in the future.  Here is what you do know: you know exactly what it is like today!  The ability to refinance a mortgage is better done when there isn’t a sense of urgency when you are not on a strict timeline.

What is the next big part of the process?  The actual cost of college.  Fact: most families underestimate the true cost of college by 52%.  52%!  That is significant.  In our 3-part series, we will break down, by year, what you can expect to pay for college. Then in part 3, we will break down how you can start today in funding that college investment with ease!

Refinance

In the mortgage industry or personal finance industry, “experts” like to overcomplicate the process with insider terms, graphs, charts, and complicated products and services.  In the end, it is a hype machine to make things out to be more than what they are.

Albert Einstein once said, If you cannot explain it simply, you don’t understand it well enough yourself!”

Albert Einstein is 100% spot on.  A mortgage professional has two jobs: To understand your financial situation and goals, and keep it simple. Refinancing your mortgage is about keeping more of your own money.  Think about the lengths we will go to save money:

FACT: People love saving money!  Industries are built around this very concept. So it begs the question, why would you not take advantage of the same concept with your single biggest expense?  Outside of being self-employed, your home will likely be your biggest expense, so it needs to be the item that is financed properly!

Remember, it is about a goal, not a rate. If you have a rate of 3% or higher should you consider a refinance?  Yes, 100%, but not solely for the reasons you may think off the top of your head.  You single biggest expenses are:

  • Term? Instead of 30 years, you could save hundreds of thousands in changing your term.
  • PMI? If you pay mortgage insurance, you could be saving $100 a month. This is real money that is not going to your home.
  • FHA? Same deal, hundreds per month is being spent that is not a direct benefit.
  • Credit cards? The single biggest expense of your home is also your single biggest resource.  You can become debt-free, especially when rates and terms are historically low!

Make it simple.  You have the opportunity to keep more of your own money.  Create and commit to a financial goal that will eliminate debt and provide more retirement and college savings all done through a simple refinance. 

Mortgage Debt

If you speak to 100 people, chances are you may get 90 different answers.  As consumers and homeowners, we look at our bills differently.  What is the most expensive?  What is the one that nags at you the most?  Let’s break it down:

–  Credit Cards.  Without question, we all feel the burden of credit card debt.  It seems like no matter how hard we try, we simply cannot get off the roller coaster of pay off, max out scenarios.

–  Auto Loans. Auto loans or leases is one bill that many regret.  Possibly the better way to put it, buyer’s remorse.  Today, consumers are more apt to accept an 84-month loan and a car payment upwards of $800 dollars a month.  No doubt this is an expensive bill. 

–  Student Loans. Student loans can be suffocating at times.  Because of the amortization schedule, it is a big monthly payment.  You are staring down the barrel at years paying off $100K worth of debt.

Credit cards are often mistaken for your most costly expense. A day does not go by that you hear about eliminating credit card debt.  You may see interest rates at 12%, 14%, or even 21%.  On the surface that would “feel” like your most expensive monthly bill.

There are many examples we could run through.  However, there is a notable exception: your mortgage.  Often we think of our mortgage in terms of payment and rate.  Rarely do we look at our mortgage as our most expensive monthly bill.  In the end, it truly is.

Mortgages often get lost in just being seen as a payment.  Many people are comfortable on some level with their 30-year or 40-year mortgage.  However, the overall cost is what makes it the most expensive monthly bill.

We are conditioned not to overspend.  We research cars on carfax and other resources.  We use websites to find a low balance transfer option for the lowest cost to our credit cards.  However, we forget a simple exercise to understand our mortgage.  Try this:

 

Mortgage:  $336,000

Term:  30 Years

Rate: 4.5%

Payment: $1651.39 – just principal and interest only.

Take $1651.39 x 360 =  $594,572.40 

 

OR

Mortgage: $336,000

Term: 30 years

Rate: 2.5%

Payment: $1287.78

Take $1278.78 x 360 = $463,600.80

 

First, your monthly payments decrease by almost $400 per month, great savings!  However, overall you are saving almost $132,000.00!  This is why your mortgage is your biggest monthly expense.

As homeowners, it is easy to get caught up in the “here and now” mentality.  Credit cards and student loans.  However, you are better positioned to deal with those payments once you deal with your biggest expense, your mortgage.  Start at the top and work your way backward. The solution both short-term and long-term starts and ends with your mortgage.  

House Refinance

There is a popular narrative being floated in the financial world that if you refinance your mortgage, you are digging a deeper hole!  That starting all over again, you are in fact going backward.  However, is this really the case?

There are many factors to consider in a refinance of a mortgage.  Let’s consider a few questions:

  • Have you been making payments on a current credit card or credit cards only to see the balance stay the same or increase?
  • Have you recently or within the last 18 months did balance transfers from multiple credit cards to one?
  • Do you have a home equity line of credit or a home equity installment loan?
  • Do you have more than 2 years remaining on student loans?
  • Do you have multiple no payments finance deals getting ready to expire in 12 months?
  • Do you expect to move in the next 16 months?
  • Is this your “forever” home?

Now, did you answer yes to 3 of any of the above questions?  If so, then let’s talk about a refinance.  Before we do, let’s talk about the appreciation of your home.  Most homes in the United States appreciate in value year over year.  In fact, the nationwide average is 3% to 5% yearly.  This is a conservative estimate, especially in today’s real estate market.

If you have been in your home for 2 years now, let’s consider a scenario:

The value of your home in August 2018 was $300,000.

The value of your home (as an estimate) in August 2020 is approximately $330,750.

You have built equity and that has nothing to do with your mortgage.  In essence, you are $30,000 to the plus!  You won’t be going backward.

Now let’s consider debt:

$15,000 in credit card debt: average monthly payment is approximately $450.00 per month.

$45,000 in student loan debt: the average monthly payment is $460.00

$275,000 mortgage payment for principal and interest and is approximately $1196.00 monthly.

Just these three items come to $2100.00.  Plus, $910.00 per month may not be tax deductible.  However, for this post, let’s not complicate that calculation.

If you refinanced right now at today’s current rate, assuming good credit: $1383.00  Your savings in real money is almost $850.00 a month!  $850.00 a month. This is over $10,000 a year in real cash in your pocket.

Let us be clear, this is not an offer for a mortgage.  The calculations above are for illustration purposes only.  A mortgage professional will assist in helping you understand rates, terms, credit scenarios, and appraisals.  However, with that being said: are you starting over?

Imagine what your finances would like with an additional infusion of cash at a level of $600, $800 or $1000 dollars monthly!  It would be significant and would have an impact. You are not starting over.  In fact, in doing a refinance the proper way, you will be light years ahead in debt, savings, and the elimination of massive interest charges.  It’s time to meet with a mortgage pro!

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>

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