Establishing Credit... the Right Way!

Do me a favor:  Head to Google.com and search for “build your credit”. Once you hit “search”, I bet it’s no surprise that in under 1 second, about 50,000,000 results can be found. And if you’ve never had a credit card or a loan, your credit history is most likely a blank slate, leaving at least half of your search results inapplicable. Your credit history, as documented on your credit report, is a record of how responsibly you’ve repaid the money you’ve borrowed… and creditors and lenders use your credit history to make decisions about whether or not to give you a credit card or extend a loan. If you have no credit history, however, there’s no record of how you might manage debt. And as a result, many creditors and lenders won’t lend you money. The quickest way to build good credit is by using a credit card, but you can’t get a credit card without good credit. So what can be done to establish credit? And how do we find out if it’s working?

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Become an Authorized User on Someone Else's account

To become an authorized user, a person (usually a family member or significant other) grants you permission to use his/her credit card account. Authorized users can be added to bank accounts and loans for withdrawing, depositing and transferring funds to and from their account… but unlike joint account holders, are not responsible for paying the bill on the credit card or loan account; the repayment responsibility remains with the primary account holder.  As an example, my daughter just graduated college with a great credit score because my wife opened a couple of credit cards, in her name with my daughter as the authorized user, when she started college.  So when she graduated, she had 4 years of excellent credit and now a great score.

Find a Secured Credit Card… and Apply for it!

A secured credit card is a great tool to use when attempting to establish credit. It functions just like any other credit card in the sense that when you use it to make a purchase, you’ll then make payments on that purchase on or before the due date, gathering interest if your balance is not paid in full. The most unique thing about them is the fact that you’re required to place a refundable security deposit when you apply. If approved, your credit limit will generally equal the amount of that deposit, which the issuer will hold as collateral until you close your account. If your application is rejected, you’ll get the money back right away.

All major secured credit cards report account information to at least one of the big three credit bureaus on a monthly basis, and that’s all the opportunity you need to improve your credit score. As long as you pay the bill on time every month, positive information will flow into your credit reports, building a track record of responsibility and covering up mistakes from the past, if applicable.

Get a Co-Signer

While a secured credit card is a great way to build or repair your credit on your own, you can also apply for an unsecured credit card using a co-signer. The co-signer agrees to pay back debt in the case that the borrower is unable. This may include any late fees and collection costs, on top of the full amount of debt. If you do plan on applying for an unsecured credit card by means of a co-signer, make sure you use it responsibly, paying your balance early or on time and never charging more than you can pay back.

Check your Progress by Checking your Credit Report and Score

After six months of timely credit card payments, check your status by viewing your credit report and score. Pay special attention to what is on your credit report and any positive or negative factors listed, so you have a better idea of what you need to work on next. Also make sure to take a look at your credit score – it will help you make sense of your credit report and give you an idea of how well you’re doing.

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There’s a lot to keep track of, but with some strong focus and planning, you can stay on top of your finances and greatly improve and establish credit. After a year of paying your bills on time, potentially adding a new form of credit and removing any errors from your credit report, your credit could look vastly different. If you or your client’s goal is preparing your credit to be a first time home-buyer, by following just a few simple steps, you’re that much closer in making that goal a reality.

3 Reasons Why Rates are on the Rise

As expected, the Federal Reserve raised the Fed funds rate in March - the first of three expected rate hikes for 2018.  It’s the sixth rate increase since the Fed starting pushing the rate back up in January of 2016 (from basically zero to now a tad over 1.5% - pushing the Prime Rate from 3.25% to 4.75%)

In short, the federal funds rate helps determine short-term market rates, as well as the interest rate borrowers pay on car loans, credit cards, personal loans and home equity loans. And although the Fed’s interest rate hike doesn’t directly affect mortgage rates, it influences other factors, such as the 10-year Treasury Bond – that do affect mortgages. And while these changes may only really indicate the mindset of the Fed with regard to where we are headed economically in the long-run, the point to grasp here is that our economy has human characteristics like emotion and is always moving. So we have to adapt and prepare. The questions we need to answer are what should we expect and how are we to properly advise our clients in navigating such murky economic waters?

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Recently I came across a vlog (which you can find here) by mortgage industry executive, Barry Habib, who, in his video, highlights the 3 reasons why he believes rates are on the rise. In an effort to educate my colleagues and their clients, I’d like to share those very reasons.
 
Number 1. The Federal Reserve is going to be buying a lot less mortgage bonds and treasuries.While this began in October of last year, the Fed certainly ramped up this practice a few months ago during January, which puts an incredible amount of pressure on the market.
 
Number 2. Stock prices – which have recently been on the decline, could be due for an upward run. Bonds tend to move like a seesaw with stocks. When the price (or yield) goes up for one, it will go down for the other - and vice versa; which means that when stocks go up in value, bonds are hurt. This essentially affects interest rates for consumers. Barry believes the stock market is due for another decent run up – his advice? Keep an eye on the S&P – if we see it surging, that could mean higher mortgage rates.
 
Number 3. Inflation:  It’s the arch enemy of interest rates. It eats away your buying power and is the bond market’s worst enemy.  Barry believes we are due for a report later in April that will indicate higher inflation numbers – and just hearing it could spook bond markets.
 
So what can we do? Act now, but proceed with caution. Tread carefully and stay informed. As part of my dedication to the education of my clients and colleagues, it is my passion to advise others during uneasy economic climates. And it’s my goal to do all that I can to protect homeowners and potential home-buyers from finding themselves vulnerable to losses.

Education vs. Asset: The Post-Grad Dilemma

It's almost graduation time and you know what that means! Final exams, graduation parties, moving back home, and finding a job within 6 months to begin paying down the average $45,000.00 price tag attached to your degree. While it sounds almost impossible, and quite frankly insane, for the 44 million college graduates now indebted to the federal government (and several private student loan lenders) it’s a stifling and dreadful reality.

If you’ve followed my blog over the past couple years, it shouldn’t come as any surprise that I am as passionate about the financial future of our students and graduates as I am of my own. And as a mortgage advisor, managing student loan debt for first time homebuyers is a routine part of my job. But what can we as real estate and mortgage professionals do to assure young graduates that by financing another huge purchase, they will be benefiting their bank account and not that of a landlord? After all, being a homeowner is a huge part of the American dream, so why shouldn’t our college graduates have a shot at finding theirs?

