Last month, Fannie Mae and Freddie Mac all but ended Interest Only Mortgage loans, so the only loans left are Amortizing Mortgages.  (Some borrowers can still get an Interest-Only style mortgage, but they are very restricted now).

If you have ever closed on a mortgage, you probably remember the large stack of paperwork you needed to sign.  A large chunk of that is the “Amortization Schedule”, which is the spreadsheet that shows month by month what the loan balance is projected to be, how much of your payment goes to interest, principal and mortgage insurance if possible.

An Amortizing Loan is simply a loan where your payment never changes, but the amount you pay in interest declines each month as the principle balance is paid down. (Here in North Carolina, the banking commission makes us use two pages of disclosures in the loan application package to explain that one sentence).

The Amortization Schedule is a useful tool for an Annual Review of your mortgage.  However, there is a major problem with the original Amortization Schedule you received at closing.  As soon as you pay as little as $1 extra in principle, the remaining months on the schedule become inaccurate.

When you pay extra principle on your mortgage, you shorten the term of your loan, effectively skipping past months on the schedule.

Here are a few ways to shorten the term of your loan, if that is something you want to do:

1. Bi-Weekly mortgage payments.  This is a separate service from your mortgage servicer that deducts half of a regular mortgage payment from your checking account every other Friday.  There are 52 Fridays each year, so this means you make 26 half payments or 13 full payments each year.  The extra payment each year shortens your loan term.  The problem with Bi-weekly mortgages is that you usually have to pay a fee of up to $400 for the privilege or sending the bank your extra payments.  It seems that they should pay you for sending in extra payments, but they don’t.  Bi-Weekly payments are handy if you get paid every other week so that you can have half your mortgage taken from each paycheck.
2. The ‘Banker’s Secret’.  A book from a few years ago explained the so-called Banker’s Secret.  What this program did was to have you pay the regular payment on the mortgage on the due date, but add in the extra principle from the next month on the Amortization Schedule.  This skips you down the schedule every month and effectively cuts your loan term in half.  The gotcha here is that as you get later on in the amortization schedule, you have larger and larger principle payments to make extra each month.  If you aren’t earning more money each year and don’t desire to put that money into home equity, the Banker’s Secret is actually a secret way for them to get more money from you faster, so that they can lend it out again and earn more interest.
3. Make One Extra Payment each year.  If you get an annual bonus or a regular tax refund, making one extra payment each year allows you to get the same benefit of the bi-weekly repayment plan without having to pay the extra fee.  This extra payment will go all towards principle, and not interest, so it will jump you pretty far down the Amortization Schedule each time you do it.  Maintain this practice for the term of the loan and you’ll reduce a 30 year loan to just over 24 years.

You can contact me for a free update of your Amortization Schedule – even if I didn’t originate your mortgage – I have some pretty good software to create an accurate update.

If you are a “Do it Yourself-er”, download a useful excel spreadsheet and plug in your own numbers.

Paying extra payments on the mortgage feels good for a lot of people.  Don’t fall into that trap of basing your financial decisions on your feelings!  If there are better uses of your money, such paying off other debts, building an emergency fund, or saving for kid’s college expenses – do that first.  Those beneficial decisions not only feel good, but are good for you.

Many home owners in Charlotte and North Carolina are discovering it’s a great time to refinance their home loan.  With the unusually low rates of the past few weeks, we’ve helped homeowners:

• Shorten their mortgage term to 10 or 15 years without increasing their payment
• Save several hundred dollars each month in interest
• Convert from interest only loans to amortizing loans without increasing their payments
• Pay off credit cards, car loans, second mortgages and lower payments overall by several hundred dollars

Should you look into refinancing?  Yes, if:

• If you are employed, or have been self-employed for more than 2 years
• have an interest rate over 5.75% on any loan
• Have an Adjustable Rate or an interest only loan
• There is equity in your house and you have better uses for that wealth – like paying for education, paying off other debts, or re-building retirement accounts

What are the pitfalls?

