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Why have a mortgage during retirement?

3/19/2020

Why have a mortgage during retirement?

You don't have to watch TV for long before Tom Selleck, Henry Winkler or Robert Wagner will tell you why seniors should consider a reverse mortgage.  However, there are a seniors who are resisting the conventional wisdom of having their home paid for and opting for a mortgage with payments on their home.

In some cases, seniors will downsize into a smaller home and have a large amount of equity to pay cash for the new home.  In other situations, they may have their home paid for and decide to do a cash-out refinance which will require making payments.

The logic behind either of these examples could be motivated by the fact that since mortgage rates are so low currently, the owners can reinvest the money at a higher yield and make money on their equity.  This will give them more money for their retirement income.

A common question that is asked by owners considering such a strategy is whether they'll be able to qualify for the new mortgage since they may no longer be employed.  The Equal Credit Opportunity Act prohibits discrimination against borrowers based on age.

All borrowers, whether they are working or not, need to show that they have good credit, reasonable debt and enough stable income to repay the mortgage.  Lenders cannot base their decision on loan term based on an applicant's life expectancy, so a 30-year loan is possible regardless of the borrower's age.

Fannie Mae, one of the largest purchaser of mortgages on the secondary market, is concerned on income that is stable, predictable and likely to continue.  Retirees' income can come from Social Security, pensions, or distributions from retirement accounts like IRAs, 401(k)s, Keogh or other plans.  Lenders will analyze these sources to estimate how long it will last. 

Other investments can be considered like stocks, bonds, mutual funds and annuities.  Based on the type and the volatility of the investment, lenders may be restricted from considering 100% of the income.

Getting the facts as it pertains to you as an individual is important to be able to know if you are eligible and how much you can borrow.  A trusted mortgage professional who understands this type of borrower is very important to help you determine the right mortgage vehicle and provide information to decide if this option is right for you.  Call me at (503) 238-1700if you would like a recommendation.

Reasons to Refinance

3/17/2020

Reasons to Refinance

3/17/2020
Reasons

The 30-Year Option

2/24/2020

The 30-year Option

2/24/2020

The advantages of a 15-year loan over a 30-year include the obvious shorter term, usually a slightly lower interest rate and that equity builds faster.  The disadvantages are higher payments that are required regardless of temporary personal economic conditions.

If a borrower is experiencing unexpected expenses that make it difficult to make the higher payments on the 15-year loan, there is no option to make a lower 30-year payments until the situation improves.

The borrower could have originated a 30-year loan but make payments like it were a 15-year loan.  The additional amount would be applied to the principal which would still save interest, build equity faster and shorten the term of the mortgage.  The big difference in this scenario is that the higher payment is optional.

If the situation arises, the borrower is only obligated to make the 30-year payment.  When the situation improves, the borrower can resume the higher payments to retire the loan early.

A $300,000 mortgage at 3.6% for 30 years has a P&I payment of $1,363.94.  If it were amortized for 15 years, the payment would be $2,159.41 or $795.47 more.

Let's assume you made the higher payment for three years and then, made the lower payment for six months due to some financial situation.  After that you resumed the higher payment each month.  At the end of ten years, the unpaid balance would be $124, 485.48.

The 15-year loan would have an unpaid balance of $118,411.03.  When you factor in the six months of lower payments that were made, there is only a $1,301.63 difference. 

Using the option of the 30-year loan and paying it like a 15-year can provide options that may be very beneficial should unexpected financial conditions occur.  Since unexpected expenses are more common than unusual, getting the 30-year is almost planning for the inevitable while trying to meet your goal of paying the loan in a shorter period.

To do some planning with your own situation, check out rates on 30 and 15 year mortgages on www.FreddieMac.com and use the 30yr vs. 15yr Comparison.

Financing Home Improvements

2/12/2020

Financing Home Improvements

2/12/2020

Home improvement loans provide a source of funds for owners to finance the improvements they want to make.  These are usually, personal installment loans that are not collateralized by the home itself.  Since there is more risk for the lender with this type of loan, the interest rate is higher than a normal mortgage loan.

In today's market, the rates on home improvement loans could vary between 6% and 36%.  A borrower's credit score will determine the interest rate; the lower the score, the higher the rate and the higher the score, the lower the rate.