According to a study by American Student Assistance, 55% of student loan holders said their debt has caused them to put off home-ownership—and many would-be buyers aren't even TRYING to get pre-qualified out of fear of not staying afloat. It’s also important to understand that homeownership and student debt aren't mutually-exclusive. Meaning you can buy a home, get approved for a mortgage loan, and still make good on your student loans. And despite the justified conservativism used by Millennials in deciding where to spend (given the high levels of student debt currently stifling post-graduates), it’s important that they consider homeownership as a safe and financially savvy investment option. 

Still, many young Americans are unaware of the benefits cultivated from homeownership, such as the ability to turn housing costs into an investment, rather than an expense. And in more ways than one. Think about it:  If you manage to buy a home in an up-and-coming neighborhood for $300,000, and its value quickly climbs to $350,000, you'll have a nice little profit on your hands (which is not something that renters can claim). Owning a home can also provide an alternative source of income, for example, when rented out to peers. And a rent payment is essentially all that a mortgage payment is– a rent payment, but instead of heading straight into someone else’s pocket, it heads towards owning a larger share of your home. And when enough equity is built up, homeowners can take out home equity lines of credit to pay for expenses such as home renovations or education costs.

The next step is choosing the right mortgage professional to can help post-college home buyers understand what they can afford and how buying a home versus renting one may greatly improve their financial situation in the years to come. And as someone, like each of us, who benefits from the innovations, improvement, and success of the great, young minds of this country, I’m happy to help.

Will the New Tax Law Save You Money... or Cost You?

It's official:  The new tax law, which is now in effect, may affect potential and current home-buyers… in more ways than one. American homeowners may be facing a lower threshold on the mortgage interest deduction, a cap on the state and local deduction, and a higher standard deduction. So will the new tax law save us money… or cost us money? The answer depends on a complex array of factors that touch on just about every aspect of our financial lives. And Senior Moody Analytics economist Adam Kamins claims, “States in the Northeast and along the coasts are hit pretty hard, and states in the South and Mountain West come out ahead”.

Good news, Middle Tennessee that means we may be in the clear.

The mortgage interest tax deduction is a great way to make homeownership more affordable. It cuts federal income tax that qualifying homeowners pay by reducing their taxable income by the amount they pay towards mortgage interest. And luckily, via the new tax law, homeowners with existing mortgages may continue to deduct interest on a total of $1 million of debt for their first and second home. But for new buyers, the $1 million limit fell to $750,000 for a first and second home.

For example, if I already have a $750,000 mortgage on a first home and a $200,000 mortgage on a second home, then I can continue to deduct the interest on both on Schedule A. But what if I already have one home with a $750,000 mortgage and want to use a new $200,000 mortgage to buy a second home this year? Well, in this case, I couldn’t deduct the interest on the second loan.

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"States in the Northeast and along the coasts are hit pretty hard, and states in the South and Mountain West come out ahead."

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While the new tax law doesn’t affect just homeowners or individuals wishing to finance a home, a few other caveats, such as a moving expense deduction overhaul, exist. For example, under the former tax law, you could deduct some moving expenses when you moved for a new job. You had to meet complex criteria involving distance and timing of the move. But as of the beginning of 2018, only active-duty members of the armed forces will be allowed to deduct moving expenses.

So if you came out ahead on the tax bill with respect to housing or any other aspect of the bill, congratulations! If not, don't worry. Since 2018 is an election year, I wouldn't be at all surprised to see beneficial tweaks in the tax law via new legislation.

Remember that while taxes may be permanent, the size and distribution is always changing. And as far as the potential effects such changes may have on the housing market, I have no fear. Owning a home is part of the American dream, and maybe even the pursuit of happiness. According to Logan Mohtashami, a spokesperson for AMC Lending Group, “In general, people buy homes because they want to raise their family, they want to own something, forced savings,” he continues, “and not have to deal with a landlord.”

Cracking the Credit Code: How to Supercharge Your Score

If you’ve ever been in the market for financing, chances are your full financial profile was examined by a lender. And if you’ve ever been prequalified for a loan, the inspection of your employment income, credit, assets, and debt-to-income ratio most likely laid the groundwork in determining your candidacy. But despite all four items, did you know your credit has the most pull in determining your eligibility (or ineligibility) for financing?

While your credit score is just a number, chances are it’s already had a measurable effect on your wallet. And when it comes to borrowing money, your credit score is one of the most important factors in determining which rates you will pay on everything from a business loan to a mortgage. Doesn’t seem too scary, right? Well, look at it this way: If you have a poor credit score, you could end up paying hundreds (or even thousands) more in interest over time on anything from credit cards to an auto loan. So how can you tell if your credit score is “good”, and what should you do if it’s in need of some serious improvements?

If you’ve never actively worked to improve your credit, a credit score may seem mysterious or enigmatic. You may understand that scores run from 300-850, but that’s where the credit knowledge of most consumers ends. And when you don’t quite understand the way something works, it’s easy to assume you have little control over it, or in this case, where you fall on the credit score spectrum. In reality, however, your credit score is based on very real and measurable criteria… and you have the complete power to change it. In fact, most consumers are in a position to improve their credit with very little effort. 

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The breakdown.

FICO is the biggest name in town when it comes to credit scores. Most major card issuers and lenders in the U.S. use FICO’s traditional model to decide whether to extend credit to consumers and at what interest rate. Using the information in a borrower's credit report, FICO breaks that information into categories. Those five components each get different weights.   

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Recently I came across an article titled, “How Your Credit Score is Calculated” by personal finance writer Miriam Cross of Kiplinger Magazine. Miriam’s article, which you can access here, outlines each credit-affecting factor in your financial life, and details how to positively steer each factor in the direction of an improving credit score. It also proves to be the most concise credit guide I’ve ever had the pleasure of finding and I felt compared to share it with you.

Let me ask you something— when was the last time you checked your credit score? And if your answer is, “I haven’t”, did you know that several credit card issuers and personal finance websites such as Credit Karma allow their users to frequently check their credit score at no cost? Seriously. It’s free. It’s also seriously imperative to understand how to go about improving your credit score, especially if it’s not up to par (and there’s always room for credit score improvement, anyway).

