Cash is King

If you ever have a financial emergency, which would you rather have, equity in your home or money in the bank? Let's say you unexpectedly lost your job. Would you rather have cash on hand to pay your bills or extra equity in your home?

I mentioned in an email a couple of weeks ago how someone is truly debt free when he/she has liquid funds sufficient to pay off any outstanding loan balances (including a mortgage). The argument was made that it makes sense in most situations to invest money (stocks, bonds, etc...) versus paying down mortgage debt. The main reason for the argument is that typically arbitrage exists (when investment rates are better than mortgage rates) and compound interest takes effect, allowing money to grow faster when invested than it will by using the same funds to reduce mortgage debt.

The thing that I didn't mention, that helps the argument even more, is that Cash is King!! Not only is a dollar in your hands worth more today than it will be 10+ years from now, there is no better insurance to fend off difficult situations than cash on hand.

If you have sufficient liquidity, I certainly recommend paying off non-mortgage debt, particularly if you are paying a rate of 3 to 4% or more on the debt. But, if the only debt you have is a mortgage, I’d argue that liquidity trumps equity. I guess I could also make the argument that if you have a home equity line of credit with sufficient availability on it, that it could be used to some degree as an emergency fund as well. When it comes to living a stress-free financial life, there is no substitute for liquidity (cash available invested wisely). Liquidity can always be converted into equity by paying off/down mortgage debt, but the opposite isn't always the case.

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The Week Ahead
Next week, Retail Sales will be released on Monday. Retail Sales account for about 70% of economic activity. The Consumer Price Index (CPI), the most closely watched monthly inflation report, will come out on Tuesday. CPI looks at the price change for finished goods which are sold to consumers. Housing Starts and Industrial Production will come out on Wednesday. Philly Fed and Empire State will round out the schedule.

The Week That Was
The stock market was the biggest influence on mortgage rates this week, as investors shifted assets from stocks to bonds. The Fed Minutes also were favorable for mortgage rates, and rates ended the week lower, near the lowest levels of the year.

Beginning with the Jobs report last week, investors became more bearish about the stock market, and investors grew more concerned this week that upcoming earnings releases will be weak. As a result, investors have reduced their positions in stocks, causing the Dow stock index to fall over 500 points from last week's record high. Some of the proceeds from the stock sales were used to purchase bonds, including mortgage-backed securities (MBS). MBS prices increased from the added demand, leading to an improvement in mortgage rates.

Wednesday's release of the FOMC Minutes from the March 19 Fed meeting also helped mortgage rates. In the Minutes, some Fed officials expressed concern that inflation would remain below the Fed's target level of 2.0% for years. While this may be bad from the Fed's point of view, low inflation is positive for mortgage rates.

Gift Funds

When you have a client with excellent credit, but he/she is depending on a gift for the funds needed to close (down payment and closing costs), we can do a conventional loan up to the maximum amounts when a gift is provided.

In the past, borrowers have been required to put a certain amount of their own funds (3% or 5% depending on the loan type) when doing a conventional loan. So many times, an FHA loan is suggested in that scenario (FHA has always allowed the full amount of the up-front money to come from a gift). However, the advantage with the conventional loan is that the mortgage insurance will likely be much less expensive going that route versus the typical FHA.

Last week, we had a client buying a $200,000 home. She had great credit and her parents were providing a gift for her needed funds. It had been recommended to her that she take out an FHA loan. We showed her that by putting an extra 1.5% down ($3,000 in this case), she would be able to significantly lower her payment. How? Well, the monthly mortgage insurance payment would be $95 per month on a conventional loan versus $217 per month on the FHA. Granted, the conventional loan in this case would require an additional $3,000 down, but with a monthly savings of $122, her parents were more than happy to give her the additional amount needed.

Another great benefit with the conventional loan is she will have the ability to remove the Mortgage Insurance once her loan balance has dropped to 80% loan to value. FHA will require the Mortgage Insurance to be paid for the life of the loan.

As fast as things change in our industry, sometimes it is good to be reminded of simple strategies like this. Make it a great week!

The Week Ahead
Next week, the JOLTS report, measuring job openings and labor turnover rates, will be released on Tuesday. The FOMC Minutes from the March 19 Fed meeting will come out on Wednesday. These detailed Minutes provide additional insight into the debate between Fed officials. The Producer Price Index (PPI) focuses on the increase in prices of "intermediate" goods used by companies to produce finished products and will come out on Friday. Import Prices and Consumer Sentiment will round out the schedule. In addition, there will be Treasury auctions on Tuesday, Wednesday, and Thursday.

The Week That Was
This week, all eyes were on Friday's key monthly Employment report. Adding to the focus, Fed Chair Janet Yellen emphasized on Monday that future Fed policy will primarily be determined by the performance of the labor market. The jobs data was right in line with expectations, and mortgage rates ended the week a little lower.

