Let’s say that you just won $8,750 on a lottery scratch-off ticket. You’ve decided to be frugal and invest the money and have decided on three alternatives: buying a certificate of deposit, a mutual fund or use the money as a down payment for a $250,000 home.
To compare the three alternatives, let’s look at the equity in each one three years from now.
The certificate of deposit can be invested at 1.3% in today’s market and you believe you can reasonably earn 5% on a mutual fund. You expect the home to appreciate at three percent a year.
The certificate of deposit would be worth $9,096 at the end of three years and the mutual fund would be worth $10,129. However, the equity in the home at the end of three years would be $45,204. That is a four time’s higher yield on the home.
One of the main reasons for the big difference is that the buyer benefits from leverage: the use of borrowed funds to increase the results. The $8,750 down payment is controlling a $250,000 investment. The appreciation is determined by the price and not merely by the cash invested. Another factor is that the loan balance is smaller at the end of five years than originally borrowed due to amortization.
There are certainly other factors to consider such as maintenance and other expenses but when the financial benefits are as strong as they are, it certainly deserves a much closer investigation. One of the first things to consider is whether the borrower can qualify for a mortgage and the only satisfactory way to be certain is to get pre-approved by a trusted mortgage professional.
Use the Your Best Investment calculator to make your own projections.
People tend to fear what they don’t understand. Homeowners understand fixed rate mortgages and remember the horror stories of people who lost their homes because they could no longer afford them when their adjustable rate mortgages went up.
Interest rates on fixed-rate mortgages have been so low for enough years, that borrowers haven’t even given much consideration to an adjustable rate mortgage. Changes in the way adjustable rate mortgages are now made make them much safer for borrowers who understand how they work but also know they’ll only be in the home for a limited period of time.
Adjustable rate mortgages can go up or down according to an index that the lender has no control. The amount that can be adjusted is limited by caps for each period and for the life of the loan. While there are different periods for ARMs, the most popular lock the first period for five to seven years and then, can adjust annually after that.
One quick and easy way to determine whether an adjustable may be a viable alternative to a fixed would be to determine the maximum payment adjustments possible to find out when the savings from the early years are exhausted which would be the breakeven point. If the borrower is certain they’ll move prior to that date, the ARM will definitely provide a lower cost of housing.
The breakeven point for a $250,000 mortgage would be 8 years 3 months comparing a 2.9% 5/1 adjustable-rate with 1 and 5 caps to a 3.8% fixed-rate mortgage. In the initial five-year period, the payments on the ARM would be $124.32 lower and the unpaid balance would be $3,522 less than the fixed-rate to make a total savings of $10,981.
Whether you’re buying or refinancing, get some good advice from a trusted lending professional about the adjustable-rate alternative. If you’re only going to be in the home a short time after the mortgage is made and your tolerance for risk allows you to feel comfortable, the ARM may be the best choice for you. Check out this ARM Comparison to use your own numbers.
Homeowners may be totally unaware that their home has an unpleasant odor. It can be unrecognizable to them but immediately apparent to visitors on entering the home.
Candles, aerosol spray or even chocolate chip cookies can’t get rid of the smell. To eliminate the odor, the source of the smell first has to be removed and then, the affected areas can be treated.
Cigarette smoke is particularly offensive to people. It is very common for buyers to refuse to even consider looking at a home where smoking is allowed. This odor permeates the air in a home and soaks into carpets, furniture, drapes, clothing and even the building materials like drywall and cabinets.
Pets may be considered part of the family but it is still a problem when the animals are not adequately house-broken. Urine isn’t just absorbed by the carpet but also the padding and in some cases, the subflooring. Sometimes, walls and floors have to be treated and sealed before painting and new floor covering can be installed.
If a casual friend doesn’t want to hurt your feelings about the jeans you’re wearing, you can bet the ranch that they won’t tell you about the odors in your home. You’ll need to rely on your closest friends to tell you the truth or maybe your mother-in-law.
You are probably aware that Federal law entitles you to a free copy of your credit report annually by each of the three credit bureaus: TransUnion, Experian, and Equifax. By regularly looking at each of these reports, you can determine if there are any errors on them and be aware of your credit worthiness.
Instead of ordering all three at the same time, experts recommend that you stagger them throughout the year. This will let you look at your credit at three different times during the year instead of only once a year.
An easy way make this happens on a timely basis is to set a recurring appointment on your digital calendar whether it is on your phone, your email program or a contact manager. Make the appointment to order a free credit report from www.AnnualCreditReport.com a recurring event to take place every four months. You’ll order one report from each of three companies once a year.
You can record that date and the bureau you ordered the last report in the appointment’s note section so that you’ll have a history and won’t try to order the same report twice in one year.
This isn’t just for people who are trying to clean-up their credit. This procedure allows you to monitor your credit to be sure that your report is accurate. You might even discover that someone is illegally using your good credit.
Technology has certainly streamlined the home buying process and introduced things that help purchasers make better decisions. Buyers have enthusiastically embraced video tours, digital signatures and the enormous amount of information available about a home, neighborhood, schools and neighbors.
The ironic thing is that buyers are ignoring the one single thing that can help them secure the “right” home. Talking to a lender or using a financial calculator is not pre-approval.
Pre-approval requires written verification on employment and income and ordering a credit report for the purpose of obtaining a mortgage. A mortgage credit score is different than what a person might see from credit reporting websites.
Pre-approval gives buyers the confidence to know the amount they can borrow which can result in bargaining power when dealing with a seller or competing against another offer. Transactions can close quicker once a buyer has been pre-approved.
