Tag: mortgage

Categories
News News Feature

Buying a Home?

Photo: Tierra Mallorca | Unsplash

In a seller’s market, buyers can end up getting the short end of the stick. Housing inventories have yet to revert to normal levels, and the demand is high for mid-price homes, often driving multiple offers on many properties. If a buyer is lucky enough to get an accepted offer, they still need to contend with the reality of higher interest rates taking a bite out of their household income (unless they’re an all-cash buyer).

So, what’s a buyer to do? Before you start looking at homes, you need to know three key numbers: what the bank will lend you, what you can afford, and what you’re willing to pay. It’s essential to understand the difference between these three numbers, or you might end up biting off more than you can chew.

1. What Will the Bank Lend You?

Unless you’re holding enough cash to buy a house outright, your first step is getting preapproved for a mortgage. This is especially important in a hot real estate market. When there are multiple offers on the table, sellers may reject offers outright that aren’t accompanied by a preapproval letter.

But don’t take the first mortgage deal you’re offered. Even if you have an existing relationship with your local credit union or community bank, it’s in your best interest to get at least one comparison quote before you sign on for a mortgage. A rate difference of as little as 0.25 percent can really add up over 30 years. While you can shop different lenders for the best terms and rates, a better option is to use a mortgage broker. They can save you time by shopping different lenders on your behalf.

Because brokers work with multiple lenders, they often have more flexibility in how they structure your loan. They can alter terms like cash down, interest rates, closing credits, and loan duration, which will likely result in a mortgage that better fits your financial needs.

2. What Can You Afford?

Unfortunately, regardless of which lender you work with, you can’t rely on them to tell you what you can afford. While they will tell you what they will lend you, that is by no means a bellwether for what you should spend because the calculation they perform is essentially a measure of risk, not a measure of cash flow.

Credit scores are used as an indicator of how much risk a lender assumes when they sell you a mortgage. Not only can a very low credit score impact your ability to get a mortgage, but it will also factor into the interest rate you’ll pay. The lower your score, the higher your interest rate will be. That translates into a larger mortgage payment overall.

3. What Are You Willing to Pay?

The last number you need to know is what you’re realistically willing to pay.

This number will change from property to property, depending on what features the home has and what projects you may have to take on. Understand that in a seller’s market, you’ll likely have to pay above list price, and you may have to pay above the property’s appraised value.

If you’re willing to pay more than the appraised value of the home, you’ll need more cash in the deal because your lender won’t cover the gap between the offer price and the appraised value with a mortgage.

This can put you in a sticky situation if you have little leftover cash to cover the unexpected expenses that inevitably come with home ownership.

Keep a Healthy Cash Reserve on Hand

Home buying is a stressful process, but owning a home without adequate cash reserves is a recipe for disaster. Regardless of the condition of the real estate market, it’s important to keep a healthy cash reserve on hand to handle emergency expenses without going into credit card debt.

It’s a tough market for buyers right now. But if you go into the home buying process armed with the appropriate information, you’ll be well positioned to make a strong offer on a property that meets your needs and budget. In the end, your perfect house is probably the one that allows you to sleep soundly in the short term and helps you build value over the long term.

Gene Gard, CFA, CFP, CFT-I, is a Partner and Private Wealth Manager with Creative Planning. Creative Planning is one of the nation’s largest Registered Investment Advisory firms providing comprehensive wealth management services to ensure all elements of a client’s financial life are working together, including investments, taxes, estate planning, and risk management. For more information or to request a free, no-obligation consultation, visit CreativePlanning.com.

Categories
News News Feature

Insights From Mortgage Math

Photo: Kostiantyn Li | Unsplash

In the last few years, mortgage rates have touched lows we’ve never seen in our lifetimes, and recently have risen to levels not seen in over a decade. In the initial stages of mortgages, the interest calculated is based on the mortgage rate applied to a vastly huge mortgage balance. You might be surprised to learn that even relatively small changes in mortgage rates can have massive impact on the percentage of payments that go toward principal, on the advantage of making early prepayments on the mortgage, and on the value that can be financed in a loan.

