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The Home Decision II: Answers to Questions (Updated 2013/2/11)

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Title: The Home Decision II: Answers to Questions (Updated 2013/2/11)


1
The Home Decision IIAnswers to
Questions(Updated 2013/2/11)
Personal Finance Another Perspective
2
Objectives
  • 1. How are mortgage brokers paid?
  • 2. How do I know when to refinance my home?
  • 3. What happens when good credit marries bad
    credit?
  • 4. What about prepayment penalties? What should
    I know?
  • 5. Whats the lowdown on buying down or paying
    discount points?

3
Objectives (continued)
  • 6. How do I make sure that brokers give what
    they promise, i.e., no bait and switch?
  • 7. How much of a percentage should I pay for a
    down payment?
  • 8. Should I pay off the loan early or stick to
    the loan schedule?
  • 9. Is a 15 or 30 year loan better?
  • 10. Do I have to pay Private Mortgage Insurance
    (PMI)?

4
Objectives (continued)
  • 11. How do I know whether to rent or buy?
  • 12. How easy is it to refinance a home with an
    interest only loan?
  • 13. If a person is upside down in their mortgage
    (i.e., they owe more than the house is worth) and
    they would like to sell their house, what can
    they do? This is called a short-sell.
  • 14. If a person is upside down in their
    mortgage, can they still refinance?

5
Objectives (continued)
  • 15. What do you think about purchasing distressed
    properties out of state?
  • 16. If you move from your first house, do you
    recommend keeping it as a rental?
  • 17. If the offer is not accepted, is the earnest
    money returned?
  • 18. What is your recommendation on your first
    house?

6
Objectives (continued)
  • 19. What type of account should you use to save
    for a down payment (e.g., ETF, stocks, bonds,
    money market, etc.)?
  • 20. With home values depressed, home values are
    bound to increase. How do we weigh this in the
    decision to purchase a home? Should we
    accelerate the purchase so we can buy when the
    market is low?
  • 21. How do we balance our current home size need
    with the fact that our family will be growing?

7
Objectives (continued)
  • 22. With a tax shield on mortgage interest
    payments and low rates on student loans, doesnt
    it make sense to invest for retirement instead of
    immediately paying off these loans?
  • 23. Can you review the Home Buying process?

8
1. How do Mortgage Brokers get Paid?
  • Principle Stewardship
  • Logic If you understand how people are paid,
    you can use that knowledge to your advantage in
    getting a lower interest rate
  • Mortgage brokers are out to provide a service and
    make money
  • They generally work with similar lenders with
    similar rates
  • They are done with you after your loanthere is
    no follow up
  • Your goal is to minimize your interest rate
    received with the fewest discount points (if any)

8
9
Mortgage Brokers (continued)
  • Mortgage brokers make money three ways
  • Origination fees These are the costs and
    profits on making the loan
  • Discount Points These are payments you make to
    lower the loan interest rate
  • Backend bonus These are bonuses paid to the
    mortgage broker if they get a higher interest
    rate than what the lender requires
  • There is a relationship between discount points
    you pay and the brokers backend bonus
  • Your goal is to minimize the interest rate and
    the discount points you pay. It will likely
    reduce the brokers backend bonus as well.

10
Mortgage Brokers (continued)
  • How do I estimate the Lenders required rate or
    return for mortgage loans?
  • Logic Brokers earnings are origination fees,
    discount points and backend bonus
  • Find out how low (the interest rate and points)
    they will let you buy-down to, i.e., 4.75 with 3
    points
  • This may be close to the lenders rate, as they
    will not let you buy-down below the lenders
    required rate
  • Use this information in your negotiations

11
The Underwriting Process
  • The Underwriting Process
  • From http//upload.wikimedia.org/wikipedia/commons
    /0/08/Borrowing_Under_a_Securitization_Structure.g
    if on 7Oct08

11
12
2. How do I know when to refinance?
  • Principle Stewardship
  • Logic Determine the costs you would pay before
    refinancing and the costs you will pay during and
    after refinancing, including any prepayment
    penalties
  • Calculate an internal rate of return on your
    savings, which takes into account the time value
    of money
  • Calculate a breakeven analysis and a total cost
    analysis as well
  • These are all inputs into your decision. See LT
    19 Home Loan Comparison with Prepayment and
    Refinancing

