|
| |
Mortgage
Loan Solutions
Finding the ideal mortgage loan for your situation is much more
than obtaining a rate quote. I suggest taking a different approach from the typical
lender/broker by focusing on the use of your
mortgage
within your financial blueprint. In other words, pinpoint exactly what you want to
accomplish with your
mortgage as it relates to your financial goals and current financial situation.
Many different types of loans are
available with various time lengths: Fixed Rate, FHA, VA, Adjustable Rate, Interest
Only, Option ARM,
Option FIXED, Home Equity Line of Credit -- all with either full
documentation or stated (i.e., no income verification and/or no asset
verification) up to, in very rare instances, 100%
loan to value. Recently, lenders have tightened loan requirements by
increasing credit score qualifications, verifying income and lowering
loan to value percentages. Occasionally, some lenders will have special rates and/or
borrower qualifications.
When individuals obtain a loan, they satisfy at least one or
more of the following mortgage uses: (1) affordability, (2) flexibility, (3)
debt consolidation and (4) building wealth for financial security. Lets review
each use.
Affordability
-- Everyone is familiar with this concept. Borrowers desire the lowest
payment, whether it be a fixed rate, an interest only option or a
minimum payment. Important lender factors to consider include credit score, loan to value, current
earnings, future cash flow savings
and how long the
borrowers intend to own the property. The best choice for the exact type of loan depends on
what borrowers specifically
want to accomplish with their mortgage.
Flexibility
-- This use appeals to borrowers who want their mortgage payment to fluctuate
with their monthly earnings or to have leeway for unexpected emergencies. In
essence, borrowers desire monthly control over their mortgage payment by having
the ability to select various monthly payment choices. Self-employed,
commissioned earners and seasonal workers are ideal for this concept due to the
inconsistency of monthly earnings -- they like the idea of paying a lower mortgage
payment when income is lower and can choose a higher payment when their monthly
income is higher.
Debt Consolidation
-- This scenario is for refinances only and appeals to borrowers who want
to convert credit card debt, other high interest debt and their current mortgage
debt into one lower payment. Often the equity appreciation in property presents
a cash out situation where borrowers can pay off the entire non-mortgage debt
and have a "clean slate"; at the very least, a sizable portion of
credit card can be eliminated with the remaining balance paid off by future cash
flow savings from their mortgage.
The Credit Card Dilemma
Average household has $12,000 in credit card
debt.
2% minimum payment on $12,000 @ 18% with
no future charges takes over 51 years to pay off!
Credit card debt is bad debt (high interest rates, no
tax advantages). In contrast, good debt has lower rates and tax benefits in property that continues to appreciate in value.
An important concept: if you must have debt -- and most us must have debt -- then hold debt in an appreciating asset.
Building Wealth for Financial Security
-- mortgages can be an effective tool in the pursuit of financial
independence. In today's economy and standard of living, it is challenging for
people to have available investment money after monthly expenses. As an
example, a family of four with $100,000 in annual gross income would seem to be in good
shape -- lets take a look:
Taxes:
$30,000
PITI:
30,000
Automobile: 6,000
Credit Cards: 9,000
Total Expenses: $74,000 Balance:
$26,000 or $2,166/month
Other monthly expenses?
Utilities
250
Telephone & Cell 200
Auto Insur. & Gas 450
Food & Clothing 700
Child
Care
1,000
Cable & Internet 100
Net Income
-$533/month
What about...Retirement? College Fund?
Restaurants? Entertainment?
The Problem? Cash Flow!
Current Situation for many Borrowers
earnings unlikely to significantly increase
monthly expenses on the rise
savings rate is zero
or negative
insufficient retirement funds
Solution is Reallocating Debt
wealth building starts with cash flow
use mortgage as a financial tool to build
wealth
let time and compounding
generate growth
future value of
one-time $10,000 @ 10%, compounded annually:
after 15 years = $41,772
after 25 years = $108,347
Certain mortgages can immediately generate significant cash flow savings,
which can then be invested to pursue specific financial goals. In the above
$100,000 illustration, nothing was available for investment due to a combination
of taxes, mortgage and essential living expenses; with a lower mortgage payment,
either with or without cash out, it would be possible to invest for retirement.