Number one:  Appraisals. Since the HVCC, or Home Valuation Code of Conduct was forced on consumers last year, appraisers have been reducing home values across the country with impunity.  This ill-conceived regulation is the biggest roadblock – for some, just a speed bump, but for others, a dead end.  Unfortunately, the only way to find out a true appraisal value is with the actual appraisal that your lender orders for you.

As a safety valve, we recently started offering an AVM or Automated Valuation service on our branch website.  This $29.95 service will give you an educated guess if your house will appraise adequately for refinancing.  If you get an AVM here, and then refinance your mortgage with us, we will refund the cost of the AVM at closing.

Number Two: Credit Score. If you don’t have a 740 or higher middle credit score, you can expect to get a slightly higher rate than other with high scores.  Fannie Mae started charging borrowers higher fees for lower credit scores.  If you call, we can get you a free copy of your report and will tell you how much impact, if any, the score has on your rate.

If you don’t ask, the answer is no.  If you own a house, and have a rate higher than 5.5% right now, you owe it to yourself to look into refinancing now while rates are this low.

I’ve been saying for years – Mortgage debt along with other savings is far better than no debt with no savings. In other words, build up your savings and form the habit of saving money, then pay off your mortgage.  apparently, the Wall Street Journal thinks so also:

By JANE J. KIM And JEFF D. OPDYKE

It would be the height of foolishness to load up on debt now, right?

Just look at the news these days. Homeowners are being foreclosed on at a record clip. Governments around the world are lurching toward insolvency. Job growth in the U.S. remains feeble at best. And at the center of the global economic storm are bad loans, which promise to weigh on consumers, businesses and governments for years if not decades to come.

And yet—and yet!—the cold clarity of financial analysis points to an inescapable conclusion: There has never been a better time for people to borrow money, whether to buy financial assets or boost cash reserves.

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For sophisticated, disciplined investors who have lived and invested within their means—and perhaps decried the bailouts being lavished on those who haven’t—this is your time to take advantage. Not only are interest rates just about as low as they can get, but future inflation could erode the paper value of loans, making debt even cheaper over the long run.The first step involves making peace with the idea of taking on new debt at this perilous moment in global economic history.

It isn’t an easy concept to embrace. While the inflation scenario seems likely over the long term, there is a small but growing chance that the global economy could suffer from the opposite problem, deflation. Japan could be the template for the kinds of problems facing the U.S. and other advanced economies: years of tepid growth and falling asset values and prices.

That would make new debt more expensive over time, not less so. It would also mean that the job market is headed for a longer slump than even the direst estimates now suggest.

Then again, the moments that seem the bleakest often turn out to be inflection points. Alan Greenspan has famously said that the worst of loans are made at the best of times. The opposite holds true as well.

Most important, “there’s nothing inherently wrong with leverage,” or borrowed money, says Christopher Jones, a New York financial planner working with high-net-worth clients. For people with the capacity to take on debt, who understand it and can tolerate the risk, “now is an ideal time to leverage cheap dollars to buy into areas that can produce much higher returns over the longer term,” he says.

Mr. Jones is advising clients who can afford to pay cash for a home to take out a mortgage instead and invest the funds in a diversified portfolio. “If you look at where the market is now and where it could be five to 10 years from now, the return potential is significant,” he says. Ideally, investors would want to borrow at rates below 5% and invest the money in a well-diversified portfolio aiming to return 8% a year over 10 to 15 years.

“You don’t want to be borrowing money and going to Vegas with it,” Mr. Jones says.

Investing the Proceeds

Wealthier investors who already have built up considerable equity in their homes might even consider—gasp—a cash-out refinance. Yes, this sort of behavior is what got so many people in trouble during the housing bubble. And, yes, leveraging a home to the hilt can be dangerous because if home prices continue to slide, you could owe more on the house than it is worth.

