My Home, My Security Blanket

When I discuss retirement with clients the discussions either go like this….

“well social security won’t be there for me and I’m still recovering from the dot com bust and my financial planner is a complete moron and at the I’m saving, I’ll never retire”

or like this…

“I plan on retiring at 55-60 depending on what happens with my investments and my home’s value”

Your home’s equity is a solid foundation for retirement according to an article entitled Retiring on Your Home’s Equity

A recent study commissioned by Oakland, Calif.-based Bell Investment Advisors, found that seven out of 10 60-year-olds consider their home part of their retirement plan. Of that group, almost one in five — 24% to be exact — said their home’s equity represents half or more of their total savings.

Also included are the sources where current retirees will be drawing their retirement:

Wealth holdings of a typical household prior to retirement*:

Social security: 42%
Primary house: 21% of total wealth
Defined benefit plan: 16%
Defined-contribution plan: 8%
Financial assets: 7%
Business assets: 2%
Other nonfinancial assets: 4%

* Households headed by individuals aged 55-64. Source: Survey of Consumer Finances 2004.

More importantly, the article continues to discuss two ways to tap your equity when you retire including downsizing into a smaller home and keeping the profits and a reverse where you get a that pays you.

This article brings to light the importance of mortgage planning as a key component in your wealth management. Your home is your security blanket since it can be the largest asset in your estate. Your mortgage allows you to manage this asset. Obviously I just scratched the surface of planning but if you need more information, contact me.

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Building Equity

There are quite a few ways to build equity in your home faster than a traditional fixed mortgage will allow. Within the first six years of your home, for every dollar you apply towards your mortgage, approximately twenty cents will go towards reducing your principle, or the original loan amount borrowed. One way to increase the amount applied towards your principle is to increase your monthly payment to a higher amount. If this is not possible than structuring your with a bi-weekly payment plan will help to decrease your principle balance and increase the equity in your home.

Building a home also has an advantage over buying an existing home. When you build you usually end up with instant equity at the end of the construction phase. If you have good credit and want to build you should consider a loan or a one-time-close loan.

If you get a tax refund check every year, rather than spending it or put it in your savings account, apply it towards paying down the principal of your mortgage. Interest rates offered by most savings accounts and CD’s do not come close to the interest charged on your mortgage loan. Paying down the principal in the early years of your loan can significantly lower the total interest expense in your over the life of your loan.

Instead of making an extra mortgage payment, many of the savviest personal investors use any additional capital to invest in additional assets, which over an equivalent time period tend to build more value than additional payments to principal. Instead of trying to pay off your house 7 years faster, in certain areas it may be more profitable to invest that money in additional . Assuming a 30 year , ask yourself, “How much was my house worth 23 years ago?”. In most areas of the country, the answer might be 1/5th or even less of its current value. Now ask yourself how much even a relatively small additional investment would be worth in the same amount of time. In many areas you will likely find that owning more is more lucrative than paying down principal, because they can always print more money, but they aren’t making any more land.

Not all lenders allow you to structure and pay weekly or bi-weekly directly with them. You can do this on your own if you are diligent. Take your monthly payment and divide it by 4. If you always dedicate or set aside this dollar figure every week then in the months that have 5 weeks instead of 4 you add those additional funds to your principal that month. At the end of the year you will have put an entire monthly payment directly towards reducing your principal balance.

If you can make one extra payment per year you will end up knocking 6-7 years off of your .

Although values are not guaranteed to increase they have always risen and historically performed well. There may be times where values decrease slightly or stagnate but your investment in will 99% of the time increase in value over time.

There is one very simple way to build equity without making any additional payments on your . That is simply to own property. In some areas of the country, southern California for instance, property values have risen over 20 per cent per year for the past couple of years. Although property is not guaranteed to increase in value, you can see that the more real that you own the chances are very good that the more equity you will be building.

Building equity also comes from natural appreciation in your . If you are in an up and coming area the value of your home, and equity will increase at a quicker pace.

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What is a Real Estate Bubble?

Recently there have been concerns and speculation voiced about a “real estate bubble“.