As a mortgage advisor and loan originator who aims to educate, advise, and inspire, it is my goal is to do all that I can to help potential borrowers find their footing along the path to home-ownership. And with that, I’d like to share some important tips, many requiring little effort, that allow potential borrowers, or anyone in need of financing, increase their credit score. You may also reference the linked article above for a more detailed explanation of each:

1. Make your payments on time and for the right amount – every month.
2. Avoid over-extending your credit, and stay away from unsolicited credit cards as they won't benefit in any way to your credit score.
3. Don't ignore your overdue bills, and if you face any problem regarding repaying your debt, contact your creditor for repayment arrangements.
4. Be sure of what type of credit you have, as credit from some financing companies can affect your score in a negative way.
5. Try keeping your outstanding debt as low as possible – particularly on revolving debt (credit cards). Extending your credit close to your limit constantly is considered to be bad and will reflect negatively in your score.
6. Restrict your number of credit applications as a credit report having many hits (credit inquiries) is viewed poorly.  In other words, the more times you let people pull your credit, the worse your score is likely to be.  But not all hits are considered to be negative, like monitoring of accounts, prescreens, etc., are viewed positively.

Your credit score plays an important role in your life that can put you on the right path towards financial success, or even simply veer you off course.  When you improve upon your credit score, you are also improving upon your confidence… and with confidence comes the power to seek out and follow through with the goals you strive to meet. Besides, if you are one of the 8 in 10 Americans who consider owning a home as part of the American dream, are you really going to let something as easily changeable as a credit score hold you back?

What do you want them to say about you?

As we head into a new year, everyone is excited to turn the page and get a fresh start – a “do-over” if you’ll permit that expression.  New Year’s resolutions are commonplace – whether health, finance, exercise, family, etc…, most everyone wants to do better next year.  Which is a great thing!  But what do we need to do to make sure those pledges that we make to ourselves stick? 

Where we fail most often with our New Year’s resolutions (and any other goal for that matter) is in execution.  We have this grand idea of what we want to happen, but lack the gumption to execute.  To execute, there must be discipline.  And for there to be the kind of discipline needed to promote the execution that accomplishes the resolution, there must be passion behind the “why” to the resolution.  So we need to dig a little deeper and determine what the “why” is behind the goal and use the passion and energy created from the “why” to make the change.

I was given an exercise about 15 years ago from a business coach I had hired to help me with my work/family balance.  The first thing he asked me to do was get in a room by myself, with no distractions, for a couple of hours while I wrote my own eulogy.  In other words, he asked me to write down what I would want my friends/family to say about me when I’m gone.  When I did that, it gave me the fuel to change everything about my actions that needed changing.  I was able to focus on the things that needed to be done to allow what I wanted said about me to happen.  I got to the core of what was important to me and let that be the motivator for everything, both big and small, that needed to change in my life.  So ultimately, the things I wanted said about me when I’m gone not only could be said, but would be.

So figure out what it is that you want said about you when you are gone and design your life (daily routine and activities) around making that happen.  May 2018 be your best year ever!

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Part 2 | Quick Market Review

Friday morning the President signed into law the biggest tax code overhaul in more than thirty years. Its centerpiece is a cut in the corporate tax rate from 35% to 21, plus cuts in individual tax rates.

Critics of the bill say lower taxes will raise the deficit, supporters claim the boost in economic growth, jobs and wages resulting from the tax cuts will ultimately increase government revenues. Part of the new package includes the Tax Cuts & Jobs Act. For homeowners, the capital gains exclusion on home sales, and the mortgage interest deduction on existing mortgages were left unchanged. But the interest deduction on new mortgages is only available up to $750,000 (down from $1 million). 

Time will tell the ultimate benefit of the new legislation.  For now, the housing market continues to boom.  I can’t help but think that we are in for higher interest rates in the near future.  For now, we continue to trade in this tight range (near the bottom of the range) that we’ve been in since the end of March.  If/when the mortgage bonds break through the bottom of this channel, higher rates are likely.

Housing is Still Much More Affordable Than a Decade Ago

Home prices continued to rise nationally in August, up 0.9% from July, in the latest Home Price Index and HPI Forecast from CoreLogic, a global information and analytics firm, putting prices up 6.9% from the year before. But does that mean house prices are becoming unaffordable?  I keep hearing this common theme from buyers – that houses are just getting too expensive.  But are we/they truly looking at this from a proper perspective?  The First American Real House Price Index (RHPI) reported that "while affordability is lower than a year ago, it remains high by historic standards." The RHPI is 38.4% below its housing boom peak of July 2006.  
What does that mean?  House prices are typically reported nominally. In other words, without adjusting for any inflation. Just like other goods and services, the price of a house today is not directly comparable to the price of that same house 30 years ago because of the long-run influence of inflation in the economy. The RHPI helps provide an alternative view of the change over time of house prices in different markets across the country. The three key drivers of the First American Real House Price Index (RHPI) are incomes, mortgage rates and an unadjusted house price index. Incomes and mortgage rates are used to inflate or deflate unadjusted house prices in order to better reflect consumers' purchasing power and capture the true cost of housing.  So when interest rates are low and overall employment/income is improving, higher prices don’t necessarily mean less affordability.  According to CoreLogic, wage growth is outpacing home price growth in about half of all local markets so far this year.  And we know how low rates continue to be.  So when those things are considered, higher housing prices don’t necessarily mean that they are too expensive.
Bottom line – when our current buyers complain about how high the prices of housing has gotten, we can remind them that from an affordability standpoint, we are actually still in a great position.  For more information on this, go to http://www.firstam.com/economics/real-house-price-index/.  It is very interesting.

After about a month and a half of pressure to move rates higher, we may actually be moving back into a better scenario – let’s just hope the activity of the last couple of days continues.
 

Smoke and Mirrors

OK, I’m going to apologize on the front end as this will be a little longer read than my typical update.  But I’m pretty passionate about the topic, so forgive me.  I’m over all of the gimmicks out there designed to pay off your mortgage faster.  Honestly, I think it is the wrong argument anyway, or at least wrong from an execution standpoint, and I’ll get to that shortly.  The two I’m going to pick on today are the bi-weekly mortgage and the concept of using a HELOC in place of a mortgage as strategies for paying off a mortgage faster. 