But people who have a potentially profitable use for that money—preferably an investment—could come out ahead using this strategy. A borrower who takes out a mortgage at 4.5% is essentially borrowing money for free on an after-tax, after-inflation basis, assuming he or she is in the 33% marginal tax bracket and inflation returns to its long-term average 3% or more, says Greg McBride, a senior financial analyst at Bankrate.com. “That’s probably the best example of how those who are well positioned can utilize the low-rate environment and leverage up their financial return prospects,” he says.

If that hypothetical investor were to take out a $400,000 loan at 4.5%, he would come out ahead if his portfolio makes more than 3.015% a year after taxes, says Terry Siman, a wealth adviser in Spring House, Pa. If you assume 2% a year is lost to taxes, such as capital gains, dividends and interest income, then the portfolio needs to return 5.015% annually to break even. “Anything better than that and you’re in a winning situation,” says Mr. Siman.

Skip Fiore is a Waretown, N.J., director of a digital print-manufacturing company nearing retirement who is looking to rebuild a nest egg devastated by the stock-market collapse. He has no mortgage on his $1 million home, so he is in the process of taking out a $300,000 mortgage at a fixed rate of 4.75%, and plans to use the money to invest in his portfolio. “Fundamentally, it was cheap money,” he says. “And it was cheap money that could be used to supplement a depressed retirement portfolio.”

The risk, of course, is that the investment returns will be lower than the new mortgage interest rate. Investing in bonds probably wouldn’t make sense, says Mr. Jones, the financial planner, because Treasurys or high-quality corporate bonds aren’t yielding enough to offset the cost of carrying the debt.

Also, investors who are borrowing against their home can’t invest the money in municipal bonds and get both an interest-tax deduction for the home-equity loan and the tax-free income from the municipal bonds. “There’s no double dipping,” says Mr. Siman, who is working with Mr. Fiore to rebuild his nest egg.

Mr. Jones suggests using home-equity money only in a well-diversified equity portfolio split among U.S. and international markets.

Within the U.S. portion, he suggests buying equal amounts of U.S. large growth, U.S. large value, U.S. small growth and U.S. small-value and real-estate investment trusts. On the international side, he suggests equal helpings of large growth, large value, small growth, small value and emerging markets.

Marc Schindler, a certified financial planner in Bellaire, Texas, is encouraging clients to consider “pulling equity from their home with the idea they can invest and generate better returns.”

Rate of return is a big key when looking at leverage vs. mortgage payments.  Also consider the advantage of Liquidity and the Safety of Principle in your Mortgage Plan.

You often have to choose how to balance your savings between “liquid” cash, paying off bills, saving for retirement or college and paying down the mortgage. If the Great Recession has demonstrated anything, it’s that home equity is a poor choice. You can find out a lot more about this in previous blog posts.  I’ve written at some length on this on my blog.

Here’s a sobering statistic from last months ‘good’ jobs report:  44% of unemployed persons were out of work for 27 weeks or more. When someone loses their job, they’ll never say, “I’m so glad I have a 15 year mortgage and have paid $50,000 extra towards principle”. No, at this point, the higher mortgage payment and the equity suddenly trapped in their house is frozen from them.

With a mortgage payment and the need to eat and pay utilities, could you go half a year without a pay check? In today’s ‘new normal’ economy, you need to work towards the day where you can confidently answer ‘yes’ to that question.

If you can’t, often times the mortgage currently in place is a good place to start – either by getting a lower payment to grow savings faster and reduce expenses, or maybe by taking cash from the house and putting it where it can grow, be safe, and be available.

If you haven’t looked at your house equity in light of how much cash do you have available, maybe that is a good place to start.

A lot of people dream about the day when they make their last mortgage payment and they finally own their house “Free and Clear”.  Sounds nice, doesn’t it? Unfortunatley, there are two problems with this dream – that can turn into a nightmare if not planned for.

Even with no mortgage, you can still lose your house.

Try not paying the property tax bill for a few years and see how good it was to pay off the mortgage.  Or, consider what happened to the thousands of homeowners who lost houses when hurricanes pass through town at 100+ miles per hour.  Last time I checked, Hurricanes don’t care if you have a mortgage or not.