After a rough start to the year, partly due to unusually severe winter weather, job growth has returned to the levels expected by most economists and the Fed. The economy added 192K jobs in March, and upward revisions to the data from the prior two months added another 37K jobs. Anticipating even stronger data, which would be more inflationary, investors had pushed mortgage rates a little higher earlier in the week. After the report was released, mortgage rates completely reversed those increases.

The biggest surprise in the jobs data may have been the surge in the labor force. The Unemployment Rate remained unchanged at 6.7%, above the consensus of 6.6%, but the flat reading was due to an unexpectedly large number of people entering the labor force. The Unemployment Rate measures the percentage of people who want a job but are unable to find one. Growth in the labor force is a sign of an improving labor market.

Debt Free?

What do you think it means to be "debt free?” I asked a client that this week as we were discussing financial issues. Her response - “Well, I suppose it means that you don’t owe anyone anything.” I told her I thought that was a great response and one that I would have expected her to give. While I can’t necessarily argue with that, I think I may have a better answer.

For me, being debt free means this:

You have the ability to pay off any debt you have, anytime you want.

In other words, you have enough cash on hand to write a check for whatever debt you may have. So any debt you have, you have by choice – not out of necessity. For example, if the only debt you have is a mortgage and you have more money in the bank than you owe on the mortgage, you are totally capable of being debt free.You simply choose to have the debt. I also think there is a pretty justifiable argument in most situations for having a mortgage loan. Let me show you what I mean.

Jim and Sandy are in their early 50's, buying a $400,000 home and debating whether or not to take out a loan or just pay cash. Their ultimate desire is to have no mortgage when they retire. Let's say they choose to borrow $300,000 on a 15 year loan instead of paying it all in cash. Their payment would be $2,175 per month at today’s rate. So over the 15 years, they would pay a total of $391,500 in payments. But since they kept the $300,000 invested and earned 6%, their investment would grow to $719,000 by the end of the 15th year. At 8%, they would earn over $950,000. Even at 3%, it’s $467,300 or $76,000 more than the payments made for the 15 year loan. So in each of these cases, they are better off.

I see way too many people who have a goal of paying off their mortgage while under funding their savings. Primarily things like emergency funds, retirement accounts or college savings accounts. Paying off a sub 5% mortgage when these type of investment accounts are not suitably funded makes no sense to me. Sure it is nice to not have to “pay the bank” each month, but cash is king. Put it to work for you and enjoy the benefit of compounding when you can afford it!

The Week Ahead
There will be some big economic events in both the US and Europe next week. A key report on inflation in the euro zone will come out on Monday. The next ECB meeting will take place on Thursday. Given the wide range of investor expectations, the ECB decision could have an impact on US mortgage rates. In the US, the important monthly Employment report will come out on Friday. As usual, this data on the number of jobs, the Unemployment Rate, and wage inflation will be the most highly anticipated economic data of the month. Before that, ISM Manufacturing, Construction Spending, ADP Employment, and ISM Services will be watched by investors.

The Week That Was
It was a very quiet week for mortgage rates. There were few surprises in the economic data. Talk of easing by the European Central Bank (ECB) was positive for US mortgage rates, helping rates end the week a little lower.

Mortgage rates are primarily set based on expectations for future inflation. The Fed has an inflation target of 2.0%. Most economists think that inflation rates well above or well below this level could have negative consequences for the economy. Recent readings for core inflation have been holding steady, below 2.0%. The Core PCE price index released this week revealed that core inflation was just 1.1% over the past year. Last week's widely followed Core Consumer Price Index (CPI) showed an annual rate of 1.6%. The majority view on the Fed, though, is that inflation in the US will gradually climb due to an improving economy and a tighter labor market. To prevent inflation from rising too far, the Fed is on track to end its bond purchase program later this year, and Fed Chair Yellen has indicated that the first fed funds rate hike is expected to take place next year.

The situation in Europe is very different. The economic recovery has been much weaker there. Recent inflation readings have been low and appear to be heading even lower. Traditionally, the ECB is known as a stricter inflation fighter than the Fed, meaning that it is more reluctant to add stimulus. Given current economic conditions, though, officials across the euro zone have suggested that the ECB may cut rates or begin to buy bonds to help stimulate the economy and increase inflation. Increased expectations for additional ECB stimulus helped push bond yields lower around the world, including US mortgage-backed securities (MBS).

On Stage

I had the pleasure, once again, of getting the Disney experience on spring break this week. I'm not sure there is a company that has had more of an entertainment influence on American families over the past few decades. One very unique aspect about Disney is that they do not have employees. They have cast members, and as cast members, they are always "on stage."

You see, every "cast member" that has contact with a patron, regardless of the task they perform, has a responsibility to be part of the magic that is Disney. So, regardless of whether you are at a park, a cruise or staying at one of their hotels, a cast members responsibility is to make their visitors feel like they are not only being treated with special customer service, but like they are part of the total Disney experience. Every single person plays a significant role in making our visits memorable.

