Friday, October 31, 2008

How to know when to refinance!

In spite of the bad press right now may be a great time to refinance with rates at historic lows. CNN reported in September 2008, the rate on a 30 yr fixed mortgage dipped to 5.93%.

The decision to refinance is subject to one basic premise: decide if refinancing presents enough financial advantage to make the deal worthwhile. Easy online mortgage calculators can help the consumer to compare the cost of maintaining their current mortgage, against obtaining a new one. You should have specific numbers regarding costs and fees, from a lender you trust. By having solid estimates from a lender, together you can prepare budget projections and compare those projections to the current situation to determine how much you can reduce monthly expenses.

Also calculate how long it will take to recover the initial fees and costs of refinancing. Things such as prepaid mortgage insurance, prepaid discount points, title searches, appraisals, inspections, and other mortgage processing fees, can and will add significantly to the cost of the refinancing process. If possible, these one time fees should be paid for "up front" by the consumer, rather than being included in the amount to be financed. Once the consumer has the estimated total for these one time fees, they should compare this figure to their total estimated monthly mortgage savings, and determine how long it will take for the savings to pay back those extra costs. It is often said that, if the mortgage savings won't pay for the costs of refinancing within seven years, then that money is being poorly spent and refinancing should be avoided at that time.Consumers might be well advised, at this time, to avoid refinancing a home mortgage in order to "cash out" equity. Because home values are radically deflated over much of the country right now, equity valuations are also at historic lows. Unless the equity funds are to be used immediately to retire debt at high interest rates, or to improve the subject property in ways which will significantly increase its value, you may wish to wait until a home's value rebounds before they tap into its equity value. As mentioned before, do the math to determine if the cost of cashing out equity is justified by the potential savings from refinancing.A lot of people may be putting too much emphasis on non essential factors. The election, the bailouts of large financial institutions, inflation, and unemployment rates actually have little bearing on the decision. Those larger economic dynamics take their own course regardless of how responsible consumers handle home mortgages. Homeowners must decide for themselves, based on their budget whether or not refinancing shall pay them the dividends which justify the effort to restructure their home mortgages.

Wednesday, March 12, 2008

The Equity Question

What do I do with all that equity?
As home values continue to rise, many of my customers ask for help evaluating the question: Am I doing the right thing with the equity in my home?This has been the focal point of much attention and the topic of several books. The question itself has as many answers as there are individual risk profiles. Let me share with you a few of the options that exist. You can then begin to evaluate your situation to see which one would benefit you the most.

1. Do nothing -The first option is to do nothing. This path of least resistance is also probably the least risky. It involves no change while providing you with additional equity, as long as your home continues to increase in market value and you continue to pay down the principal of your mortgage. People choose this option by default because they believe in the “forced savings” concept--that your net worth increases without your having to think about it, and at the end of the day, you will have a benefit that you did not really anticipate. The problem is values are not increasing as dramatically as in the past. A more aggressive approach As a preface to the following options, let me offer two philosophies. First, I am opposed to the use of equity in your home to purchase cars, boats, etc. And while the “do nothing” option is good for some people, for others, it is preferable to access and manage the equity in one’s home in a more aggressive way, thereby conserving and maximizing liquidity, safety, rate of return, and tax deductions.Second, consider this thought as you evaluate the best use of your home’s equity: Houses are meant to house families, not cash!

2. Consolidation of debt- A second option is to use the equity in your home to consolidate non-preferred debt (this is debt that has no tax benefit attached to it). That involves converting non-preferred debt to preferred debt (this is debt that has some tax benefit attached to it, e.g., tax deductible interest or home mortgage interest). Please do not consider this a general statement advocating that homeowners should borrow on the additional equity, pay off credit cards and other consumer debt, only to accumulate more consumer debt. What we advocate is responsible equity management. And many times, the first step to achieving financial freedom is to reposition and restructure your existing debt.

3. Invest your equity -A third option is to reposition the equity to take advantage of investments. This does not mean to throw caution to the wind, but there are many ways to use the same approach bank uses, a system that simply says, if you borrow at one rate, invest at a rate that is equal to or higher than your net cost of borrowing. This can be accomplished in a very safe environment using investment vehicles such as tax-free municipal bonds, investment grade life insurance contracts and many others. Adding real estate investments to your portfolio can be another way that you can benefit tremendously from this equity repositioning.

A final thought for consideration is that many people believe that the more equity they have in their home, the safer it is. As a result, they pour a substantial amount of money to paying off their mortgage as early as possible. In reality the two best ways to ensure security in your home are to either have the home completely paid off or have it mortgaged to the hilt. Anywhere in between leaves you quite vulnerable should the unexpected occur. The bank is much more likely to foreclose on a property that has a lot of equity than on one with a large mortgage on it. Besides, if you have a large mortgage on your home with the equity invested to an accumulated balance equal to or greater than the balance on your outstanding mortgage, isn’t the mortgage effectively paid off anyway? You have the money in a side account. The big difference is that you (not the bank) control the cash, allowing you to maintain the tax benefit for the life of the mortgage. As you can see, there are many options available as you evaluate the growing equity in your home. Because great care needs to be employed when you consider using a mortgage as a financial planning tool, it is critical that you involve the collaborative efforts of a mortgage professional along with a financial planner, CPA and possibly an estate attorney before you implement any of these strategies. However if you do, you can experience a dramatic increase in your personal wealth over time.

Tuesday, March 11, 2008

What's this all about!

This will be a no-holds barred look at the Mortgage Crisis. The truth, the BS, and what we can do about it as consumers, professionals, and innocent bystanders. I will be adding content on a regular basis once I have a schedule established and/or the the fancy strikes me.

Check back often....... in the meantime if you'd like to avoid any of this mess visit my site