I’ll start by focusing on the whole concept of what is really required to get a mortgage paid off quickly.  It’s not rocket science.  If you want to pay a loan off faster, and it doesn’t really matter what type of loan it is, you simply pay more than what is required.  There is no magical formula that makes the debt disappear.  It requires discipline and effort.  You want to lose weight?  Eat less calories and get on a treadmill.  You want to save money?  Do a budget and manage your finances by it.  Want to be a better golfer?  Go to the driving range.  You get my point…  The bottom line is that to accomplish anything out of the ordinary, your behavior has to be out of the ordinary.  It’s all about discipline.

A bi-weekly payment plan will definitely help you pay a loan off faster.  You are simply making 26 half payments every year – in essence, one extra principal payment per year.  I don’t have a problem with these plans unless there is a fee involved.  The reality is that you can make that extra payment on your own – either portioned out monthly or annually, and accomplish the same thing with no extra cost.  So why pay a fee (most of the bi-weekly programs out there charge one) to do what you can do by yourself? It’s all about discipline.

Recently I had a client decide he would buy his home using a HELOC to finance it versus a traditional mortgage.  He was wooed by a company’s claim that by using its strategy, he could pay his home off in 7-8 years using a HELOC versus the traditional mortgage.  This concept intrigued me enough to get the book, offered by the company promoting the strategy, and read it.  I was open minded about it hoping to learn something when my natural skepticism hinted that I wouldn’t.  I guess I should have been immediately more skeptical when glancing through the 127 page book, I noticed the last 56 pages were about strategies to make more money and credit repair.  I read it anyway – and was once again confirmed by the fact that if you make anything sound too good to be true, not only is it, but sadly there are those out there that will believe it – and ultimately buy it.  At the end of the day, the concept is nothing more than paying a loan off faster by paying more than is required monthly.  Granted, I believe that a HELOC is a great product and can be used strategically to both grow and protect wealth.  I have one myself.  But the central argument used in the book is that it is all about debt balance and not rate.  I couldn’t disagree more.  Banks make money based on the rate.  You eliminate balance by paying principal.  They faster you pay principal, the less interest (rate) you pay – that’s the whole point, to pay less interest.  You can definitely get your loan paid off faster using this strategy, but it is just another gimmick.  You are simply paying more than what is required versus a traditional mortgage.  There is actually a real danger here and that is you are using an inferior product (a loan with a rate that fluctuates) to accomplish what can be done on your own – paying extra on the debt.  And I’m sure there is probably a pretty good sized fee from the company touting the strategy to help you get everything set up.

But are we really even focusing on what is in my opinion the more important concept?  I agree that it is all about getting out of debt.  But what does that really mean?   Most would say that it means owing no money to anyone.  I disagree.  I’ve stated for years that being debt free isn’t really about having no debt – it’s about having the ability to pay off the debt anytime you want to.  In other words, it’s about having more financial resources than money owed.  If you have $200,000 in a safe investment and owe $150,000 on your mortgage, you have the ability to pay that loan off anytime you want – you are debt free, you just choose strategically to have debt.  I used to crack up listening to The Money Game back in the early 90’s with Dave Ramsey and Roy Matlock.  They used to argue about this concept.  Back then mortgage rates were around 8% and the rate of return on equity investments was around 12%.  Dave wanted people to pay off their mortgage and Roy argued that it made more sense to invest the money versus paying off the mortgage – an alternative to the traditional thought of being “debt free”.  I love Dave, but I was always on Roy’s side when they argued this topic.

I’ll give you a simple example related to the whole HELOC versus mortgage concept – and I’ll be generous to the HELOC concept assuming that the rate never changes.  The last two times the Fed started increasing the Fed Fund rate (that prime is tied to), prime topped out around 8%.  Prime is currently 4.25%, so we’ll use that figure.  The 30 yr mortgage is at 3.75% right now, so we’ll use that figure as well.  We’ll assume a $200,000 mortgage and that the payoff target is 8 years.  The P&I payment on the mortgage is $923 per month.  We’ll assume an average of $4,250 per year of interest on the HELOC (that is averaging the interest over 8 years with constant rate assuming the balance will be paid down to zero by the end of 8 years).  To pay off the loan on a monthly basis would require a payment of $2,392 ($2,038 in principal dividing $200,000 by 96 (8 years) plus $354 in average interest).  So the first 8 years will require an additional payment of $1,469 versus the 30 yr mortgage.  If the person with the mortgage invests that extra $1,469 over the 8 year period at 6% (very conservative as pretty much any 10 year period in the history of the equity markets provides a return of 8%+), the total saved/earned will be $181,337.  By the way, his principal balance at this point is ~$163,000, so he’d have the cash needed to pay off the balance if he wanted to at that point – with some left over.  But here is where the real magic exists.  Let’s say that the person that did the HELOC and paid his loan off in 8 years now invests the $923 per month (the amount the mortgage guy will still be paying) over the next 22 years.  His investment will grow to $506,687. Let’s assume that the guy with the mortgage, who invested his money over the first 8 years, continues to pay his mortgage and never pays an extra penny towards his investment or paying his mortgage early (I’m keeping the amount paid by each the exact same for the full 30 years). The investment he grew over the first 8 years will be worth $653,454 by the end of the 22nd year.  He comes out $150,000 ahead.  So who was the real winner? And all of this assumes the HELOC rate never changed, the investment return was below average, and isn’t considering the tax benefit of the interest paid.  Thank you compound interest – the only real magic in this entire equation.

So I guess my point is that regardless of strategy, and I believe I’ve proven that investing versus paying down the mortgage (particularly in this low rate environment) makes more sense, what doesn’t make sense is to use gimmicky options, especially if there is any type of fee involved, to pay the mortgage off early.  If you want to do that, get a safer fixed rate option and just pay extra.  Or, in my opinion, invest the difference and work towards having the cash available to pay the loan off when you want to.  Either way, it’s all about discipline – not a hokey strategy.