How about us? When we are dealing with our customers and referral partners, should we not maintain that same philosophy? We are always on stage. Every aspect of our interaction with our clients should be treated as another opportunity to make them feel special – that they are getting treated to something extraordinary. That is the kind of attitude and approach that will create loyal customers and fans that tell others about us. Plus, it makes our job a lot more fun!

How will you create an extraordinary experience for your customers this week?

The Week Ahead
There is a wide range of economic data for investors to consider next week. The primary reports will be New Home Sales, Durable Orders, Pending Home Sales, and Core PCE inflation, the Fed's preferred inflation indicator. Personal Income, Consumer Sentiment, and Consumer Confidence will round out the schedule. In addition, there will be Treasury auctions on Tuesday, Wednesday, and Thursday. Changes in the situation in Ukraine also could influence mortgage rates.

The Week That Was
A short comment by Fed Chair Janet Yellen caught investors off guard on Wednesday, and the reaction was not good for mortgage rates. In addition, a reduction in tensions in Ukraine cause investors to return to riskier assets, hurting safer assets such as mortgage-backed securities (MBS). As a result, mortgage rates ended the week higher.

As widely expected, the Fed scaled back its bond purchases by $10 billion to $55 billion per month. According to Yellen, if the Fed's economic outlook does not change significantly, the bond purchases are expected to end in the fall of this year. Fed officials have long maintained that they expect that the fed funds rate, the Fed's primary tool for monetary stimulus, will remain near zero for a "considerable period" of time following the end of the Fed's bond purchases. The big surprise came during Yellen's first press conference as Fed Chair, when she defined the meaning of a "considerable period" as about six months. This would place the first fed funds rate hike in the spring of next year. Before Yellen's comments, the market consensus was for the first rate hike to take place near the end of next year. While mortgage rates are not directly tied to the fed funds rate, the economic strength implied by the expected timing of the first fed funds rate hike was unfavorable for bonds of all maturities.

The housing reports released this week revealed that conditions in February were little changed from January. February Existing Home Sales decreased slightly, while Building Permits increased 8%. The March NAHB Housing Index showed that home builder confidence increased slightly. It is widely believed that housing activity over the last couple of months has been depressed by the usually severe winter weather, which means the pent up demand could be a positive in coming months.

Living the 10-10-80 Life

Are You Up For The Challenge?

First, let me make clear that I’m not talking about a piggyback mortgage where you put 10% down, get a 10% second mortgage and an 80% first mortgage. This is a different concept entirely. I had the pleasure of speaking to a high school group this week and I shared this simple concept with them:

Give the first 10% of everything you make
Save the next 10% and
Live on the remaining 80%.

Granted, it takes discipline and strategy (yes, budgeting requires both) to live on 80%, but learning to do this, truly live on 80% of your take home pay, is the key ingredient to making this strategy work. Doing this allows you to “pay yourself first”. I’m sure you have heard that concept before. It’s why the 10-10 comes in front of the 80 and not vice-versa. By putting the important things first and committing to them, they get done instead of becoming an “afterthought” of something to do once all the monthly expenses have been paid.

In my mortgage career, two things stick out to me that cause most financial disasters – over-extension, or spending more than you make, and lack of savings to deal with emergencies. Many times the two go hand in hand. By following the simple principal of the 10-10-80 Rule, you overcome both of these obstacles. The things that you are able to accomplish in life, at least from a financial perspective, are accomplished via those first two components of the 10-10-80 Rule – Giving where there is a need and Saving to be able to address future needs. That is how you become a difference maker. It is how you grow your legacy and it is the key to your financial freedom. If a group of high school kids can get it, all of us can. Are you up for the challenge?

The Week Ahead
The important monthly Employment report will come out on Friday. As usual, this data on the number of jobs, the Unemployment Rate, and wage inflation will be the most highly anticipated economic data of the month. Before that, ISM Manufacturing, Personal Income, Core PCE inflation, and Construction Spending will come out on Monday. ADP Employment, ISM Services, and the Fed's Beige Book will be released on Wednesday. Factory Orders, Productivity, and the Trade Balance will round out the schedule. tion Spending will come out on Monday. ADP Employment, ISM Services, and the Fed's Beige Book will be released on Wednesday. Factory Orders, Productivity, and the Trade Balance will round out the schedule.

The Week That Was
The economic data released this week contained mixed results and had little impact on mortgage rates. Strong demand for US fixed income securities was the main influence this week, helping mortgage rates end the week a little lower.

There were strong indications this week that foreign investors, most likely in Japan and China, increased their purchases of US bonds, including mortgage-backed securities (MBS). The currencies of Japan and China have weakened recently versus the dollar, and the economic policies currently in place in both countries have caused investors to expect their currencies to weaken further. This makes US bonds more attractive to investors in those countries as the investor not only receives interest on the investment, but also expects appreciation in the value of the investment.

After a couple of months of weaker readings, the New Home Sales report released this week was a pleasant surprise. January New Home Sales jumped 10% from December to an annual rate of 468K units, far above the consensus of 400K. This was the highest level since July 2008. Also released this week, January Pending Home Sales posted a slight increase.