13
Refinancing (continued)
  • Calculate
  • A. Current monthly principal and interest costs
  • B. Refinance monthly principal and interest
    costs
  • C. Monthly savings from the refinance
  • D. Total new fees/costs, including origination
    fees, discount points, and other fees from the
    refinance. In addition, be sure to include all
    new costs that will be incurred in taking out of
    the new loan including prepayment penalties
  • Note that costs that are the same for both loans,
    i.e., escrow or reserve accounts, do not need to
    be included in these calculations

14
Refinancing (continued)
  • To determine if refinancing makes sense, look at
    three calculations
  • 1. Internal Rate of Return,
  • 2. Breakeven Analysis and
  • 3. Total Costs
  • If all are reasonable, then do it. If only one
    calculation makes sense, I would likely not do it

15
Refinancing (continued)
  • 1. Internal Rate of Return
  • Outflows
  • A. Calculate all costs and fees for the loan
  • Inflows
  • B. Calculate the monthly savings
  • C. Determine the number of months savings
  • Note Set the number of months on the new load
    equal to the number of months remaining on the
    old loan
  • Recommendation
  • Set PV - A, PMT B, N C, solve for I
  • If your IRR is greater than your risk-free rate,
    then refinance

16
Refinancing (continued)
  • 2. Breakeven Analysis
  • Calculate
  • A. All new costs and fees for the new loan
  • B. Savings in principle and interest over the
    old loan
  • Recommendation
  • Divide all new costs (A) by monthly savings (B)
    which will give you your breakeven point in
    months (C)
  • If your breakeven point (C) is
  • Less than 4 years, it may be a good idea
  • If 5-7 years, it might be considered
  • Greater than 7 years, be careful
  • You may likely move before 7 years

17
Refinancing (continued)
  • 3. Total Costs Analysis (no Time Value of Money)
  • Calculate
  • A. Your total new costs and fees from the loan
    until it is paid off
  • B. Your total current monthly principal and
    interest costs remaining without refinancing
  • C. Your total refinance monthly principal and
    interest costs
  • Recommendation
  • If you will be paying less overall, think about
    it
  • If A C lt B, it may make sense.
  • If A C B, it may not make sense
  • If A C gt B, it does not make sense

18
Case Study 1
  • Data
  • Steve has a 150,000 30 year 6 fixed rate loan
    that he has paid on for 10 years, and he owes
    125,529 on the loan. He is looking to
    refinance. He has found a 20 year 5.25 loan
    with origination fees of 1,500, and 2,500 in
    other fees. His risk-free rate is 8.
  • Calculations
  • Calculate the three types of refinance analysis
    for this new loan IRR, Breakeven and Total Cost
    Analysis.
  • Application
  • Should Steve refinance with this loan?

19
Steve has a 150,000, 30 year, 6 fixed rate loan
that he has paid on for 10 years (125,539
remaining). He has found a 5.25 loan with a
1,500 origination fee and 2,500 in other fees.
Calculate Steves Breakeven and Total Cost
calculations. Should Steve refinance with this
loan?
  • 1. IRR Analysis
  • A. Calculate all costs for the new Loan? 4,000
  • B. Calculate the monthly savings Old versus
    New
  • Old -150,000PV, N 360, I 6, PMT ?
  • PMT 899.33
  • New -125,539 PV, N 240, I 5.25, PMT ?
  • PMT 845.87
  • Monthly Savings 899.33 - 845.87 53.46
  • C. Months on the new loan N 240
  • Recommendation Calculate the IRR
  • PV -4,000, PMT 53.46, N 240, solve for I?
    I 1.27 12 15.27. Compare this to their
    risk-free rate

20
Steve has a 150,000, 30 year, 6 fixed rate loan
that he has paid on for 10 years (125,539
remaining). He has found a 5.25 loan with a
1,500 origination fee and 2,500 in other fees.
Calculate Steves Breakeven and Total Cost
calculations. Should Steve refinance with this
loan?
  • 2. Breakeven Analysis
  • A. Calculate new costs and fees
  • 1,500 2,500 4,000
  • B. Calculate monthly savings
  • Current principal and interest PMT 899.33
  • Refinance principal and interest PMT 845.87
  • Monthly Savings 53.46
  • Recommendation Calculate the Breakeven in
    Months
  • Divide the total costs (A) by the monthly savings
    (B). The Breakeven is 4,000 / 53.46 74.8
    months / 12 6.2 years. Not a great payback
    period