If a
401k with a company match was available, the borrowers could not only invest
their cash flow, they would also generate tax savings and receive
"free money" from the company match (most matches are 50% of the first
6% of participation).
The important key for this type of mortgage use is
to have a specific destination for the cash flow. Borrowers should have a
specific investment strategy along with the discipline to implement this action for at
least 1-2 years. If you don't have a workable plan for the cash flow savings,
you will more than likely blow the money and be disappointed.
Do you own
commercial property? A small business commercial real estate mortgage
is
available for self-employed, small business and commercial real estate
investors. Term loans (up to $500,000) with fixed or adjustable rates, commercial equity
line of credit and line/loan combo are offered for owner-occupied or
investor real estate properties valued up to $2 million. Features
include stated-income, low closing costs and a streamlined application
process.
How is my credit score determined? The
following chart illustrates the components of a credit score. Emphasis is
given to payment history and amount owed. If a borrower has no late payments
and has not "maxed out" loan amounts, then that borrower is likely
to have a good credit score. With most lenders, high credit scores (720+) receive preferred loan
rates for conventional conforming mortgages.
Why is the "use" of a mortgage more
important than just only getting a good rate? You obtain a mortgage to fit
into your financial blueprint, which includes your income, assets and
liabilities; other important considerations include your credit score, loan to value and
how long you intend to own the property. Future financial objectives, such as
retirement, college savings, etc. should also be considered. You will receive
a good rate in a type of loan that is customized to best fit your specific
situation.
Why do you emphasize cash flow? As previously
discussed, most people do not have adequate savings for retirement.
Subject to certain conditions, many individuals can obtain a loan for a house, an
automobile, a boat, even education; however, individuals cannot walk into a
bank and say they want a loan for retirement -- the lender will ask what
collateral is involved and will also review your ability to repay based on
income and assets. The time to build for retirement is well before retirement,
preferably when you can let the power of
compounding over time work for you.
Is inadequate retirement savings a reason why the
reverse mortgage concept is becoming more available for borrowers who own their primary residence? Yes. A reverse mortgage offers to
a borrower, who is at least age 62, a loan up to 70% of the value without ever
paying principal and interest; the loan is paid off when the property is sold
or the borrower(s) die. It appeals to retirees who have either paid off their
mortgage or have sizable equity in their home,
yet have little other assets. However, the borrowers are still responsible for real
estate taxes and insurance. Important:
although borrowers do not pay interest,
the interest
clock keeps ticking....compounding interest on interest!
In my opinion, this is a loan of last resort. In most
cases, the owners would be better off selling and either buying a smaller home
or renting. They could then invest left over monies for supplemental income.
However, for those homeowners who have little or no other assets and who do
not want to sell their home, then a reverse mortgage may offer them a way for
additional income.
Could you give another example of the power of
compounding? Assume a $9,000 401k investment ($6K plus $3K with company
match)
for one year only. Future Values of
$9,000 @ 8%
and 10%:
@ 8% compounded annually grows to: $19,430 in 10 years; $28,550 in 15 years;
$61,636 in 25 years
@ 10% compounded annually grows to: $23,344 in 10 years; $37,595 in 15
years; $97,512 in 25 years
Contributing another $9,000 ($6K plus $3K with company
match)
in year two results in the following:
@ 8% compounded annually grows to: $37,875 in 10 years; $56,031 in 15 years; $127,698 in 25 years
@ 10% compounded annually grows to: $45,398 in 10 years; $73,881 in 15
years; $195,739 in 25 years
In many instances, borrowers can achieve financial
security by reallocating debt, investing the cash flow savings and allowing the power of time and
compounding to work for them.

For questions,
seninvest@aol.com or call 630-606-6118.
Jack Piazza

Site
Map | Sensible Investment Strategies
Home | Links
About
Sensible Investment Strategies | Question
and Answers
Objectives
& Risk | Strategies
| Featured
Articles
|