Smaller loan amounts are under $40,000 with larger loan amounts over $40,000 based on the extent of the improvements to be made.  With all things being equal, a larger loan may have a lower interest rate.

Besides the interest rate being higher than a regular mortgage, the term is shorter.  Similar to a car loan, the term can be between five and seven years.  A $50,000 home improvement loan for a borrower, with good but not great credit, could have a 12% interest rate for seven years.  That would make the monthly payment $882.64.

An alternative way to fund the improvements would be to do a cash out refinance.  These types of loans are collateralized by the home.  The current mortgage would be paid off with the new mortgage plus the amount for the improvements.  Lenders will usually require that the owner maintain a minimum of 20% equity in the home.

Assuming a homeowner owed $230,000 on the existing mortgage and wanted $50,000 for improvements.  The new loan amount would be $280,000 and the home would have to appraise for at least $350,000 for the homeowner to have a 20% equity remaining. 

Another thing that occurs on a refinance is that the standard term for mortgages is 30 years which means the owner would be financing the improvements for 30 years instead of a shorter term.  The advantage would be a smaller payment.

Let's say in this example, the owner originally borrowed $250,000 at 4.5% for 30 years with a payment of $1,266.71.  After 54 payments, the unpaid balance is $230,335.  If they did a cash out refinance at 4.5% for 30 years for the additional $50,000 and financed the estimated closing costs of $8,700, the new payment would be $1,464.50.

Using the home improvement loan, the combined payments would be $2,149.35 which would be $684.85 higher.  While the cash out refinance produces a lower payment, it adds $8,700 to the amount owed and stretches it out over a longer period.  Home improvement loans have lower closing costs than regular mortgage loans.

Another alternative loan is a HELOC or Home Equity Line of Credit which can be explored and compared to the two options mentioned above.  If a homeowner is going to finance improvements, a comparison of different types of loans and payments can be helpful in the decision-making process. 

A trusted mortgage professional is a valuable resource to assist you with current and accurate information.  If you need a recommendation, please call me at (503) 238-1700.

Property Management

2/10/2020

Property Management

2/10/2020

On any given day, investors who own rental property want to buy more or they want to get rid of what they have.  In most cases, it doesn't have to do with the satisfaction of the investment itself; it has more to do with the management.

Managing property and dealing with tenants can be headache and it may not be the best use of an investor's time and effort.  The solution isn't to sell the rentals but to get a property manager.

To begin with, managers understand the landlord tenant laws and what is required and what makes good business sense.  They are familiar with all the necessary paperwork, documents, and procedure that a casual investor may not be.

Property managers usually have connections with workmen and service providers to get repairs done right, at lower prices and in a timely fashion.  Your manager can handle issues with tenants that seem to come up in the middle of the night or on a holiday weekend.

Some investors have taken on the duties because they're trying to save the management fees.  It is very possible that professional management can shorten vacancy times, increase rents, and lower expenses which might not only cover the cost of the fee but increase your cash flow.

Being a real estate investor and managing the property are separate decisions.  You might enjoy being an investor a lot more if you had professional management.  For a recommendation, give me a call at (503) 238-1700 or download Rental Income Properties.

House-Hacking Rental Property

2/5/2020


House-hacking refers to buying a multifamily property on an owner-occupied mortgage, living in one unit and renting the others.  If you're thinking about becoming a rental mogul, starting early is an advantage.  Not only will you have longer to accumulate a larger portfolio, you can increase the leverage on the first acquisitions if they are owner-occupied. 

Leverage is the use of other people's money to finance an investment.  The higher the loan-to-value, the greater the leverage which can increase the yield.

A $200,000 rental property with an 80% LTV at 4.5% for 30 years producing a 16.88% before-tax rate of return would increase to a 23% return on investment by increasing the mortgage to 90%.  A typical down payment on an investor property in today's market is 20-25% but, in some cases, a higher loan-to-value is possible.

Owner-occupied, multi-unit properties, two to four units, allow a borrower to occupy one of the units and rent the others out.  The cash flows from the rental units subsidize the cost of housing for the unit occupied by the owner.  VA will guarantee 100% of the mortgage for eligible veterans, while FHA will loan up to 96.5% for qualifying borrowers.

Consider a four-unit property was purchased as owner-occupied and the other three units were rented for $800 each.  If an FHA loan was obtained, the owner could live for roughly $355 a month after collecting the rent and paying the expenses.  Assume the owner lived in it for two years and then, rented out the fourth unit for the same $800 per month.  The cash flow would rise to $4,800 a year with a before-tax rate of return of 30% based on a 2% appreciation.