21
Steve has a 150,000, 30 year, 6 fixed rate loan
that he has paid on for 10 years (125,539
remaining). He has found a 5.5 loan with a
1,500 origination fee and 2,500 in other fees.
Calculate Steves Breakeven and Total Cost
calculations. Should Steve refinance with this
loan?
  • 3. Total Cost Analysis
  • A. Calculate new costs and fees for new loan
    until paid off 240 845.87 203,008
  • B. Total costs without refinancing 240
    899.33 215,838
  • C. Costs to refinance 4,000
  • Recommendation Total Cost Savings
  • Since 203,008 4,000 207,008 lt 215,838, the
    savings are positive (they would save 8,830), I
    would think about refinancing
  • Summary Since the IRR is greater than their
    risk free rate of 8, and since they will save
    8,830, they likely should refinance.

22
3. What Happens when Good Credit Marries Bad
Credit
  • Principle Stewardship
  • Logic Determine the cheapest way of getting the
    highest credit score so you can pay the lowest
    interest on your loan
  • There are five main options
  • 1. Buy the house as co-owners and co-borrowers
  • 2. Have good-credit buy the house alone
  • 3. Have good-credit buy the home using a
    no-income verification mortgage (if available)
  • 4. Have a third party with good credit replace
    the bad-credit as the co-borrower
  • 5. Improve bad-credits credit score

23
Good Marries Bad Credit (continued)
  • 1. Buy the house as co-owners and co-borrowers
  • Bad credit will result in bad credit for the loan
    and a higher interest rate
  • This is what you want to avoid
  • 2. Have good-credit buy the house alone
  • This is the preferred option
  • However, this may limit the size of the loan to
    the income that good-credit can support
  • Do not buy a house on two incomes when you know
    you will drop to one income in the futureit is a
    recipe for disaster

24
Good Marries Bad Credit (continued)
  • 3. Have good-credit buy the home using a
    no-income verification mortgage
  • This would be OK, but these mortgages are much
    harder to get
  • These mortgages also require higher down payments
    of 25-30 of the property value
  • 4. Have a third party with good credit replace
    the bad-credit as the co-borrower
  • Co-signers are hard to find
  • Usually, only a parent would be willing to do this

25
Good Marries Bad Credit (continued)
  • 5. Improve bad-credits credit score
  • Suggestions include
  • Put bad-credit on joint accounts with
    good-credit spouse. This can improve history
    and score
  • Call bank to increase the available credit limits
    on bad credit to reduce usage percentage
  • Have bad credit and you pay bills twice a month
    to reduce amount used to reduce percentage of
    credit
  • Have bad credit and you pay off debt as quickly
    as you can

26
4. What about Prepayment Penalties? What should
I know?
  • Principle Stewardship
  • Logic Understand what you are getting into
    before you sign the Loan papers
  • Mortgage lenders usually do not require a
    prepayment penalty on a first mortgage, but they
    do require it on a 2nd, 3rd, or subprime loan
  • If mortgage brokers get a prepayment penalty on a
    loan, they may make more money
  • Make sure there is no prepayment penalty on your
    first mortgage

27
Prepayment Penalties (continued)
  • There are two main types of prepayment penalties
    soft and hard
  • Both have
  • 1. A stated period of time, i.e., 1, 2, or 3
    years the prepayment penalty is in effect
  • 2. A maximum pay down percentage (MPP), i.e., 6
    of the principal per year, and
  • 3. The prepayment penalty if you sell it before,
    i.e., 6 months interest

28
Prepayment Penalties (continued)
  • Soft Prepayment You cannot within the stated
    period of time without penalty
  • Refinance at all
  • Sell the loan to family members
  • Pay down more than your MPP each year
  • The only way to get out of a soft prepayment
    penalty is to sell the property to an unrelated
    party

29
Prepayment Penalties (continued)
  • Hard Prepayment You cannot within the stated
    period of time without penalty
  • Refinance at all
  • Sell the loan to anyone
  • Pay down more than your MPP each year
  • There is no way to get out of a hard prepayment
    penalty before the defined period without paying
    the penalty

30
5. What is the Low Down on Buying Down (Points)?
  • Principle Stewardship
  • Logic You can reduce your loan interest rate by
    paying discount points (these points go to the
    mortgage brokernot the mortgage lender)
  • The longer you actually stay in the home the more
    valuable the discount points as those costs are
    allocated over more years
  • Since the average homeowner is in their homes
    only 5-7 years, the savings from the discount
    points should break even before that time is up

