themarycoxteam.wordpress.com - Amortization

Ready for Retirement

It can be shocking to hear how many people spend more time planning their vacation or next mobile phone purchase than planning for retirement. It is hard to imagine that they are expecting Social Security will take them through their golden years. A person who has paid in the maximum each year to social security can assume to receive about $30,000 a year.

Every adult in the work force, should go to SSA.gov to find out what they can expect based on their planned retirement age. Since it probably won’t be the amount you need to retire comfortably, at least you’ll know how much you’ll be short so that you can devise an investment plan.

There’s an easy rule of thumb used to estimate the investable assets needed by the time they retire to generate a…

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Investing on Your Side of the Fence

The grass tends to look greener on the other side of the fence. Maybe that’s why some people invest in things they don’t understand. It has been said that the grass is just as hard to mow on the other side of the fence so stay with what your most familiar.

Single-family homes used for rental property give a person a chance to invest in something they understand: a home. They also have distinct advantages over other types of investments.

An investor can borrow up to 80% of the value at fixed interest rates 30 years. The financing creates leverage so that the investor can benefit from the increase in value of the home not just the down payment.

It is reasonable to expect that the home will appreciate while providing tax advantages and practical…

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Assumptions are an Alternative

In the late 80’s, both FHA and VA began requiring buyers to qualify to assume their mortgages. The main reason there haven’t been many assumptions in the past 25 years is that interest rates have been steadily going down and if a person has to qualify, they might as well do it on a new loan and get a lower interest rate.

Based on projections by Fannie Mae, Freddie Mac, the MBA and NAR, rates for the second half of 2017 and 2018 are expected to be higher. When interest rates on new mortgages are higher than the rates of assumable FHA and VA mortgages in the recent past, it becomes more advantageous to assume the existing mortgages.

FHA and VA loans originated with lower than current interest rates have great advantages for buyers and sellers.

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Would-be to Should-be

Some would-be buyers have emotional reasons to own a home like having a place of their own where they can raise a family, feel safe and secure and enjoy their friends’ company. Other buyers’ dominant reasons might be financial in nature such as building equity or lowering their cost of housing.

Regardless of what might be motivating people to want their own home, it is easy to justify that now is a good time to purchase. Let’s look at a $250,000 example using a FHA loan.

The total payment will be about $1,835 dollars a month. If the payment is lower than the rent a person is paying, that should encourage a person to continue investigating.

In this example, when you consider the monthly principal reduction, the monthly appreciation and the tax…

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Postponing a Purchase

You might be surprised how many people contact real estate offices because they want to buy a home but they don’t have the down payment or the credit to qualify. Occasionally, an agent will be working with someone who does have the down payment and credit but for whatever reason, decides to postpone the decision to purchase now for some point in the future.

It’s not uncommon that once they’re out of the market, the money starts burning a hole in their pocket and they end up buying a boat or a motorcycle or some other thing that cannot positively affect their lives and security the way a home does.

If the money had been put away somewhere safe like a certificate of deposit, it wouldn’t earn a lot but it would be there when they decided the time was…

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Leverage - A Maximum Advantage

Leverage gives the user a maximum advantage whether it is physically lifting a large object or rapidly building equity in a home. In the case of the home, the high loan-to-value mortgage allows the profits made to be greater than simply the cash invested.

A $250,000 home can be purchased on a FHA loan with a 3.5% down payment of $8,750. If the home appreciates at 2% a year, in seven years the equity will grow to $75,920 due to the appreciation and the amortization of the mortgage. That would be a remarkable 36.2% rate of return.

It is estimated that homeowners have a 45 times higher net worth than renters. Since the obvious difference is that renters don’t own a home, owning a home is a distinct advantage. The leverage that allows a borrower to…

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It’s a Big Difference

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…

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Forced Savings

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…

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Your Best Investment

According to a Federal Reserve report on Consumer Finances, homeowners’ net worth is 36 times greater than that of renters. Building on that study, the National Association of REALTORS® believes that by the end of 2015, the factor will grow to 41 times greater.

There can be several factors that contribute to this disparity but an important one is the forced savings that is achieved due to an amortized mortgage. A portion of the payment goes to the reduction of the principal balance of the mortgage which increases equity in the home.

Appreciation is also a major contributor to homeowners’ equity. Homes, in most areas, have consistently increased in value over the long term and during the past four years have experienced solid growth. Many economists…

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What’s Stopping You?

The majority of tenants say they’d like to own a home but continue to pay rent and missing out on financial and emotional advantages. There seems to still be a lot of misinformation in the marketplace. 

There are a number of programs for low or no down payment options. Veterans can get into a home with no down payment or closing costs. In qualifying areas, USDA has zero down payment programs. FHA requires 3.5% down payment and there are conventional programs for as little as 3% and 5% down.

People with credit issues need expert opinions about their specific situation. Borrowers with bankruptcies or foreclosures may be eligible to purchase again after certain periods of time. There are short-term fixes for some types of credit problems. There is an…

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