By the end of the loan, almost 100 percent of every payment goes to principal, but early on the amount varies widely. For example, for a 2 percent mortgage, 55 cents of every dollar in the first payment goes toward paying off principal. For a 6 percent mortgage, only 16.6 percent of that first payment goes toward principal. This means the lower the mortgage rate you lock in, the quicker you can build equity.

For a 30-year fixed mortgage at the beginning of the loan, how much time does it knock off to prepay one month’s payment? Again, the answer varies widely depending on your mortgage rate. At the extreme of a zero percent mortgage, a month’s prepayment will reduce the term of your loan by exactly one month. At a 2 percent mortgage, it will knock almost two months off, while at 6 percent it will reduce the term by almost six months. As mortgage rates get higher, the numbers get more extreme — at an 11 percent mortgage, a single month’s prepayment early on will reduce the term by over two years! This is interesting, but not very practical. If you have resources to make very large prepayments early in a mortgage, you probably could have just made a larger down payment to begin with and locked in a much lower monthly payment. Nevertheless, it does show that as mortgage rates rise, prepayments become much more beneficial.

Probably the most interesting variable about mortgage rates is the potential impact they could have on house prices. Imagine a 30-year fixed mortgage with a $1,500 monthly principal and interest payment and zero down payment. How much house will that buy? At today’s 5 percent mortgage rate, that payment would finance a $279,000 loan. At 2.75 percent, a rate we were seeing just a few months ago, that payment would buy a $367,000 house. If rates jumped to 10 percent, a rate most of us have seen in our lifetimes, that same $1,500 a month could only buy a $170,000 house.

When mortgages are discussed, the question of paying them off early always comes up. When we run the numbers historically, the answer is that you should not prepay a mortgage at all if you can help it, at least at these rates. It’s difficult to find a 30-year period where the return of a reasonable investment allocation would not meaningfully exceed 5 percent. Ultimately owning a house is far more an emotional decision than a financial one, so making choices in your mortgage for peace of mind, rather than dollars and cents, can make sense — many of our clients pay off their mortgage even knowing it’s not likely to be an optimal financial decision.

There is always uncertainty in real estate, and it feels like these times are more uncertain than usual. Hopefully these facts can help you think through your real estate decisions as mortgage rates rise and more inventory comes on the market.

Gene Gard is Chief Investment Officer at Telarray, a Memphis-based wealth management firm that helps families navigate investment, tax, estate, and retirement decisions. Ask him your questions or schedule an objective, no-pressure portfolio review at letstalk@telarrayadvisors.com. Sign up for the next free online seminar on the Events tab at telarrayadvisors.com.

Categories
News News Feature

Paying Off Debt: When Should I Pay What?

Towfiqu Barbhuiya | Unsplash

Q: I have debt I want to pay off, but I also want to start investing to enjoy the value of compounding. How should I think about household debt?

A: It’s probably never truly wrong to pay it off, but sometimes a little debt might not be a bad idea.

Let’s start with the easy part. Some types of debt should be attacked mercilessly with singular focus and attention until it’s gone. This would include any kind of payday loan, credit card debt, predatory car loans, or anything with a high interest rate. To me, a high interest rate is anything above what a reasonable investment portfolio could hope to produce on average in the future. Over the last 20 years, U.S. stock market returns have annualized about 10 percent a year and are unlikely to exceed that going forward, so any 10%+ interest rate should certainly be considered high these days and attacked with all available resources.

What about loans with lower interest rates? There’s still a good case to be made for paying them off as soon as possible. Even 0 percent interest sounds like a great deal, but it’s still money spent that you didn’t have at the time, and those payments impact your future financial security and flexibility until they’re gone.

There’s a lot of debate about what defines good debt. The most common example is a mortgage, as it represents a hybrid of paying for shelter and investment in the future. Real estate has made many people wealthy over the years, but not without risk. It’s hard to make big returns in real estate without borrowing, which works great most of the time, but can also go wrong, as we saw leading up to 2008. I believe in buying a house because you need a place to live, not as a speculative investment. Enjoy any appreciation, but don’t expect it and certainly don’t rely on it. A mortgage is usually the lowest-priority debt to pay off in a given household.