Paying off your house each month with extra principal payments is the riskiest way to pay off your house.

Consider your friends or family members in places like Florida, Michigan, or California. If they sent in extra principal payments to their mortgage servicer, what happened to that money as home prices declined?  I know someone with a 15 year mortgage that sent in $2,000 per month to watch their house decline in value by $3,000 every month.  When you send in extra mortgage payments, your lender transfer the risk of the mortgage right back to you.  Put another way, each time you send in extra principle payments, your lender has less risk, and more of your money is now in a place where it can disappear or be destroyed.

If you send in extra principal payments, and then find you need the money back, you may not be able to get it.  It could have disappeared, like it has in some parts of the country, or the mortgage rules or your circumstances may have changed to where you can no longer get your money back.

Another way to be Free of your Mortgage:

If you had wnough money to write one check and pay off your mortgage, isn’t that the same as not having a mortgage?  Strictly from an accounting perspective, it is.  On a balance sheet, if the cash assets were greater than the mortgage balance, you are debt free. Now it just becomes a matter of deciding if you should pay off the mortgage, or keep things the way they are.  Think about it – what if you had a $300,000 mortgage, and $300,000 in investments that were targeted as ‘mortgage payoff funds’. You could write one check whenever you wanted to and eliminate that mortgage.  Or, you might recognize some benefits of having both investments and  a mortgage.

• Grow your savings over time, and after a while, the compound interest you earn will be much greater than the interest you pay.
• Mortgage Interest is Tax Deductible – having the mortgage may allow you to pay less in income taxes and keep more for yourself.
• Your mortgage (if it’s not interest only) will pay itself off over time – just let it do that.
• You have more freedom where to store your money – rather than putting it into the walls of your house, choose where it should best be stored for safety.
• If something happens to your house, you still have your money – separate the house and the wealth to keep both safe.
• Your money can earn Compound Interest if it is working for you.  Inside your house, it is just sitting still doing nothing.

Reaching the Freedom Point

You are debt free when you have enough money to pay off your mortgage.  You could still lose your house even if you have no mortgage, so don’t kid yourself into thinking a mortgage payment is your only threat.

A better goal in today’s economy is to plan to reach your Freedom Point as soon as possible.  Just be sure to plan ot do it the fastest, safest, way possible – store your money where it can be accessed if needed and where it grows for you.  You will be able to decide if you want to pay off your mortgage much faster and safer this way.

If you haven’t developed a plan to reach your Freedom Point by a certain day, give us a call – we can help you create a home ownership plan with a path to pay off your mortgage in the fastest and safest way possible.

Taxes are due April 15 and if you’re among the millions of Americans who wait until the last week to file, here’s a video interview that could help you reduce your federal tax liability.

Originally broadcast by NBC’s The Today Show, the 4-minute piece reviews various tax credits and deductions, plus some recent tax law changes.  A few of the topics covered include:

• Tax filers receiving larger “personal exemptions” in 2009 versus 2008
• Unemployment income recipients being required pay taxes beyond the first $2,400 received
• The “first time” home buyer credit being extended to non-first time home buyers for up to $6,500

The interview also talks about how taking a parent, child or other family member into your home may change your tax filing status and reduce your tax liability.

Even if you’ve filed your taxes already, watch the video above. You may find that you missed a potential deduction. If that’s the case, consider filing an amended return with the IRS to recapture the credits you left on the table.  Most times, the benefits of re-filing will outweigh the costs of doing it.

Be sure to talk with your tax professional for personal tax advice.

With all the government spending, a lot of people are rightly concerned about future inflation.  The timing of when inflation from printing more US Dollars hit is the big question.  At some point, the dollar will become worth less than the goods and services that people need to buy, and prices will start to increase.

If you’re trying to predict whether mortgage interest rates will be rising or falling, one key to watch for is “inflation”.  Mortgage rates are highly responsive to inflation.

