My Blog

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.

Mortgage Lock-In

1/13/2020

Mortgage Lock-in

1/13/2020

A mortgage lock-in is a lender's agreement to hold a specific interest rate for a stated period for a loan at the prevailing market interest rate.  This provides the borrower some protection against the interest rates going up during the lock period.

If you think the rates are going down, the advantage would be to "float" and take advantage of the lower rate.  If you think the rates are going up, you could lock when you apply or when the application is approved.  Some buyers are marginally qualified at the current rate and if the rates go up, it could keep them from buying the price home they want or must make a larger down payment.

The lender will require the borrower to pay a fee for the lock-in.  It could be a flat dollar amount or a percentage of the loan to be made.  Usually, the longer the rate lock period, the higher the fee will be. 

The agreement should include the terms you've locked in such as the mortgage rate, points and other costs, the lock's effective and expiration dates, the cost of the lock itself, and any options that may be available.  As with any contract, it should be in writing to avoid misunderstanding.

The risk in a lock-in is that if the rates go down, you won't be able to take advantage of it unless there is a "float down" clause in the agreement.  If so, you must advise the lender that you want to take advantage of it.  You may incur additional costs to rewrite the lock-in.

Locks can be anywhere from 15 to 60 days.  Your lender can advise you how long it should take to get it approved and close the loan.  If it doesn't close on time, the lender may extend the lock for free, charge an additional fee or a percentage of the loan.

Mortgage brokers act as middlemen for the lender and borrower.  It is important to know who is locking the rate because generally, a mortgage broker cannot write the lock but has to obtain it from the lender.

For more information, see the Federal Reserve Board's Consumer Guide to Mortgage Lock-Ins.

In case of an Emergency

1/9/2020

In Case of an Emergency

Published on 1/6/2020 & modified on 1/9/2020

Imagine having an emergency in your home and needing to find something that will solve the problem.  You need to be able to put your hands on it quickly. 

A fire extinguisher hung in a conspicuous place, easy to reach, is a prudent precaution.  Everyone in the house should know where it is and how to use it if it is necessary.

A water meter key could easily divert another kind of household disaster assuming it could quickly and easily be found and if a person knew how to use it to shut off the water to the home.

With household water pressure generally below 100 pounds per square inch, a significant amount of water can still be dispersed into a home if a pipe were to burst.  That amount of water can do drywall and floor damage, as well as cause losses to electrical appliances like TV's, clothes, furniture and other things.

While some houses may have a main shutoff valve separate from the meter, the question would be if all of the occupants knew where it was and how to operate it.

Purchase a water meter key from a local hardware or box store and learn how to use it.  Once the meter is open, a wrench is needed to close and open the valve.  Some water meter keys have a wrench on the other end of the key making a separate wrench unnecessary.

Consider hanging the water meter key next to the fire extinguisher so that both are easily found.  Training the responsible parties in the house is also necessary to minimize damage.

Fixed Rate Payment Change

1/7/2020

Fixed-rate Payments Change

1/7/2020

Deciding between a fixed-rate mortgage and an adjustable-rate is one of the choices buyers make when getting a loan to purchase a home.  While the rate remains constant for the term of the mortgage on a fixed-rate loan, it does not mean that the payment will remain the same.

Most lenders require borrowers to include the monthly amount of the property taxes and insurance with each principal and interest payment.  The lender wants to be certain that the taxes are paid, and that the property is insured to protect their collateral for the loan.

The funds are held in escrow so they can be paid when they are due.  Periodically, the lender will audit the escrow account to see if there is enough money available.

If the taxes or insurance increase, the total payment will have to increase to cover the additional expense.  Once the lender determines there is not going to be adequate funds to pay the taxes and insurance, they can give the borrower the option to deposit additional funds to cover the shortage in the escrow account.

The borrower may choose instead to pay a higher payment that will accumulate by the time the expenses are due to equal the amount.

It is worth verifying the taxes and insurance premiums to see that the lender is using the correct amounts in case a mistake has been made.

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