themarycoxteam.wordpress.com - Equity

Invest in Equity Build-up

Equity build-up could be one of the biggest advantages to buying a home. There are two distinct dynamics that take place to make this happen: each house payment applies an amount to reduce the mortgage owed and appreciation causes the value of the home to go up.

It is easy to make a projection based on the type of mortgage you get and your estimation of appreciation over the time you expect to own the home. Even conservative estimates can produce impressive results.

Let's look at an example of a home with a $270,000 mortgage at 4.5% for 30 years and a total payment of $2,047.55 payment including principal, interest, taxes and insurance. The average monthly principal reduction for the first year is $362.98. If you assume a 3% appreciation on the…

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America Still Considers Real Estate the Best

35% of respondents, in a recent annual Gallup poll that dates back to 2002, identified real estate as the best long-term investment option compared to 27% who identified stocks.

The top choices included real estate, stocks, savings accounts and gold. Even with the remarkable prices of the different U.S. stock indices recorded in 2019 through April and May, homes have the highest confidence in the minds of the respondents.

This seems to be based on the stability of the housing market and the expectation that home prices will continue to rise. Homeowners build equity from both appreciation as well as reducing principal with each payment made. These same factors exist for investors of rental homes in predominantly owner-occupied neighborhoods.

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Get Leverage Working for You

Leverage is an investment term that describes the use of borrowed funds to control an asset; sometimes referred to as using other people's money. Borrowed funds can affect the investment in your home positively.

For instance, if you had a $100,000 rental property, collected the rents and paid the expenses and had $10,000 left, you would earn a 10% return (divide the $10,000 by the $100,000.) With no loan on the property, there is no leverage.

If you decided to get an 80% mortgage at 8%, you would owe an additional $6,400 in expenses leaving you only $3,600 net. However, your return would grow to 18% because your investment is now $20,000 in cash (divide the $3,600 by $20,000.)

Leverage, the use of borrowed funds, causes the return to increase…

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Building Equity

Owning a home is the first step to building equity. Tenants build equity but not for themselves; they build it for the owners.

Equity is the difference in the value of the home and what is owed on the home. There are two dynamics that cause this to grow: appreciation and principal reduction.

As the home increases in value, it is said to appreciate. Various authorities will annualize an appreciation rate based on average sales prices from one year to the next. Since appreciation is based on supply and demand as well as economic conditions, it will not be the same year after year.

If you looked at a ten to twelve-year period, some would be higher than others and there may even be some individual years that it is flat or even declined. For the…

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More Than Just an Address

For a short time after the housing crisis a decade ago, some homeowners thought the value of home is a place to live rather than an investment. A home certainly has an appeal as a place to call your own, raise your family, share with your friends and feel safe and secure. It can be more than an address; it can also be one of the largest investments homeowners have.

Most mortgages apply a portion of the payment toward the principal amount owed in order to pay off the loan by the end of the term. This acts like a forced savings for the homeowner because as the loan is reduced, the equity grows which increases their net worth.

The other contributor to equity is appreciation. Most homeowners don’t realize the increase in value until they sell the…

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Depends If You Can Afford It

Affordability, stability and flexibility are the three reasons homebuyers overwhelmingly choose a 30-year term. The payments are lower, easier to qualify for the mortgage and they can always make additional principal contributions.

However, for those who can afford a higher payment and commit to the 15-year term, there are three additional reasons: lower mortgage interest rate, build equity faster and retire the debt sooner.

The 30-year, fixed-rate mortgage is the loan of choice for first-time buyers who are more likely to use a minimum down payment and are concerned with affordable payments. For a more experienced buyer who doesn’t mind and can qualify making larger payments, there are some advantages.

Consider a $200,000 mortgage at 30 year…

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Eliminate FHA Mortgage Insurance

Mortgage insurance premium can add almost $200 to the payment on a $265,000 FHA mortgage. The decision to get an FHA loan may have been the lower down payment requirement or the lower credit score levels, but now that you have the loan, is it possible to eliminate it?

Mortgage Insurance Premium protects lenders in case of a borrower's default and is required on FHA loans. The Up-Front MIP is currently 1.75% of the base loan amount and paid at the time of closing. Annual MIP for loans with greater than 95% loan-to-value is .85% per year.

For loans with FHA case numbers assigned before June 3, 2013, when the loan is paid down to 78% of the original loan amount, the MIP can be cancelled. The borrower may need to contact the current servicer.

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Gift of Equity

There is a little-known mortgage program that could provide the vehicle for the right person to get into a home. If a person sells their home to another for less than the fair market value, the difference in the appraised value and the sales price is considered a gift of equity for the buyer.

FHA requires that borrowers receive gifts of equity only from family members transferring title to the borrower.

An appraisal is required to determine the value of the home. The sales price is subtracted from the appraised value to determine the equity to be gifted. If a home appraises for $300,000 when the owner will sell it for $250,000, the gift is $50,000.

The gift is applied to the down payment. In this example, the borrower would have to qualify…

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It’s Not Just the Tax Benefits

When the standard deduction for married couples filing jointly was increased from $12,700 to $24,000 for 2018, there was some speculation that the bloom was off the rose of homeownership. The thought was that if the tax benefits from being able to deduct the property taxes and interest was less than the standard deduction, that maybe, the buyer would be better off continuing to rent.

With mortgage rates as low as they have been for the past eight years, payments have been lower and so has the amount of interest that was paid. This and the fact that sales and local taxes, which include property taxes, are limited to $10,000 a year on the Itemized Deduction form have made it harder to reach the increased standard deduction.

The reality of the…

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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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