A case can be made against almost all other kinds of household debt. The problem is that virtually all household borrowing is financing consumption of things that are currently unaffordable. Some things might be necessary, like a reliable car, but a lot of unnecessary money is spent and justified in the name of reliable transportation. Generally, consumer loans like these should be minimized and paid off as soon as possible.

Student loans are a tricky subject, because right now, many people are expecting eventual forgiveness from the government. Forgiveness might come, or might not. Regardless of your expectations, it’s probably wise to avoid taking advantage of any kind of deferment where payments stop but interest continues to accrue.If possible, make payments so that the balance declines each month.

Credit scores are also tricky. On one hand, a decent credit score is necessary for basic tasks like renting apartments or opening bank accounts. On the other, I’ve seen many financially destructive things done in the name of establishing credit or building credit history. In my experience, credit history will naturally build up over time with things like car loans and a credit card with reasonable limits. There’s no reason to focus on gaming your score.

For some debt, it might make sense to keep the low-interest debt and invest any extra money in the markets. Keep in mind that we may not get another 20 years of 10 percent stock market returns, but there’s a good chance the market will outperform a 2.5 percent mortgage in the long term. Investing in things like 401(k) plans with an employer match should probably be prioritized even above paying off non-mortgage, low-interest debt. Ask your financial advisor about both opportunities and risks in your particular situation. It’s important to look at the big picture.

Many lives have been ruined by overwhelming debt, while I’ve never heard anyone complain about being debt-free, even if it’s not optimal. If in doubt, it’s probably never completely wrong to just pay your debts off if you can.

Have a question or topic you’d like to see covered in this column? Contact the author at ggard@telarrayadvisors.com. Gene Gard is Co-Chief-Investment Officer at Telarray, a Memphis-based wealth management firm that helps families navigate investment, tax, estate, and retirement decisions.

Categories
News The Fly-By

Sex and Real Estate

CREDIT: AGG | dreamstime.com

Urban Land Institute trend-watcher Chuck DiRocco says everything comes down to real estate.

“If an adjustable-rate mortgage resets from $600 a month to $900 a month, that’s $300 in disposable income that people are not spending elsewhere,” DiRocco said. “It’s going to affect commercial real estate down the line.”

As one of the authors of the land institute’s Emerging Trends in Real Estate, DiRocco was in Memphis last week to present the study’s findings and to discuss which markets are the “ones to watch.”

And, frankly, Memphis wasn’t one of them.

In terms of commercial and multi-family development potential, the study ranked Memphis 38th out of 45 metropolitan areas. Topping the list were Seattle, New York, Washington, D.C., Los Angeles, San Francisco, and Boston.

“The top markets to watch fall on the coast,” DiRocco said. “It all comes down to global pathways.”

That and what the study calls “24-hour cities.”

“For years, Emerging Trends has extolled the handful of America’s 24-hour cities — multifaceted markets with desirable, walkable residential neighborhoods near commercial cores: New York [City], Washington, D.C., San Francisco, Boston, and Chicago. These markets — along with Southern California’s suburban agglomeration and more recently Seattle — have gained further status as the preeminent U.S. global gateways,” read the report.

With the economy on a downswing, investors want to be safe, not sorry. But DiRocco noted that logistics experts are beginning to look inland for global gateways. And that is where local panelists think Memphis could succeed.

“Though we’re not a port city,” said local panelist Jim Mercer of CB Richard Ellis, “I think we’re probably the next best thing.”

With FedEx’s hub and the busiest cargo airport in the nation, Memphis is uniquely situated to become what experts call an “aerotropolis,” a city built around a bustling airport and aviation-intensive businesses.

But, as DiRocco says, everything depends on real estate.

Which might explain why, later that same day at a public hearing, representatives from airport area businesses and the Memphis medical community spoke against the city’s proposed sexually oriented business ordinance.

The area around the airport includes an unlikely combination of Smith & Nephew, Medtronic, Elvis Presley Enterprises, FedEx, and various adult businesses.