We’ve seen a couple of dips since we started our run to better rates at the beginning of July.  But the one we had last week took us out of the upward moving channel for the first time.  It will be interesting to see if that continues over the days and weeks to come, but we’ll keep you posted.

10 Timeless Personal Finance Tips

In honor of its 70th anniversary, Kiplinger’s Personal Finance magazine this month released their top 70 ways to build wealth.  Knight Kiplinger, the editor in chief, listed his “10 Timeless Tips” as part of the list of 70.  They are awesome, and I wanted to share them with you here (worth passing along to any young person you know who is starting out).

1.       Wealth creation isn’t a matter of what you earn.  It’s how much of it you save.

2.       Your biggest barrier to becoming rich is living like you’re rich before you are.

3.       Pay yourself first.  Arrange to have your retirement and other savings deducted from your pay-check before the money hits your bank account.  If there isn’t enough left over for your bills, cut your spending.

4.       No one ever got into trouble by borrowing too little.

5.       Conspicuous consumption will make you inconspicuously poor.

6.       The key to stock market success isn’t your timing of the market.  It’s your time in the market – the longer, the better.

7.       Diversify, because every asset has its day in the sun – and its day in the doghouse.

8.       Keep a cool head when others are losing theirs.  When others are selling investments, it’s usually a good time to buy.  The foundations of great fortunes are laid in bear markets, not bull markets

9.       Money can’t buy happiness, but it can make unhappiness easier to bear.

10.   Sharing your wealth with others is more fun than spending it on yourself.

It's All About Cash Flow

I had a conversation with a buddy of mine this week and we weren’t really talking about real estate specifically, just investing in general.  But that led to a discussion about some real estate that he bought several years ago when the market was flying high – much like it is now. 

He told me that he learned a valuable lesson when investing in real estate and that was to focus primarily on cash flow that the property is providing versus the potential appreciation.  That may not sound like rocket science, which it isn’t – and this guy was not a real estate professional.  It is simple common sense.  However, he, like many others, forgot that real estate is a commodity and can drop in value just like it can go up.  He had based his returns on his properties increasing in value, not worrying so much about the fact that he was barely breaking even on a monthly standpoint (rents received versus cost of owning the homes and carrying loans).  When the market turned, he got stuck not only paying a monthly tab, but doing so on properties that were worth far less than what he paid for them.

The real estate market in Nashville is flying high right now and I believe it will continue to do so for at least the next couple of years.  But we don’t need to get caught up in the exuberance of the situation and buy long term investment property (or allow our clients to do so) solely on the basis of the expected appreciation.  Granted, a flipping situation is a little different.  But someone buying a property to rent it out needs to make sure that the cash flow works.  In other words, there is more money coming in on a monthly basis than is going out.  And Ideally that number needs to produce a return that is an adequate cash return (amount received above expenses is earning a decent return based on the initial amount invested).  With the requirement of at least 20% down payment for most rental property loans, getting the rental income to exceed the payment is typically doable.  But it needs to be enough overage that there is a return for the money invested.

Sometimes we forget these basic principles when the market is doing so well.  And many times, the market appreciation bails buyers out of less than stellar decisions.  But this is also how investors get burned.  So just a reminder of the lesson my friend learned the hard way.  Investing in rental real estate is all about cash flow.  There are many other benefits - primarily appreciation and tax deductions.  But if the property won’t cash flow, it likely needs to be passed on, if the purpose of the purchase is the long term rental benefit.

"Buy a lottery ticket..." Seriously!?!?

I may be old school, but I'm fine with it - I don't really like the new school, particularly when it comes to finances.  I heard a radio advertisement recently and I about drove my truck into a tree it made me so mad.  It was about two guys that were about to go back to college and they didn't have any money because they wasted their summer playing too much. I admit that it was funny and I laughed at first.  Then they announced the recommendation to the two slackers that would solve all of their financial problems: "Go buy lottery tickets".  Are you kidding me? And we wonder why our younger generation doesn't understand how to be successful financially. 

What happened to working hard and saving money? Where did we go wrong in allowing our newest generation to believe that they should have whatever they want, and have it now?  I want my kids to dream big and believe they can do anything they want with their lives. But I think there's a difference between believing big and working hard with realistic expectations. Real success is only going to come if both are combined. But this radio ad was just another reminder of the message our young people are consistently getting – and that is why the average age of our first time homebuyers continues to climb.  They don’t know how to save money and they exit college anchored down by school debt and completely clueless about personal finance.

We have to teach our kids, and their kids, a new measurement for success when it comes to finance.  There is nothing wrong with getting a good education (albeit one that is incredibly deficient in educating them on personal finance) and buying nice things such as clothes, a car or even a house.  But that can’t come at the cost of sabotaging their futures by not understanding the right way to go about obtaining those things and keeping debt in the proper perspective -  basically not having any other than for a personal business or an appreciating asset.  We have to be intentional about it, because if we are not, the message they will be getting everywhere else they turn will lead them in the wrong direction.

OK, I’ll get off of my soapbox now….

I Kinda Ruined My Life By Going To College

“I Kinda Ruined My Life By Going to College”

That statement is on the cover of Consumer Reports’ August issue.  College expense and the debt totals being amassed in student loans is a HUGE hot button for me, so I immediately devoured the magazine.  I’ve shared before, and Consumer Reports backed it up, that we now have 42 million people in our country carrying $1.3 trillion (yeah, that is 11 zero’s behind the 3) in student loan debt. That alone is heartbreaking enough.  But reading the stories of the many individuals who just had no clue what they were getting into with student loan debt, who are now debilitated by the debt load they are carrying, just ticked me off even more. 

But there was some specific instruction given, not just in how to avoid/minimize debt, but also prepping strategically for college, that I thought was very beneficial.  So as opposed to beating a dead horse – hopefully we all agree that that student loan debt is out of control, I want to share some of the insights I found very helpful.  So here goes:

1. Start talking early and often with your kids when they are in their younger high school stage about what they ultimately want to do with their education as it relates to what they will spend their careers doing.  Too many kids are going to college with no clue of what they want to do with their lives, much less what they want to major in.  Only 39% of students graduate in 4 years (thus incurring additional expenses) and the main reason is taking and paying for classes that aren’t relevant to their degree because they don’t know what they want to do when they go to college in the first place.

