The Power of Mathematics And The Magical Refinance

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

Adding An Addition Or Remodeling Your Home ?

Your home is your castle. It’s more than just a living space. Your home is a place to raise your family, a place where you can be yourself. It is a sanctuary and provides safety, security and a sense of pride. For most people, it is the biggest investment they will ever make. The equity it will provide in the future might represent most of your retirement wealth. If you already have a home, there may come a time where you will want to add living space, remodel, or both. For some, simply moving to a bigger and better home is the answer. For others, moving is not a workable option. The factors to consider when remodeling and/or living space, are numerous. Here are some ideas to note. They are not necessarily in the order of importance.

1) Will the remodel conform to the rest of the home and will you be happy with the resulting “look”?
2) Are you “overbuilding” for your neighborhood?
3) Will the remodel be functional? In other words, will the rooms, such as the bedroom, kitchen or bathroom, be too small or crowded ? Will you need to make compromises?
4) Can you afford it? Do you have the borrowing power? Will you have money left over for the unexpected?
5) Do you have a quality, competitive, reliable and honest contractor? If not, do you know how to find one?
6) Will you be able to obtain a permit from the city? (Always do so if your project calls for one!)
7) What are the areas of the remodel where you will invest the most money and effort?
8) What will increase the value of the home the most? The least?
9) Will you have to move out of the home and how much will it cost you to stay at another location?
10)
How long will the project take?

Overview:

First, come up with a general idea of what you would like to do. Before you get too far, however, contact your professional mortgage broker or banker. You will need money. If you have the cash on hand, perfect. If not, you’ll need to get it. It can be in the form of an equity line of credit, a refinance or a construction loan. The first two are the easiest. NEVER begin working on a project until after you have arranged financing. This is because most lenders will not fund a loan with a home that is currently under construction. Once the financing questions have been answered, you can get more serious.

Sketch out your own ideas and plans. Look in home magazines to help spark your creativity. What does your project look like after it has been completed? What is your guess on the cost? Don’t forget the labor! Next, seek the opinion of your trusted, neighborhood Realtor®. They may be your most used resource. Realtors® know about design and appeal. They know where the value is and what sells. Even if you’re not planning to sell right now, the changes you make will affect your home’s value and desirability. If you’re going to do it, do it right! Find out what your home is worth before and after the project has been completed. You can even obtain a professional appraisal. Sure, it will cost a few hundred bucks, but it might well be worth it. Appraisers are an excellent source for before and after value information. Don’t pick up the phone book to find an appraiser. Contact your mortgage broker/banker for a referral.

Next, find a contractor. Again, the phone book is a bad idea. Would you hire a doctor that way? Get two or three referrals from your Realtor® or lender and invite them out to your home to review your ideas. You may ultimately need an architect too. Ask the contractors if they feel you need one and get a referral. If you use an architect, they will layout the formal plans and materials and may also seek information from a contractor. Now you can solicit formal bids from your contractors. It’s not always about price. We all know someone who got stuck in a nightmare with a bad contractor, so don’t be shy about asking questions. You want competitive pricing, quality, reliability and honesty. Get everything in writing and that means everything. If you need a permit from the city, the contractor you choose will get it.

Finally, the project will begin. With these tips, you will greatly improve the process of completing your home project smoothly and successfully. Need more advice? Just contact me. I’m here to help.

Is It Time To Buy That Rental Property?

Is It Time To Buy That Rental Property?

History shows us that most individual wealth is achieved through real estate investments.  Sure, values go both up and down in the shorter term.  Over the long haul, however, property values end up higher and higher.  The sooner you start, the more advantageous it becomes.  Given that, should you consider purchasing a rental property?  Here are some of the benefits:   1)  Inflation Protection:  Owners of real estate simply ride the inflation wave and keep up with it.  In this way, real estate becomes their “hedge”, or protection, against inflation. On the other hand, individuals who do not own real estate are at a major disadvantage.  By not owning this kind of asset that keeps pace with inflation, they are handicapped in the battle against rising prices.   2)  Market Value Appreciation:  The market value of real estate generally tends to increase over time.  If you own real estate, inflation actually becomes your friend. The increasing value of your property over time can be a large contributor to your future financial net worth.   3)  Tax Benefits:  Tax time provides great benefits if you own residential investment property.  Basically, you get to “depreciate” the value of your rental property each year.  This is, of course, only a paper loss for tax purposes.  When depreciation is combined with the regular operating expenses of the property, there can be a big impact on lowering any income taxes owed on the rental income produced by the property.  If the property shows a “net loss” for the year, this loss can be used to lower the income tax on your regular earnings.  This puts cash back into your pocket.   4)  Positive Cash Flow:  A rental property will produce a regular cash flow for you if its rental income exceeds its expenses.  A positive cash flow allows a property to support itself and should be a consideration when investing in rental property.  As mentioned, tax benefits can also be treated as cash flow.  As rents gradually rise over time, the cash flow produced by the property should also increase.   5)  Equity Buildup:  With a standard principal and interest mortgage, each time you make a mortgage payment on the property, a certain amount of that payment goes towards reducing the mortgage principal.  This reduction in principal goes directly towards your equity in the property. You gain a larger piece of ownership with each mortgage payment that is made.   6)  Income Potential:  With rental property, you are more in control of your financial destiny as compared with the ordinary income growth potential of your standard 9 to 5 job.  Company pensions are going the way of the dinosaur – they are quickly becoming extinct. On top of that, social security doesn’t provide enough for the average retiree to make ends meet. Owning a few rental properties that produce a nice positive cash flow each month can provide the income that is necessary for you to live comfortably in retirement. With this in mind, investing in rental property sooner rather than later will put more time on your side to build your retirement estate.   Sometimes money sitting in the bank at low interest rates just doesn’t make sense.  Talk to your loan officer or Realtor® to see what you might qualify for.  Depending on mortgage market conditions, down payments can range from 10% to 30%.

Drop Me A Line Anytime!

When should you buy, sell or refinance a home? Where are mortgage rates really at? How about the true value of your home? When is the last time you got your credit situation analyzed by a real professional? What are the latest programs available? That’s where I come in. I have excellent sources for anything real estate related. Home inspectors, homeowner’s insurance, your property tax rate, pest control services, painters, builders, carpenters, movers…. How about a checkup? Just a friendly reminder. Whatever you need, I’m just an email or phone call away. If you have any questions, just respond to this email.

How Do You Determine A Home’s Value?

How Do You Determine A Home’s Value?

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.

Why Use A Realtor®?

Why Use A Realtor®?
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.

Should You Rent Or Buy?

Should You Rent Or Buy?

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		BUY
Generally lower payments.		Full tax deduction of your mortgage interest and property taxes paid by you.  The government makes part of your payment.
Little or no responsibility.		Appreciation of home value over time.
No repairs.		Freedom and quality of life.  You can do what you want because that place is yours!
Generally easier to move from location to location.		A source for emergency cash or credit.
No need to worry about a drop in home prices.		For many people, their equity represents most of their retirement money.
You get to retain your cash.
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.  As always, if you need help or advice, just respond to this email.