31
Buying Down (continued)
  • There are two different analyses for determining
    whether you should buy down your interest rate
  • 1. Internal Rate of Return Analysis
  • Outflows
  • A. Calculate all costs for the new loan
  • Inflows
  • B. Calculate the monthly savings
  • C. Determine the number of months savings
  • Recommendation
  • Set PV - A, PMT B, N C, solve for I
  • If your IRR is greater than your risk-free rate,
    then refinance

32
Buying Down (continued)
  • 2. Breakeven Analysis
  • A. Calculate your monthly payments
  • 1. Without the discount points, and
  • 2. With the discount points
  • B. Calculate the savings between options 1 and 2
  • C. Calculate the cost of the discount points
  • Recommendation
  • Calculate your breakeven point in months by
    dividing the cost of your discount points (C) by
    your monthly savings (B). If your breakeven is
    less than 4 years, it may be a good idea, 4-7
    years, be careful, and greater than 7 years, it
    is likely very questionable

33
Buying Down (continued)
  • Before you pay the points, ask yourself
  • Will you be refinancing soon? If so
  • There may be better uses for your money than to
    buy down a tax-deductible interest rate
  • Better uses may include
  • Paying down higher-rate debt
  • Saving for retirement in tax-eliminated or
    deferred accounts
  • Building your emergency fund

34
Case Study 2
  • Data
  • Mark is looking into a 250,000 6.0 fixed 30
    year mortgage for his new house. The broker
    offers him 6.0 with 1 origination point (Loan A
    to receive 247,500). He also says that he can
    buy down the loan to 5.5 with 1 additional buy
    down points (Loan B with 2 points total but for
    252,551). Marks risk-free rate is 8.
  • Calculation
  • Calculate the IRR and Breakeven Analysis for
    Loan B.
  • Application
  • Assuming Mark will take one of these two loans,
    which loan should he take?

35
Mark is looking into a 250,000 6.0 fixed 30
year mortgage for his house. The broker offers
him 6.0 with 1 origination point (A). He also
says that he can buy down the loan to 5.75
(252,551) with 1 additional buy down point (B).
  • IRR Analysis
  • A. Calculate the monthly payments for both loans
  • Loan A PV-250,000 , I 6, N360, Pmt ?
  • PMT 1,498.88
  • Loan B PV-252,551 , I 5.75, N360, Pmt ?
  • PMT 1,433.96
  • B. Monthly savings 1,498.88 - 1,473.82
    25.06
  • C. Cost of discount points 2 252,551
    5,051 - 2,500 for Loan A 2,551.02
  • IRR
  • PV-2,551, PMT 25.06, N360, solve for I?
  • IRR 0.95 12 months 11.4

36
Mark is looking into a 250,000 6.0 fixed 30
year mortgage for his new house. The broker
offers him 6.0 with 1 origination point (loan
A). He also says that he can buy down the loan
to 5.5 with 1 buy down points (loan B).
  • Breakeven Analysis
  • A. Calculate the monthly payments for both loans
  • Loan A 1,498.88, Loan B 1,473.82
  • B. Monthly savings 1,498.88 - 1,473.82
    25.06
  • C. Calculate the cost of the discount points
  • 2 points 252,551 1 point 250,000 2,551
  • Breakeven
  • Divide the cost by the monthly savings
  • 2,551 / 25.06 102 months or 8.5 years
  • Since the breakeven point is greater than 7
    years, I would recommend they not buy down the
    loan

37
Mark is looking into a 250,000 6.0 fixed 30
year mortgage for his new house. The broker
offers him 6.0 with 1 origination point (loan
A). He also says that he can buy down the loan
to 5.75 with 2 buy down points (loan B).
  • Recommendation
  • Their IRR is 11.4, higher than the 8 risk-free
    rate, but their breakeven analysis is 8.5 years.
    Since break even it is greater than 7 years, it
    may not be a good idea. I would recommend Mark
    to think about it carefully and likely go back
    and negotiate
  • I would use Learning Tool 19 as a negotiating
    tool
  • Using Goal Seek, set IRR to your required rate,
    i.e. 15 and solve for points (about 1.8 points)
  • Using goal Seek, set Break Even in years to your
    required breakeven point, i.e. 5 (about 1.6
    points).
  • Negotiate and tell the mortgage broker if they
    can do 5.75 with 1.6-1.8 points you will do it