The media has created a buzz correlating the “ bubble” with rising mortgage rates. However, the housing market is determined by the job market and not rates. If people feel like they’re jobs are in jeopardy, they will be less reluctant to buy homes even with low mortgage rates. Conversely, if rates rise and people feel secure with the job market, they are more apt to buy homes even though the monthly payment might be slightly higher.

Every city has different real estate and financial trends, what is happening in New York may not be happening in Milwaukee! Before you buy any you should first find a good realtor and a good mortgage broker to help guide you down your path to ownership!

Even buying in a real estate bubble isn’t necessarily a bad thing. Not all bubbles burst, some simply cool down and level off with no depreciation in value.

If you are considering getting cash-out equity of your home you should consult with a mortgage professional and professional to consider the market-value of your home with respect to your new total mortgage balance(s). Going “upside down” on your mortgage is a real happening, and could prevent a homeowner from selling or refinancing in the future if it occurs. Make sure that if you are considering an over-equity 2nd mortgage (e.g. 125% 2nd ) that you have a real long-term plan to deal with it financially so you are not stuck with misfortune.

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Should You Leverage Your Home or Pay It Down Rapidly

There is a great debate within the inner- circles these days. Should we, as loan professionals, encourage clients to borrow as much money as possible? Or would consumers benefit more if we helped them to understand the advantages of 15-year amortization schedules and pre-paying principal? Let’s examine the pros and cons of both strategies.

Leveraging Your . In order to understand why you’d want to borrow as much as possible for your home , you must first grasp the concept that equity has a zero of return. Here’s an example:

If Consumer “A” buys a home for $300,000, and puts 20% down, then they have $60,000 in equity. Over the next 5 years, the appreciates $100,000 in value. Consumer “A” now has $160,000 in equity.

Consumer “B” buys a home for $300,000, and puts no money down. At the end of 5 years, that same home is now worth $400,000. Consumer “B” has $100,000 in equity, which is the same appreciation as Consumer “A”, a net $100,000.

As you can see, your down payment has nothing to do with your rate of return. What becomes important is how you choose to manage the $60,000 you didn’t use as a down payment. If you use it for frivolous activities, such as buying toys or going to Las Vegas, it would be more prudent for you to use that money as a down payment. Especially since this will enable you to obtain a lower interest .

However, if you were to invest the $60,000 in a vehicle that can out-earn the cost of that , then this could be a formula for success. This is why some professionals suggest putting as little down as you possibly can, maximizing your tax write-off, and the rest. This principle has been applied for many years in the life insurance game. The old saying goes, “Buy term and invest the rest.” The key component is taking the money you would have used as a down payment and creating an asset accumulation account. This account should earn a significant enough of return to enable you to pay your off entirely and achieve the ultimate goal of being -free.

Paying Your Home Down Rapidly. There are very few times over the course of my career that I have seen a client with zero debt and no financial difficulties. Choosing to pay off all of your can reduce stress and help you to gain freedom of cash flow for investment opportunities. A 15-year mortgage or a bi-weekly payment strategy provides structure. It can also put you on track to have your paid off within a set timeframe. Simply put, it contains built-in discipline.

It’s important, however, to understand that regardless of how rapidly you pay your home off, you’re not getting any greater of return on your investment than if you paid it off slowly.

Conclusion. So how does one determine which scenario is best? The choice depends entirely upon the individual. Savvy consumers who are disciplined, and are comfortable taking chances from an investment perspective, would do well with the first scenario. Over the course of time, it’s been proven that your rate of return over the long-haul will be far greater than the you’d pay for a in today’s environment. It’s important to seek the advice of a skilled investment advisor to ensure success with this strategy.

The second scenario is best for those who have a difficult time managing their money or who’ll sleep easier at night knowing they have a plan in place to pay their loan off more rapidly. Be sure that your budget can handle accelerated payments. When consumers “bite off more than they can chew” with a 15-year , they frequently end up having to back into a 30-year schedule.

If you find this subject intriguing and would like to know more, I recommend that you read a book titled, Missed Fortune 101, by Douglas Andrew. It’s an outstanding read that is very simplistic and goes into far greater detail than I can cover in this column. Douglas is a financial planner who advises safe-structured investments such as whole life policies and tax-free fixed income instruments.

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