5.875% + 6 months no payment!

This morning, I heard an ad on the radio selling an amazing loan program!

5.875% 30 year fixed rate + No Payment for 6 months!

Wow! It sounds too good to be true.

It is. I haven't called in to shop this loan program, but before getting excited let's take some time to guess where 6 months of payment freedom comes from. It's going to be one of two places:

1 - EQUITY!
2 - Closing Costs (Since we'd be talking about 6 months of payments rolled into your closing costs, I think its fair to say that this 'payment freedom' will in fact be 'equity payments.')

There is no such thing as a free lunch. This program simply offers you the opportunity to eat up your equity. However, it may be a good fit for a select few people.

Let's say you have great credit but have just experienced major unforeseen expenses and need some help to get back on your feet. Perfect!

On the other hand, if you are incapable of living within your means and need payment freedom to pay down $15,000 in credit card debt, this isn't a solution. It's a band aid. The real problems? Financial management, self-control and budgeting.

Shady marketing is just that.... shady! The company has one goal, and that is phone calls. Once you've called, I hope you are ready to be told that you don't qualify because of ________ (select one or more: credit, employment, assets), but you do qualify for this higher interest rate loan that will allow you to skip two months payments!

I hope they mention that every refinance allows you to enjoy no mortgage payment for two months.

I also hope that they disclose where the money for this payment freedom is coming from.
A - Equity
B - Closing Costs

I encourage you all to trust your home to financial professionals who are not transaction driven, but people driven. You deserve a consultation where your needs and goals are discussed. Let's all get past minimum payments and start talking about how you can work towards financial freedom! It can be a reality, but it's not going to fall into your lap!

Wishing you all a wealth of real estate knowledge in 2008.

What To Do?

"Matt, we're buying our first home in June. How do we get the whole process started?"

Congratulations!
Buying a home (especially your first) is an extremely exciting time. Many times, it is a roller coaster process as you find the perfect home, make an offer and obtain financing.

1. Establish a Budget & Get Preapproved. I would run numbers based upon a 6.5% interest rate. Rates are lower than that right now, but we're still 6 months out. Establishing and remaining within your budget is vital! When you are preapproved, find out when your rate will be locked.
2. Find a Realtor. Typically, references are the best resources. Know anyone who has purchased a home recently and had a great experience? Make sure that your Realtor treats this purchase as an investment.
3. Start shopping. Take notes to remember each property. As you narrow down your choices, have your Realtor pull some comparable sales in the neighborhood to make sure that you're getting into a sound investment.

“Should we put money down? If so, how much?”
I'm not a financial investor and won't pretend to be one. However, some basic financial principles need to be applied.

I would start with 3% down in order to qualify for FHA financing. You'll obtain great rates & will lower your mortgage insurance premiums. The more money you put down, the lower your mortgage insurance payments. However, mortgage insurance is only required on homes whose financing exceeds 80% of the value. For that reason, I would not recommend putting more than 20% down as it will not improve your financing. Conservative investments offer returns that exceed the 6 – 7 % mortgage rates so reducing your principle may not always be the wisest investment.

There is one big problem when you pay down your mortgage. Liquidity. Once additional payments have been made, your monthly payments do not change. Should you run short on cash, the bank will not float your payments for 30, 60, or 90 days, they will begin foreclosure proceedings. Ugh.

Always have a plan for a worst case scenario. If you do decide to put additional money towards principle, obtain a HELOC first. This line of credit will provide the necessary liquidity while allowing you to accelerate the pay off. This is a win, win. You have access to your equity & you will reduce the amount of time you are exposed to the interest rate, thereby reducing your effective interest rate!

Hope this helps! Happy home buying!

Why Not?

I was chatting with a friend from home a few weeks ago. Soon, we started talking about mortgages. Here is his scenario.