If any issues are discovered in the initial process, the purchaser and lender will have more time to correct them compared to trying to get it done during the loan approval period as stated in the sales contract.
Most lenders best interest rates are only available to the best borrowers. You might get approved on a loan but at a higher rate than you expected which could make a significant difference in the monthly payments.
The “right” home without financing will never have the buyer’s address. Getting pre-approved with a trusted mortgage professional is one of the first steps in the buying process. It can definitely be an advantage that will benefit you in negotiations and ultimately, during the time you own the home.
Most of us understand the expression “burning the candle at both ends” to mean working so hard that you burn yourself out. Normally, that wouldn’t be a good idea unless it is intentional.
If the candle is your mortgage and the strategy is to get it paid off early, being “burned out” would be a good thing. One end of the candle would be your regular mortgage payments and the other end would represent additional principal contributions.
Since the Great Recession, lenders have been reporting a higher than normal number of borrowers getting shorter term mortgages not only when they purchase the home originally but when they refinance them also. It seems like the mindset of America’s homeowner has shifted a little from the belief that they will always have a house payment.
The extra $100, $200 or $500 in your checking account isn’t earning interest. Additional principal contributions with your regular payments on a fixed rate mortgage will save interest, build equity and shorten the term of the mortgage.
Wealth management is about making financially wise choices. If having your home paid for by retirement age is one of your goals, making extra contributions regularly could get you there. Use this Equity Accelerator to see how it will affect your loan.
The Federal Emergency Management Agency (FEMA) recommends that all Americans have some basic supplies on hand in order to survive for at least three days if an emergency occurs. It is recommended that the Ready Kit should be assembled well in advance of an emergency.
The concept is to be able to survive for at least 72 hours until local officials and relief workers arrive on the scene. The disaster could be wide-spread and involve a lot of people that makes it difficult for relief workers to reach everyone immediately.
- Water, one gallon per person per day for at least three days
- Food, at least a three-day supply of non-perishable food
- Battery powered or hand-crank radio and a NOAA weather radio with tone alert and extra batteries for both
- Flashlight and extra batteries
- First aid kit
- Medications (prescription and basic)
- Whistle to signal for help
- Dust mask to help filter contaminated air and plastic sheeting and duct tape to shelter in place
- Moist towelettes, garbage bags and plastic ties for personal sanitation
- Wrench or pliers to turn off utilities
- Manual can opener for food
- Local maps
- Cell phone with chargers, inverter or solar charger
- Family and emergency contact information
- Extra cash
- Emergency blanket
- Pet supplies if necessary
Click here for a print version of this list and additional items to consider adding to an emergency ready kit. The American Red Cross has a suggested list for first aid kits and has other items available for purchase at their online store.
One of the big banks has a voluntary program available that transfers $100 each month from your checking account to your savings account. In five years, the account owner would have over $5,000 because of a type of forced savings.
Similarly, when a person buys a home with a standard amortizing loan, each month, a part of the payment is used to reduce the principal loan amount. Amazingly, over $4,000 would be applied toward the principal in the first year of a $250,000 mortgage at 4% for 30 years. In five years, the loan amount would be reduced by almost $25,000 through normal payments.
The other dynamic that is in play is that while the unpaid balance is being reduced, appreciation causes the value to increase. The difference between the two makes the equity grow even faster. Three percent appreciation on a $250,000 home would increase its value in five year by almost $40,000.
A 30-year mortgage of $250,000 will be paid for in 30 years. At an average of 3% appreciation, the asset would be worth about $600,000. If you continue to rent, the asset belongs to your landlord instead.
Many experts believe that the homeowner benefits from the forced savings of amortization and the leveraged growth that takes place in the investment. It has been observed in the tri-annual Consumer Finance Survey by the Federal Reserve Board that homeowner’s net worth is considerably higher than that of renters.
The more equity in your home, the more options you have. Since equity is determined by the difference between value and what is owed on a property, when homes lost value during the Great Recession, homeowners’ equity decreased.
Negative equity occurs when the value is less than the mortgage owed. According to CoreLogic, 91% of all mortgaged properties have equity and only 4.4 million properties remain in negative equity at the end of the second quarter in 2015.
A homeowner, who qualifies, can release part of their equity by refinancing the existing loan and taking out additional cash or by getting a home equity loan. The benefits include:
- To get a lower rate on your current mortgage
- To finance capital improvements on your home
- To payoff higher interest rate debt such as credit cards or student loans
- To purchase items that would not have deductible interest like personal cars, boats, etc.
It could be as simple as waiting for positive home equity so owners can move to another home without having to pay out-of-pocket expenses to sell their home.
The first thing every homeowner needs to know about plumbing is how to turn the water off in case of an emergency. It’s like having a fire extinguisher; you hope you never need it but you want it just in case you do.
Generally, the cutoff is in the front of the home. There may be a separate cutoff box on the owner’s side of the meter. If not, the owner needs to be able to open the water meter and turn it off there. This will require a water meter key which can be found at a local home improvement store and a wrench. Once you have the key, practice opening the meter door and check out how the shutoff valve works. Then, put the key in a quick and easy place to find when you need it.
The second thing a homeowner needs is a recommendation of two good plumbers. Having a backup name is always good in case your first choice can’t make it when you need them.
Some homeowners prefer to go the do-it-yourself route. There are plenty of DIY videos on the Internet but having the name of a good plumber if the job gets out of hand can be the tool that saves the day.
Our business puts us in touch with some of the most reliable and reputable service providers and we’re willing to share their names with you. Regardless of whether you “do it or delegate it”, being familiar with the basics can be very helpful.