If enacted, the city ordinance would replace a new county ordinance that outlaws topless dancing and prohibits alcohol in the clubs. The city ordinance would allow beer sales and topless dancing.

If the City Council decides to do nothing, the county ordinance will go into effect countywide January 1st.

“We would prefer to adopt stricter guidelines,” said Bill Griffin, a senior vice president with Smith & Nephew. “We want to make the area around the airport a nice place to do business.”

John Lawrence, head of the Airport Area Development Corporation, said member businesses were concerned about the secondary effects of sexually oriented businesses, such as crime and falling property values.

“Today, it’s an area where industry is bringing in prospect after prospect. They’re bringing in doctors, researchers. Do we value these businesses?” Lawrence asked.

It seems strippers are standing (or dancing) in the way of Memphis’ potential in the global economy. But that’s not quite fair. As a representative for the sexually oriented businesses, attorney Edward Bearman pointed out that nothing in the new ordinance makes sexually oriented businesses safer or reduces crime.

“The reason the clubs are located near the airport is because that’s where the zoning will allow them,” he said. “They have money invested in this town, just the same as other businesses.”

I’m not going to get into whether clubs should close at 3 a.m. or midnight or whether they should allow beer sales or brown-bagging, nude dancing or semi-nude dancing.

But if the city’s goal is to encourage global pathways through Memphis, then the airport area is a precious commodity. Elvis Presley Enterprises, for instance, has a $250 million plan to transform the area around Graceland much like Disney did in Anaheim, California.

If the city doesn’t enact an ordinance, the county ordinance might regulate the strip clubs right out of business. I’m not sure that’s right, but lap dances and back rooms don’t seem to fit with a global commercial hub and an international tourist destination.

Adult businesses may offer something to see, but they won’t make Memphis a market to watch.

Categories
Opinion

“Improvident Borrower”

Julia Greer doesn’t know George Will and doesn’t watch the Sunday-morning news talk shows. But Will, the bow-tied conservative television pundit, author, and columnist, had some harsh words for people like Mrs. Greer last week.

Greer, 67, is one of millions of Americans who took out a home loan they can’t repay. The former grill cook at Baptist Hospital for 35 years lives on Social Security payments of $814 a month. In April, she took out a $50,000 loan to fix up a house in Whitehaven where she plans to care for a cousin who is handicapped from a stroke.

Greer can’t make the monthly payments on the loan, which carries an interest rate of 15 percent and is due in full in September, six months after the loan was made. That’s called a balloon note in the trade.

As Will wrote in a column published in The Commercial Appeal and other newspapers last week, “Every improvident loan requires an improvident borrower to seek and accept it. Furthermore, when there is no penalty for folly … folly proliferates.” By his lights, Julia Greer is the source of her own problem. She borrowed more than she could repay. The stock market took a nasty tumble, and investors from China to Memphis felt the pain because of the improvidence of people like Julia Greer.

But improvidence sometimes has a little help.

Fixing up the house was Greer’s daughter Linda’s idea. A cousin owned the house for several years, and it was paid for but in need of repairs. It is 54 years old and appraised at $96,200. The Greers say the plan was that the cousin would deed the house to Julia Greer so she could get it fixed up, move in, and share living expenses.

Greer tried to get a home-improvement loan from the Teachers Credit Union, First Citizens, and Sun Trust Bank but was turned down for insufficient credit history. A friend recommended she try Home Realty Company and Home Financial in Memphis.

In April, Julia Greer and the cousin met with a closing attorney. The closing costs were $13,000, including a 5 percent “loan origination fee” and another 5 percent “loan discount fee.” On top of that, documents show that Greer was obligated to pay another $2,000 to Home Financial in six months even if she made the balloon payment. The fee would be “waived” if she took out a new loan. Home Realty would keep the balance of the loan, $37,000, in escrow and reimburse Greer for improvements after they were made, if she provided receipts.

When Linda Greer read the closing papers, she thought her mother had been taken advantage of, and she tried to cancel the loan.

“They told me in order to rescind it, I would have to pay the closing amount of $13,000 within 24 hours,” Linda Greer said.