30 year fixed loan

90% financing

Low interest rate

This young lad has made some pretty wise decisions! After all, he is planning on living in this home for a long time. He is in the right loan product and he is locked in at a competitive interest rate which will save him thousands of dollars over the life of his loan.

Problem: He is putting every spare dollar towards paying off his mortgage as soon as possible.

Question: Why is this a problem? Won't this save him even more money in interest paid?

Answer! Before paying down your mortgage, take some time to evaluate your overall financial situation.

1 - Do you have any other debt that carries a higher interest rate? (i.e. auto, personal loans, credit card debt)

2 - Do you have at least enough money in the bank to cover 6 months of expenses?

3 - Are you on pace to retire at the income level you desire?

For those who are not carrying extra debt, have substantial savings and are investing for retirement.... go ahead and pay that mortgage down.

For the rest of us.... don't do it!

When you pay towards a fixed rate mortgage, you lose liquidity. In other words, that money is no longer yours and you can no longer access those funds.

What will happen if you lose an income or encounter unforeseen expenses and find yourself unable to make your mortgage payment? Will the bank give you a credit for the extra payments that you have made?

Nope. The bank will begin the foreclosure process. Not only would you lose your home, but you'd lose all of those extra payments as well. Yikes!

Don't fear! With a little education and a little bit of discipline, you can build some reserves, save for your retirement and pay down your mortgage early!

Would You Like to Own a Home?

I think it's fair to say that everyone would like to own their own home. It's the American Dream after all!

Oftentimes, sacrifices must be made to own a home. Most people will do whatever it takes. Others will not.

I think people need to take time to honestly and realistically analyze their financial goals as they prepare to buy a home.

1 - Budget. Don't fit your budget to the home. Find a home that fits your budget. Of course the more expensive home is nicer. As you battle to pay the bills every month, find yourself behind on taxes, fighting with your spouse and spread so thin that you can't afford to go out for a nice meal, you will despise this nice home and long for affordability....

2 - Stability. If you have no idea which state you will live in 6 months down the road.... don't buy a house unless you plan on renting it out. Have a stable job? Lead a pretty stable life? It might be time to buy!

3 - Prioritize. For fun, please rank the following in order of importance:

1. New Rims
2. $8,000 Birthday Party
3. Brand New Car
4. A Home

This seems like a big joke, but it's really not. Sitting in the office today, we were chatting about the most mind boggling reasons we have seen to NOT buy a home... Numbers 1 - 3 were our finalists.

My definition of "hood rich":
My rims are 20" and spinning. I partied like Keith Richards for my 25th birthday. Oh, by the way.... those rims are on my new Beemer!

If you're earning huge money, have a balanced portfolio of investments and are on track to meet your long term financial goals, I could care less if you are blowing some cash. It's play money for you!

Prioritize. Create goals. Build a realistic game plan to obtain those goals.

Would you like to own a home or are you on your way to home ownership?

Balls or Stupidity?

Sometimes I wonder which category I fall into when it comes into real estate investing.

We often times work with investors who want to start investing in real estate. My estimate is that less than 10% of these qualified and motivated leads actually follow through.

(Let me define qualified: 1- Good Credit 2- Good Employment 3- Strong assets whether in the form of equity, cash, stocks, retirement, etc...)

Today, a general contractor with over $250,000 in the bank bailed on a property and lost over $5,000 in earnest money. What?? This is the most qualified flipper I've ever seen!

Back to balls vs. IQ....

It probably takes a little bit of both.
-I've never met anyone who has told me that making money in real estate is easy. It's just not. -I've never had anyone tell me that nothing unexpected popped up along the way. Stuff happens.
-I've never met anyone who stayed on both their budget and timeline with their first flip.

This is the reality. Flipping real estate offers the highest risk and highest returns in the industry. It's not for everybody and that's okay.

Before you jump into flipping, you have to be 100% dedicated and willing to put everything you've got into the project.

It takes balls.
It might take a small dose of stupidity.

Dig it?