38
6. How Do I Get the Best Deal with Mortgage
Brokers?
  • Principle Accountability
  • Logic You can reduce your overall costs by
    shopping around and holding mortgage brokers
    accountable for what they say.
  • Following are a few ideas to help you in this
    process
  • 1. Work with a number of brokers to find the
    lowest interest rate and fees
  • 2. Research the reputation and background of
    potential lenders. Check with the BBB

39
Dealing with Mortgage Brokers (continued)
  • 3. Beware of the bait and switch routine.
    They should follow through with what they
    promise.
  • 1. Hold them accountable for their closing and
    other costs by seeing the complete (not summary)
    Good Faith Estimate and comparing it to final
    closing costs
  • 2. Hold them accountable for the interest rate
    that they promise by having them show you their
    Rate Lock Commitment sheet to make sure it is
    consistent with what they promise.

40
Dealing with Mortgage Brokers (continued)
  • 4. Beware of lenders who advertise no closing
    costs or no origination fee. Generally, they
    will either raise the interest rates, call it a
    processing fee, or add the costs to the principal
    of your loan. There are costs to processing the
    loan
  • 5. If your lender promises a short turn around
    or processing period for your loan (7-14 days),
    ask to confirm that their underwriter is in the
    same state (or in the same building). Sending
    data to underwriters out of state can result in
    loans that take much longer to process.

41
7. How much of a down payment should you make?
  • Principle Stewardship
  • Logic First, fulfill the covenants of the loan,
    and second, make sure you have an adequate
    Emergency Fund after all closing costs are paid
  • Having a buffer the first few years are
    important in case of job loss or other concerns
  • Once you have this buffer in place, you can pay
    as a down payment amount any additional funds you
    have saved
  • However, I recommend you both pay down your loan
    and save for your other goals at the same time
    (not just pay down the loan)
  • Have a balanced plan for your goals

41
42
8. Should you pay off the loan early?
  • Principle Stewardship
  • Logic While there are some tax benefits, you
    are paying interest instead of earning it with a
    mortgage even after tax benefits
  • We have been counseled to buy a modest home, fix
    it up, and pay it off as soon as we can
  • We should use wisdom in all that we do
  • I recommend to both pay off principal and save
    for your other goals at the same time
    (diversification)
  • Maintain a balanced plan for your goals

43
9. Is a 15 year or 30 year loan better?
  • Principle Stewardship
  • Logic While there are some tax benefits to a
    mortgage, you are paying interest instead of
    earning it. My inclination is to pay it off
    sooner.
  • The inputs into the decision for a 15 versus 30
    year mortgage are
  • Monthly cash flow and budget under both rates
  • Stability of your job and job outlook
  • Interest rate differences between 15 and 30 year
  • Realize you can also take out a 30 year mortgage
    and pay it off in 15 years as well (see TT19
    Prepayments) if you have other concerns

44
10. Do I Have to Pay PMI?
  • Principle Stewardship
  • Logic Pay PMI only if required, and then get
    rid of it as soon as your equity in your home is
    greater than 20
  • PMI is generally required if your down payment is
    less than 20 of the appraised value of the home.
    This can be due to
  • Principal being paid down
  • Home value appreciation, or
  • Both
  • PMI may be avoided through piggy-back loans if
    available, but these are as well

45
Eliminating PMI (continued)
  • Once your principal is reduced to 80 of the
    value of the loan
  • Contact the loan servicer
  • Request information on cancellation of PMI
  • Often, they will require a new appraisal to
    determine the Loan to Value ration (LTV)
  • Once the appraisal is completed and documentation
    is provided (at your cost), PMI will no longer be
    required.