 

Occupy 1 unit

Rent all 4 units

Gross Scheduled Income @ $800 monthly each

$2,400

$3,200

Cash Flow Before Tax

$4,59

$4,861

Before Tax Rate of Return

20.77%

30.56%

 

Rental properties offer the investor to borrow large loan-to-value mortgages at fixed interest rates for up to 30 years on appreciating assets with tax advantages and reasonable control that many other investments don't enjoy.

Some people consider rental properties the IDEAL investment with each letter in the acronym standing for a benefit it provides.  It provides income from the rent which many investments do not have.  Depreciation is a non-cash deduction from income that increases cash flow.  Equity buildup occurs as each payment is made by reducing the principal owed.  Appreciation happens over time as the value of the property increases.  L stands for leverage that was explained earlier in this article.

You may be able to buy another four unit as an owner-occupant before you need to start using a normal investor's down payment.  In the meantime, you could have eight units that are increasing in value while the mortgage balance is decreasing with every payment made.  If there is sufficient equity in the properties by the time, you're ready to buy more, you may be able to take cash out of the existing ones to use for the down payments.

This can be a great way to turbocharge your net worth by becoming an owner and a real estate investor at the same time.  To learn more about rental properties, download the Rental Income Properties guide and/or contact me at (503) 238-1700 to schedule an appointment to meet to discuss the possibilities.

What Goes With The House?

2/4/2020

What goes with the house?

2/4/2020

Sometimes, there can be confusion on what goes with the house and what goes with the seller when they move.  Generally speaking, the house is the land and buildings and any fixed or attached property.

Permanently installed and built-in items are considered real property.  Some things are obvious such as built-in appliances, wall-to-wall carpeting, light fixtures including chandeliers, shrubbery and landscaping, and window shutters. 

One indication is that if the item was removed, there be evidence that it was missing.  For example, if there was a wall mounted TV in the home, the TV is personal property, but the TV wall mount is real property.

Factors that determine if something is permanently installed or built-in would be:

  1. Was the installation intended to be permanent?
  2. How is the item attached and will the surrounding property be damaged if it is removed?
  3. Is the item made specifically for the property?

Personal property examples would include furniture, area rugs, pictures, non-built-in appliances like washer, dryer and refrigerator.  Confusion could arise between a mirror that is hung like a picture and one that is attached to the wall.  Most people would think that the former is personal, and the latter is real property.

Sellers are encouraged to have an open discussion with their listing agent about items that are not going to be included in the sale of the home.  The agent can advise you if they should be mentioned in the listing agreement and property description.

If buyers are concerned about items that may or may not be included, they should review with the agent items that the Seller has identified as not included in the sale.  If necessary, some items may be negotiated in the sales contract.

Characteristics of Home Buyers

2/3/2020
Characteristics

Homeowner Tip

1/27/2020
Homeowner

Your Rate Depends on Your Score

1/20/2020

Your Rate Depends on your Score

1/20/2020

Most homebuyers probably know that their FICO mortgage score can determine whether they qualify for a loan, but they may not be aware that it can determine what interest rate they'll pay.

The same $300,000, 30-year, fixed-rate mortgage can have a principal and interest payment that ranges from as low as $1,340 or as high as $1,619 based on this recent picture in time.  The variable is the FICO score of the borrower.  Use this calculator to see current rates and your loan amount.

$300,000 30-year Fixed Rate Mortgage

FICO Score

Interest Rate

Monthly Payment

Total Interest Paid

760-850

3.456%

$1,340

$182,320

700-759

3.678%

$1,377

$195,763

680-699

3.855%

$1,407

$206,621

660-679

4.069%

$1,444

$219,914

640-659

4.499%

$1,520

$247,156

620-639

5.045%

$1,619

$282,741

 

While you can get a conventional mortgage with as low as a 620 FICO score assuming the rest of your qualifications are strong, a higher FICO score will lower the rate you'll have to pay which results in lower payments and ten of thousands of dollars less in interest over the life of the mortgage.

It can be a smart idea to counsel with a trusted mortgage professional about your current FICO mortgage score and find out what you need to do to raise it. Call (503) 238-1700 for a recommendation.

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