By definition, inflation is when a currency loses its value; when what used to cost $2.00 now costs $2.15. As consumers, we perceive inflation as goods becoming more expensive.  However, it’s not that thinks cost more, it ‘s that the dollar, or currency to buy it is worth less. Think of the baker who says, “You want to trade me those dollars for my bread?”  Your dollars have to be worth something to him in order to make the trade (sale).

As the dollar loses value to inflation, therefore, so does the value of every mortgage bond in existence. When bonds lose their value, investors don’t want them and bond prices fall.  (“You want to buy my mortgage bond with those dollars”)  Mortgage rates move opposite of bond prices, so when bond prices rise, rate drop.

In terms of Wealth Creation, in times of inflation you want to own “things” that are perceived as more valuable than plain old paper dollars, and it’s also a good time to owe money that was used to buy things – you will buy ‘things’ when they are cheap (your dollar buys more) and pay back the lender with inflated dollars that won’t buy as much anymore.

In today’s market, the relationship between inflation and mortgage rates is helping home buyers. The Cost of Living made its smallest annual gain in 6 years last month and the Fed has repeatedly said that inflation will stay low for some time. The combination is driving investors to buy mortgage bonds which, in turn, is suppresses rates.

So long as it lasts, the cost of home ownership will remain relatively low. Combined with the expiring tax credit, the timing to buy a Charlotte home may be as good as it gets.

If you were asked to make an investment in which you were told you would never see your money again, how much would you invest?

If you put money in a savings account each month, and the bank guaranteed you that you could never withdraw the money again, would you keep depositing checks?

If your savings account was only available to keep your bank from losing money, but you could still lose money, would you keep money in that savings account to protect your banker?

If you put money in an account that was guaranteed to never pay you more than 0% interest, would you want to save your money in that account?

What if the money in the 0% account could lose money, even if it couldn’t gain money?  How much would you put there?

What are these horrible accounts I am talking about?

Did you guess Home equity?

Think about it -

• When you make a big down payment on a house, you don’t get paid money each month by the bank for that, do you?
• When you send in extra principal payments, does the banker pay you interest?
• If your home loses value, does the bank lower your mortgage balance, or does your ‘Home equity Savings Account’ disappear?
• If you have a lot of equity, does that make your house go up in value?

Down Payments, Home equity and mortgage repayment or early payments are all questions regarding where you should store your wealth over the long term.  Equity in your house doesn’t make you safer or wealthier – it just sits there.

Big down payments are safe for the banker – not you!

Of course, you pay interest on money you borrow, but that is a choice – you can pay interest, and store your money elsewhere, or not pay interest, and maybe keep the bank from losing money.

Make sure your mortgage provider asks a lot of questions about down payment amounts and home equity before you structure your mortgage.

If you already are in a mortgage, get an annual checkup to make sure your mortgage is helping you to succeed financially, rather than helping the bank succeed.

As credit cards balances get close to their maximum limits, your score will start to drop. In fact, a single credit card at its maximum limit can lower someone’s credit score by 75-100 points.  This drop in a score can be the difference between a mortgage loan approval or denial, or add 2% to the interest rate on a car loan.

Reducing the amount owed on a credit card is the fastest way to increase your score.  Even using 20% of the limit of a card ($2,000 with a limit of $10,000) can start to have an impact on your credit score.

Consolidating credit card balances onto one low interest rate card can save you money on credit card interest. However, if this also maxes out the limit on the low interest rate card, you will lower your credit score.  Save the money on the credit card interest only if you are not going to be using your credit score to qualify for something more important. That is, don’t try to save $50 on credit card interest and increase your mortgage payment by $300 due to a lower credit score.

How can you lower your balances and credit utilization ratios?