46
11. How do I know whether to rent or buy?
  • Principle Stewardship
  • Understand what you are trying to do before you
    do it.
  • There are a number of rent versus buy calculators
    on the internet.
  • One student sent this one to me. It looks only
    at monthly rent, home price, down payment,
    mortgage interest rate, and annual property
    taxes.
  • It does not take into account what you spend on
    landscaping, appliances, repair, etc.
  • http//www.nytimes.com/interactive/business/buy-re
    nt-calculator.html

47
12. How Easy is it to Refinance a Home with an
Interest Only Loan?
  • Principle Stewardship
  • Refinancing with an interest only loan is the
    same as with a traditional fixed or ARM
  • It is a fixed or ARM loan with an interest only
    option
  • You will follow the same steps as if you were
    refinancing a traditional mortgage
  • It is easy

48
13. What is a Short-sell?
  • A short-sell is where a lender allows a property
    to be sold for less than the amount owed on a
    mortgage and takes a loss
  • A short sell requires
  • A borrow who wishes to sell the property
  • A lender who decides that selling at a moderate
    loss is a preferable alternative to pressing the
    borrower into foreclosure and incurring the risks
    and costs from that process

49
Short-sell (continued)
  • A short sell allows
  • Borrower to avoid foreclosure, which involves
    hefty fees for the bank and poorer credit outcome
    for the borrower
  • Lender to make less of a loss on the property
    and to not enter foreclosure
  • A short sell does not
  • Necessarily release the borrower from the
    obligation to pay the remaining balance of the
    loan (called the deficiency)

50
14. If a person is upside down in their
mortgage, can they still refinance?
  • That depends
  • If the entire mortgage is a first mortgage, then
    the answer is likely no
  • However, if there is both a first and second
    mortgage, and the first mortgage is significantly
    less than the market value of the home, you may
    be able to refinance the first mortgage because
    the first mortgage has first claim on the home
    and it must be paid before the second is paid

51
15. What Do You Think About Purchasing
Distressed Properties Out of State?
  • Principles Stewardship and Accountability
  • 1. Can you adequately assess the quality of
    rental properties from out of state?
  • Generally no. You would need to trust someone
    elses opinion as to the quality of the
    investment
  • Be very careful about advertisements that state
    you can buy rental properties at 85 off retail
  • If it was that good, they would buy it themselves

52
Distressed and Out of State (continued)
  • 2. Can you adequately maintain these rental
    properties from out of state?
  • Generally no. It is very difficult to maintain
    these properties unless you use a property
    management company (PMC)
  • Do you know the quality of the work done by the
    PMC?
  • PMC fees are very high, often gt 50 of your
    rental costs
  • It is hard enough managing properties in your
    same city. It is not a good idea

53
16. If you move from your first house, do I
recommend keeping it as a rental?
  • Principles Stewardship and Accountability
  • A few questions
  • 1. Can you sell the house?
  • 2. Will cash flow cover principle, interest,
    taxes and maintenance costs after PMC fees?
  • 3. Do you have the time (and patience) to be a
    landlord? It is a ton of work and time (and PMCs
    are expensive)
  • Generally, I do not recommend it

54
17. If the offer is not accepted, is the earnest
money returned
  • Yes. The earnest money is contingent on the
    acceptance of the offer
  • If the offer is not accepted, the money is
    returned

55
18. What is your recommendation for your first
house?
  • What is your recommendation for your first house
    condo, townhome, or single family?
  • This depends on three things
  • 1. On the area you are moving to (i.e., San
    Francisco)
  • What is available in your acceptable area?
  • How many miles are you willing to drive each way
    to work and back?
  • Is there mass transit that you would be willing
    to take?
  • What is your maximum commute time each way

56
The First House (continued)
  • 2. On your budget (150-250K)
  • What is available in your price range?
  • Often your budget will determine the decision
  • 3. On your preferences (yard versus no yard) and
    available time
  • Can you do the upkeep on a yard?
  • Can you pay others to keep up the outside?
  • Can you live with close neighbors in condos?
  • Can you take the externalities with condos/town
    homes?

57
The First House (continued)
  • I would first answer those three questions
  • You might find your choices are limited by the
    answer to those questions
  • Where has appreciation been the best?
  • From my understanding, generally appreciation has
    been greater in single family homes than condos
    and town homes

58
19. What type of account should I use to save
for a down payment?
  • Principle Stewardship
  • Understand your competing principles
  • Investing to preserve principle will earn lower
    returns
  • Investing to increase returns will increase risk
    and may not, over the short term, lead to higher
    returns

59
Down Payment Account (continued)
  • Recommendations
  • If you have one-three years before you will be
    buying the house
  • Invest to preserve principle
  • MMMFs, CDs, internet savings, and bond funds
    (with shorter maturity)
  • If you will be saving for more than three years
  • Use a combination
  • Invest the majority to preserve principle
  • You may also want to invest some (10-40) in
    low-risk equity index funds/ETFs or longer-term
    bond funds for a higher return

60
20. Should I purchase a home now when the market
is very low?
  • Principle Stewardship
  • Understand yourself
  • Your behavior
  • Your ability to forecast housing prices, and
  • The financing process

61
Should I Purchase Now (continued)
  • Understand yourself
  • Behavior
  • Do you really consider this an opportune time to
    buy, or is this really an excuse to buy now
    because you are impatient?
  • Forecasting
  • Is the home market really as low as it is going
    to get, or could it possibly go lower?
  • Financing
  • Do you have the down payment money?
  • If you save more, can you get PMI removed from
    the outset (put 20 down)?