Charles E. Moore of Home Realty said the loan was proper. The closing costs, he said, included payment of back taxes that were due on the property. He was under the impression that Mrs. Greer was going to resell the house after fixing it up and never intended to live in it. The workers she hired, he said, “didn’t have her best interests at heart” so he hired his own workmen to take over.

Moore and the Greers disagree about how much she was supposed to pay each month, but they agree that Julia Greer faced foreclosure unless she got a new loan.

“You can’t stay if you don’t pay,” Moore said.

As it now stands, roughly $19,000 worth of work has been done, and the house is unoccupied. Julia Greer lives in an apartment downtown. Linda said her mother is “scared to death” of losing the house.

Home Realty tried to get Julia Greer to sign for a new loan for $63,000 to pay off the old one. The documents include an apparently forged signature of Julia Greer and list her monthly income as $2,800 a month from a nonexistent drapery business. Linda Greer says her mother “can’t even sew a button.”

Moore said he doesn’t know how that information got in the loan documents.

The Greers contacted Memphis Legal Services and attorney Webb Brewer, who plans to file a lawsuit against Home Realty. Brewer helped write Tennessee’s 2006 Anti-Predatory Lending legislation after seeing scores of working poor people hoodwinked by salesmen peddling subprime loans, debt consolidation loans, and fix-up loans.

“Subprime lending is like a petri dish for predatory lending,” Brewer said.

Or for folly and improvidence. Take your pick.

Categories
Living Spaces Real Estate

Your New Home: How Much Will It Cost?

Sometimes owning a new home instead of renting or living in an older home means adjusting our expectations to our incomes and dealing with hard financial facts even as we dream of the fantasy houses we see in glossy magazines. Many factors affect the cost of a new home, including financing, construction, and local regulations. But there are things you can do to help keep the price within your budget.

The down payment and monthly mortgage payments can often be the biggest hurdle new home buyers face, so shopping around for the right mortgage options can be an important way to save money. For instance, VA or FHA loans sometimes require no or low down payment. There are state assistance programs available for first-time home buyers. Sometimes, first-time buyers turn to parents or relatives for help with down payments. Also, adjustable rate mortgages can help keep monthly payments within your comfort range.

One way to keep the actual cost of a new home within your budget is to do some of the finishing work yourself. While structural construction is best left to professionals, some homeowners do their own painting and woodwork finishing. These jobs certainly are not easy but may be a way to create substantial savings. There is also a wide range of price levels for some materials, such as cabinets, carpeting, appliances, and bathroom fixtures. What people choose to put in their homes is as unique as each individual. The important thing is to weigh your options so your new home is comfortable, affordable, and meets your needs.

Another cost-saving tactic is designing a home so that rooms, such as additional bedrooms, can be added in the future. Some homeowners wait to finish their basement a few years after they move in, when it is financially easier to complete the work.

There are added costs for regulations that most homeowners never consider. Development fees and other construction charges can add more than $12,000 to the cost of a typical home. These fees include inspections and permits, re-zoning applications, wetland permits, access permits, grading, fire-retardant walls, setback requirements, and more. The costs vary from city to city, so the location of a new house may affect its cost.

With all these factors, the most important consideration is the quality of your home. It must be a sound structure that will provide years of worry-free living for you and subsequent owners. Finding a professional builder with whom you are comfortable is a basic requirement in building your dream house. Visit neighborhoods in which you want to live or where there are comparable houses. Talk to owners about their builders to see what their experience was. Professional builders are happy to supply references to prospective homeowners.

Every home buyer chooses the aspects of a new home that are most important to them. Having a home on a lake may be the dream of a boater. A traditional home with plenty of bedrooms and baths on a cul-de-sac in the suburbs: someone else’s dream. The excitement of easy access to the theater in the heart of a city may thrill another. Whatever your dream, thoughtful analysis of what is most important to your lifestyle and your budget will help ensure that the experience of buying or building your new home will be one of the most pleasant times of your life. ■

Keith Grant is president of the Memphis Area Home Builders Association.