2. As part of the discussions, be honest and very clear about how much you, as a parent, are going to be able to help from a financial standpoint.  Make sure they understand the funds that are needed and available from your contribution.  If you are planning on sending your child to college for the “experience”, then you should be prepared to pay for it – and not make them borrow to go.  Otherwise, there needs to be clarity on how you are going to help.

3. Analyze the cost of the education versus the payoff in employment compensation down the road.  Make sure the degree, and cost to get it, line up with the pay the student will earn by getting that degree.

4. Get down to the net price of attending any school your child is interested in.  All universities that participate in the federal financial aid system are required to have a net price calculator on their websites that will allow you to get down to the true cost of your specific child’s education.  Know your numbers – don’t be surprised.

5. Gap year!  Have them take a year off between high school and college.  This is particularly effective for those that don’t know what they want to study.  Let them work a real job for 12 months – that should provide some clarity.  And if the concern from a parent is “I’m afraid that if they don’t go straight to college, they’ll never go”, then there is a very good chance that they wouldn’t have survived to earn a degree anyway.  And that’s even worse, because any money spent on an unearned degree is an even bigger waste.

6. Tennessee Promise.  I’m not going to spend much time on this as I dedicated an entire blog to it a few months ago.  But this is another great option and Tennessee is one of the only places you can get a deal like this.  Basically it’s 2 years of community college (almost for free) that allows the classwork to transfer to a 4 year state school when the two years is up.  That alone could cut college costs in half.

7. Make sure you understand all scholarship/grant type options thoroughly.  Many schools will offer more generous options for freshmen as an enticement to get them to enroll, only to reduce or remove those offerings as time goes by or if certain qualifications aren’t met.

8. If borrowing is the only option, make sure your child has a firm grasp on what he/she is doing.  Help them understand the payment that is waiting for them when they are on their own and the impact to their finances.  To me, this alone is the most significant disconnect that we have.  Get real with them.

Other interesting tidbits from a survey (1,500 respondents) that Consumer Reports did in March:

• 45% of people with student loan debt said that college was not worth the cost

• 47% said that if they had it to do over again, they would accept less financial aid (gone to a cheaper school or figured out another way to pay for it)

• 44% said they had to cut back on day-to-day living expenses when they had to start paying back the student loans

• 37% put off saving for retirement

• 28% delayed buying a house

Why Do You Not Have a Home Equity Line of Credit??

Obviously this question doesn’t apply if you either don’t own a home or don’t have very much equity in the one that you do own.  However, if you have a home with decent equity (more than 10%), then the question certainly applies.  In my opinion, everyone should have a home equity line of credit (HELOC) in place if they are able.  Also, understand that I’m suggesting that you have a credit line in place, not necessarily that you use it – and I’m certainly not suggesting that you borrow on it without a plan in place to pay if off quickly.  A HELOC is kind of like a gun.  It can be a very dangerous thing if not used properly.  But when used in the proper manner, it can be a great weapon in your overall financial arsenal.

It provides two very important components:  the first is liquidity if needed and the second is a great source of temporary funds if needed for an immediate purchase.  I see scenarios all the time where people have a ton of equity in their homes but don’t have much liquid cash in the bank.  A HELOC is a phenomenal emergency fund in that situation.  Because you only pay interest on funds you have actually borrowed, you can have a HELOC in place with no cost to you.  For someone who has equity in their home, but little cash on hand, having a HELOC in place is a great safety net as it provides funds that can be drawn immediately in times of emergency.  I’m not telling you that you don’t need an emergency fund – the lack of an emergency fund is probably the biggest thing that gets folks into debt (well, maybe other than the lack of discipline to save for purchases versus buying on credit – but that’s another discussion).  Having a HELOC in place is just a safe back-up while you build up your cash savings.  If an emergency occurred and you couldn’t cover it with cash, the HELOC is there if needed.

A second great use of a HELOC is for when you have a financial opportunity to make a purchase (house flip for example) that will make you money.  I would never suggest this as an avenue to finance anything that depreciates or an investment that did not allow the HELOC to be paid back quickly.  But it is great to have available if an opportunity like that comes along.  And having one in place might give you the encouragement needed to be looking for these types of opportunities.  Remember that a HELOC is normally tied to prime, so the rate can fluctuate.  That is why it is not a good long term borrowing strategy.  But the interest payments are typically tax deductible and the payments are interest only.  So when used properly, it can be a good source of funds to buy investments where you can make your money and get out (pay the balance of the HELOC off) quickly.

If you have the equity needed to get a HELOC, it’s my opinion that you should – unless you know that you just can’t trust yourself to use it wisely.

First Time Homebuyers - Are We Asking the BEST Questions?

 was asked this week by a national publication to help answer the question “What are the best loan programs for a first time homebuyer?”  I gave them my opinion, but came to the conclusion that this really isn’t the best question that needs to be asked. Most first time homebuyers get so wrapped up in trying to maximize their purchase that they lose sight of how that affects their day to day and financial future. The 2 best questions to ask are these- How is this purchase going to affect my budget? And what is my exit strategy?

Most people in general don’t seem to have a budget. Money simply comes and goes with the hope that there is more coming in than going out. First time homebuyers therefore, are more interested in where the home is located, how big it is, what the amenities are and its curb appeal. These are all very important things, but how the payment will fit their budget is the thing that is going to be most life impacting.

I’ve written on this topic before, but as a brief recap, I personally believe it is critical to establish a monthly budget where ALL monthly expenses total an amount that is no more than 80% of the monthly net figure. This allows for a comfortable cushion that permits any individual to give or save up to 20% of their bring home pay every single month. What kind of value could we as real estate and finance professionals add to our clients if we had this in mind throughout our work? Can we accept the challenge of finding the house that meets their wants within the proper boundaries of what’s best for their budget? That is real care and concern for the success of the people we serve.

The next step is to have an exit strategy for any purchase. Both the home specifics as well as the financing are critical to this part of the equation. It is just as important to consider the home’s desirability by the general population as it is determining how well it fits the immediate needs of the current buyer. For a first time homebuyer, the likelihood of them staying in the home until retirement is unfathomable. Most don’t stay in the home more than 5-7 years. So considering the ability to sell in the future needs to be of utmost consideration in the purchase now.