1. Don’t spend too much – imagine how things would look if Congress and the White House had to have the money to spend it?  You and I should know that, so we also need to live that way.  Credit cards are ok to use to get frequent flier miles, but if they are never not paid in full at the end of the cycle – they are a problem, not a solution. Quit spending more than you can pay each month!
2. Pay off your credit cards every time you get paid.  If you get paid bi-weekly, pay your credit cards online the day you get paid.  This way your balance is always low and manageable, and you never get tempted to carry over the balance from one month to the next.  The best savings accounts today yield only 0.25% to 1.5%, so don’t risk paying interest on credit cards in the hope that you will earn an extra $0.99 on your savings account while waiting to pay off your credit cards.
3. Call your established credit card accounts and ask them to increase your credit limits.  This won’t pay down the balance but it will reduce the amount owed ratio and help your score.  Many banks won’t do this anymore, but if you don’t ask, the answer is definitely ‘No’.  Ask.
4. Don’t do the balance transfers. Most people don’t read the fine print on the transfer and credit card lenders will stick you with a 3% balance transfer fee.  On a home loan, no one would pay 3 points to get a lower rate, but people do this routinely on credit card balance transfers. Balance transfers will usually leave you with a maxed out credit card and still cost you money.
5. Steamroll your credit cards.  Pick the card that is closest to its limit, and apply all extra cash to paying off that card.  When it gets to zero, take that cash and steamroll onto the next card.  Usually we use this strategy to get out of debt, but if the goal is to increase the credit score, rank order your cards in terms of how close you are to the limit rather than the actual interest rates. As each card is paid off, you will have more and more cash available to apply to the next account.  Pay off cards prior to other loans as loan accounts won’t impact your credit score as much as credit cards.

Keep Credit Card balances low.  Reducing what you owe on credit cards can increase your score by up to 80 points in as little as 30 days.

WARNING: This a graphic story of the financial destruction of an otherwise financially successful man.

Here’s a secret for you – your credit score will go down every time you do something that people did previously just prior to defaulting on their debts.  The credit scoring model is trying to predict the likelihood of you going 90 days or more late on an account.  If someone ever defaults on a debt, they leave clues well in advance of that default.

Here is the pattern of clues John left as he trashed his credit following a medical incident that left him out of work for a few months:

1. John needed some cash, so he applied for new credit.
2. Having a lot of equity in his house, John applied for a home equity line, but the application was denied since he wasn’t working.
3. With the financial pressure of medical bills and no income, John could no longer pay off his cards in full each month.  The amount owed starts to increase close to the limit on the cards.
4. Needing cash, he turned to alternative sources, getting a signature loan at a high interest rate.
5. He was late on a few credit card payments as the money just wasn’t there to make the payments on time and he was juggling the many open accounts.
6. Creditors turned over John’s accounts to collection agencies, who immediately notified the credit bureaus of the collections.  Collection agencies wanted to lower his credit score to prevent him from opening new accounts, leaving him with a greater chance of paying the collection agency off.
7. (Trying to sell his house didn’t help as the market was slow and declining, so his equity was disappearing).
8. John first went to a credit counseling firm and then eventually filed for bankruptcy.
9. Some debts were wiped out in the bankruptcy, and he just quit making payments on the remaining debts, feeling the situation was hopeless.
10. Creditors file suit and judgments get reported to his credit report.
11. Being unable to manage then debt load, he is late paying his taxes and a tax lien is filed in court against him.
12. Unable to even make his mortgage payment with the high costs of his other bills, the house is lost in foreclosure and all the equity in the house disappears in the soft real estate market.

John’s credit destruction was now complete after just a few tragic months.  The impact will last for years, as most of these items will impact his score and stay on his credit report for seven to ten years.

While this story is a myth, the events and results happen to good people every day.

Following the StartwiththeHouse.com strategy would have helped:

1. Always have an emergency fund – this would have tied John over during the short period when he wasn’t working.
2. Keep credit cards and other loan payments very low
3. Have proper insurance against all the threats out there – not just uninsured motorists, but illness, sickness, death or lawsuits as well.
4. Store your cash where is can be accessed.  In the above story, John had over $200,000 of equity in his house – but with no job, he couldn’t access it and lost his house in addition to destroying his credit.

Your mortgage can’t be just a loan to be hated – today it has to be an integral part of your overall financial plan to help you succeed financially.  Could you survive two months without work with the increased expenses of a health issue?  If not, what are you doing to make sure you have a different outcome?