I’m encouraged to be working with individuals as great as you all reading this blog. Together we have the opportunity to help our clients succeed financially. And as you know, the right home purchase, especially for a first time buyer, is a huge part of that equation.

What Does it Mean to be Debt Free?

I had a great conversation last week with a client.  We’ll call her “Jill”.  Jill was in her early 50’s and had just gotten divorced from her husband of 20+ years.  She had gotten about $400,000 in the divorce and kept her retirement account (another ~$250,000).  I knew her financial counselor and he had already advised me that her return on the retirement account that he had managed for her over the past 20 years had been 7.2% during that time period.  She had a great job and shared with me that she intended to work for at least 10-15 more years.  She was buying a house for $400,000 and asked for my advice on what made the most sense from a financing perspective.  Her main goal was to be debt free, so she had planned on paying cash for the house.  I told her that I loved the idea of being debt free, so I asked her what that meant to her.  As expected, she told me that to be debt free, “I don’t owe anyone any money.”  While I didn’t disagree with her, I asked her another question.  I asked her “If you have the ability to pay off any debt you may have, but choose to have debt anyway, are you any less debt free?”

She was well versed financially and I could see the wheels spinning in her mind – I could tell that she had never really thought about it from that perspective.  I showed her that she could put $80,000 down on the house (20% to avoid MI) and get a 15 year loan at 3% with a $2,209 monthly payment.  Even though she didn’t really want a mortgage payment, this payment fit well within her budget.  If she paid the loan for the full 15 years, her total payments would be $398,000 (so she paid back the principal + $78,000 in interest).  I showed her that she could invest the other $320,000 at 3.5% (which was less than half of what her average return had been – I wanted to be ultra conservative), and that investment would grow to over $536,000 by the end of 15 years.  At 7%, it would be $883,000.  And even at 2%, it would be over $430,000 (so the additional $110,000 is still way more than the interest paid over that time).

I also showed her that it is more than just the return.  If she paid cash, she would have liquidated pretty much all of her liquid savings.  Sure, she would have no mortgage.  But she would still have taxes, insurance and all of her other bills as well – with no solid safety net.  What happens if she lost her job or had a medical set back – or really any emergency that required immediate cash?  I asked her “which is the better place to be in – no debt and no money, or debt but plenty of cash to live on if things go bad?”  She was already convinced, just from the investment opportunity, that getting a mortgage was the more financially astute thing to do.  But when I reminded her of the importance of being liquid, it was an easy decision.  And the reality is that she will still have the ability to pay the loan off any time she wants to if her monthly budget changes and she no longer wants to make a mortgage payment.

When I hear people talk about the great feeling they will have when they go to bed knowing their mortgage is paid off, I understand and empathize with that feeling.  But in my opinion, it is much better to go to sleep knowing that there is money invested safely, earning a return, and ready/able to pay the mortgage off whenever I choose.

RIch Habits

I recently heard an interview with Tom Corley, author of “Rich Habits – The Daily Success Habits of Wealthy Individuals”, that I thought was fascinating.  And while his focus is on the difference between the habits of the wealthy (people with annual gross income north of $160,000 and net liquid assets of $3.2 million or more) versus the poor (those with gross income of $35,000 or less and no more than $5,000 in liquid assets), I think we can apply what he calls “habits of the rich” in reality to what I’d suggest are simply “habits of the successful”.
He points out that the difference between the two lie in our daily habits. He implies that these subconscious, second-nature activities make up 40 percent of our waking hours. That means that two out of every five minutes, all day and every day, we operate on autopilot.  So to be successful, we need to train our subconscious to operate in a productive manner.  The way to do that is to develop the habits of these successful people that he studied.  I found an article (the link is at the bottom) that details the habits.  Listed below are his top 16.  But I promise you it is worth the five minutes to read the article and see the statistics represented in several of the habits.

1. Live within your means.
2. Don’t gamble.
3. Read every day.
4. Forget the boob tube and spend less time surfing the Internet.
5. Control your emotions.
6. Network and volunteer regularly.
7. Go above and beyond in work and business.
8. Set goals, not wishes.
9. Avoid procrastination.
10. Talk less and listen more.
11. Avoid toxic people.
12. Don’t give up.
13. Set aside the self-limiting beliefs holding you back.
14. Get a mentor.
15. Eliminate “bad luck” from your vocabulary.
16. Know your main purpose.

http://www.success.com/article/16-rich-habits

From Africa to England, Home Ownership Matters

As is typical for me, upon my return from a significant trip, I like to take note of what I’ve learned and see what new perspective I might have as a result of my journey – and also typical for me, there is a tie to real estate. Here goes…

I’ve been helping start a new ministry (more on that later) and the first strategic step in organizing our efforts had me hiking through the village of Nasuuti (in central Uganda) looking for opportunities to provide housing to very deserving families who would never have the opportunity to own a home without our assistance. That’s not hard to find in Africa. The material poverty and desolation in most of Africa ceases to amaze me. But it’s more than just seeing 12 family members sleep on a dirt floor in a one room shack made of whatever rubble is available to scrap together, that fascinates me. It is the hope that I see come into their eyes when they realize that they will be the owners of a new home – one that has a concrete floor, with bricks and a metal roof. Owning a home like that is a game changer for them for the rest of their lives.

On the other end of the spectrum, I wrapped up my trip with a couple of days in London to celebrate my 25th wedding anniversary. Michelle and I stayed at the end of Oxmoor Road, not far from what is considered the “richest section of housing” in the world, boasting the largest number of billionaires on the planet (yeah, that’s billionaires with a “B”). Certainly the housing is different in every aspect that is imaginable for the folks that live there versus those that I encountered back in Nasuuti. In their scenario, it was more about how to one-up any and everyone else on the extravagancies their money afforded them. And not far from this area, new condos were going up on the Thames River. A 3 bedroom on the top floor would set you back about $24 million. That’s about $8,500 per square foot for those of you who like to compare that figure to determine your listing value.

It would have been easy for my observation to simply be on the vast difference between the “have’s” and the “have not’s”, or even look with disdain on the waste of the rich when the poor lack so much. Instead, what resonated with me is the importance of home ownership for anyone who is part of the human race. Like me, you fit somewhere in the middle of these two extremes. And no matter where we fit in the grand scheme of the hierarchy of net worth, owning a place of our own fulfils a God-given desire we all have in some form or fashion. The description of that “place” differs greatly for all of us. But the description does fit somewhere in the realm between safety and hope to fulfillment and accomplishment. It’s a great thing.

Education is a Good Thing

In my opinion, too many loan officers are threatened when their clients start asking questions, particularly if they are asking the questions of other loan officers.  I love it when they ask me questions.  It not only shows their desire to learn and make educated decisions, it allows me to coach them and use my 25 years of experience to advise them well.  And when they are asking questions of multiple lenders, it simply validates what I’m advising them (they either get wise counsel and realize I’ve advised them well or they get crazy answers and realize how important it is to be working with someone who is on top of his game).

But here is the catch – it isn’t easy!  Staying on top of all the changes (pricing, products, compliance, underwriting changes, etc…) is hard work.  Being the best means giving more effort than the person beside you.   It means reading up on things like sales techniques, communication, market data, and all sorts of personal growth ideas.  How about you?  Are you willing to go the extra mile to make sure that you encourage questions?  Whether you are a doctor, financial planner, lawyer or a Realtor, clients who are asking questions should be an inspiration, not a threat.  When you are prepared, questions give you the opportunity to shine!

I sat in on a buyer consultation last week with a Realtor buddy of mine and I loved what he told his client.  He said, “My job is not to sell you a home.  My job is to educate you and empower you to make a great decision.”  I left that meeting not only impressed by his words, but challenged to continue treating my job as that of an educator and master of my trade.  It was kind of ironic because right after that meeting, I got the monthly update from the GNAR.  In it contained the link below from our friends at the CFPB.  They have finally done something that I really like.  This little brochure is something that is phenomenal to provide your clients.  It is a great tool that can help your client understand the lending process better and make educated decisions.  And that is what we should be about, educating our clients so that they can make great decisions!

http://files.consumerfinance.gov/f/201503_cfpb_your-home-loan-toolkit-web.pdf

The Main Purpose of Living on 80%: to Give/Save the First 20%

If you remember a couple of weeks ago, the 6th lesson I learned from Stan was that to have a proper budget, I had to live on 80% of my net income.  While that serves as the function of the budgeting process, it is not the purpose.  The purpose comes in Lesson 7, which goes like this:  When I keep my expenses within 80% of my net income, there is 20% extra built in for giving and saving every month.  Notice that I said “extra”.  I did not say “left over”.  For us to be motivated to live within the 80%, there has to be a passion for what is being done with the 20%.  The 20% becomes the first line item of the budget every month.  I know before I spend the first penny that I’ve created an expense model that gives me the flexibility to prioritize what is most important.

When we realize that true meaning in life comes from what we give away, motivation will follow to execute a budget that allows this.  Who are you passionate about helping?  What do you want your legacy to be?  When those things start to become our driving force, executing a daily budget becomes easy.  Action will follow passion.  Think about any successful team you have been on.  The desire to experience victory is the driving force behind all the hours of practicing.  It’s no different with your money.  When you become passionate about making a difference with your resources, your daily actions and the decisions you make with your money will start to line up.

And while generosity is the overriding passion, savings is what will allow this lifestyle to be permanent.  Having adequate savings is what will allow someone to not only handle unexpected needs for immediate cash, it will also prevent the need for future borrowing for purchases that need to be made in cash versus taking out a loan (clothes, cars, furniture, home improvements, education for children, weddings, just to mention a few).  Having adequate savings is what allows us the freedom to give generously, knowing that our needs will be met.

So the two go hand in hand.  Passionate generosity serves as the driving force.  Savings allows the generosity to become a lifestyle.  And focusing on these things allow the execution of a disciplined budget, which permits them to happen.

Lesson #6 - Living On 80% of Your Net Income

When I qualify someone for a loan, all I’m looking at from a debt ratio standpoint is how much is going out each month in debt payments as a percentage of how much is coming in from a gross monthly income standpoint. Most of the loan programs we do allow that number to go up to 45%. While I’m neither advocating that percentage nor am I an opponent of it, I do have a recommendation that I believe is better. I call it the 80% Solution. It is simply setting up your budget every month so that the total of the money you spend does not exceed your net monthly income by more than 80%. As a simple example, if someone’s income is $60,000 per year and she is in a 25% tax bracket, her net income is basically $3,750 per month ($60,000/12*.75). She would be limited to $3,000 per month ($3,750*.80) to cover ALL expenses – including her house payment, if she were “living” within the 80% rule.

Keep in mind that qualifying ratios will still prevail when determining the amount of monthly payment a borrower can qualify for. So in the example listed above, the maximum debt payment that she could have per month (counting her house), would be $2,250 ($5,000*.45). In other words, her house payment plus all of the other debt obligations that she may have (student loans, car loan, credit cards, etc….) could not exceed that $2,250 figure. What I’m suggesting here is not overriding this number. I think it is just a better mechanism to help a potential borrower stay financially fit. It works out great when both of these numbers are in sync – where a borrowing client meets the qualifying ratios (debt payments, including mortgage, fit within the required ratio allotment), thus allowing him/her to purchase the home, but also when there is a commitment to keep total expenses in check (80% or less than net income), allowing for a lifestyle that is less burdened by monthly obligations in relation to net income.

Why 80% and not some other number? The primary focus behind this specific number is that it allows someone to have an immediate 20% that can be either given away or saved. I believe that both are critical. We are blessed beyond our imaginations (go spend some time in a third world country where the largest percentage of our planet’s people live, and you’ll immediately agree with me). With that blessing comes a great responsibility for us to help. Secondly, as I’ve written about many times, and it is the underlying theme to the “Your Mortgage Matters” book – having adequate savings is crucial to financial health. Living within that 80% framework will go a long way to satisfying both of these objectives. Obviously anything lower than that number is just icing on the cake, providing more flexibility for everything else. If you, and our borrowing clients, can manage to do this, or even better, financial success is sure to follow.