62
21. How do we balance home size need with the
fact that our family will be growing?
  • Principle Stewardship
  • Understand your competing principles. Your goal
    is to balance among the three key areas
  • Home size Larger homes will be more expensive
    than smaller
  • Location Homes closer to the City will be more
    expensive than those farther away
  • Travel time Homes with less travel time to the
    City are typically more expensive than those with
    longer travel times

63
Balancing Home Size (continued)
  • Understand your options
  • Your primary options are
  • 1. Buying a large home to support your future
    family may be more than you can afford and
    outside your budget
  • 2. Buying a smaller home may be within your
    budget but may require a new home within five to
    seven years or require significant travel time
  • Are there other alternatives?

64
Balancing Home Size (continued)
  • Secondary options could be
  • 3. Moving in 4-7 years may be a viable
    alternative if you can build up sufficient
    equity to overcome the 6-7 cost of selling the
    house
  • 4. Buying a smaller home with an unfinished
    basement or attic may also be an alternative as
    you could refinish the basement or attic as
    income and time permits

65
Balancing Home Size (continued)
  • 5. Buying a smaller home with a big lot to allow
    a possible home addition in the future may also
    be an alternative
  • This could be a good opportunity to learn
    additional home skills (carpentry, plumbing,
    electrical, etc.), but there are expensive risks
    as well
  • Be careful that with the addition you do not make
    the house significantly more expensive than those
    in the neighborhood

66
22. Shouldnt I be investing instead paying off
my cheap home equity and students loans?
  • Principle Stewardship
  • Understand competing principles
  • Build your emergency fund then pay off your
    high-interest credit card and consumer loans
  • Use wisdom in working toward all your goals
  • Let time be your ally in investing, begin now
  • Mortgage interest and students loans have a tax
    shield, so they are relatively cheap
  • A diversified portfolio for retirement and other
    goals (including company match), should be able
    to earn more than what you are paying on your
    mortgage/student loans over time

67
Investing versus paying off debt (continued)
  • Generally I recommend (in this order)
  • Build your emergency fund
  • Pay off consumer and credit card debt
  • Continue to pay off student and mortgage loans
    from your normal budget expenses (the 80)
  • Save your 20 for retirement, missions, and
    education expenses (get the company match) and
    invest wisely
  • Any extra above the 20 can be used to pay down
    your mortgage and students loans
  • Note I might also use the savings for the 20
    down payment to avoid PMI

68
23. Review the Buying a Home Process
  • Purchasing a house is a four-step process
  • 1. Understand your limits
  • Understand your budget and how much you can spend
  • Pull your credit report and score. Aim for a
    FICO score of 760 and above
  • Calculate your front-end (28) and back-end
    ratios (36) and how much you can afford
  • Calculate your ratios for LDS (TT11) which
    includes tithing and savings

69
Buying a Home (continued)
  • Know how much for a down payment
  • Have copies of current income (2 years if
    possible) and tax records
  • Choose the preferred type of loan (fixed,
    variable, interest only optionI recommend fixed)
  • Determine the term of the loan (30 years?)
  • Get pre-approved
  • Note that for students, due to work history and
    down payment, an FHA loan may be the best
    alternative

70
Buying a Home (continued)
  • 2. Find your home
  • Develop a plan for finding a home
  • Determine what is important to you
  • Use a realtor or other resources to find a home
    in your price range
  • Use Zillow.com to find current home values
  • Once you are serious about the home, get a home
    inspection (offers can be contingent on the home
    inspection)
  • Determine any CCRs and homeowners fees for your
    prospective purchase, and add them into your
    prospective costs

71
Buying a Home (continued)
  • 3. Negotiate the loan
  • Choose multiple lenders to compete for your
    business
  • Get Good Faith Estimates from each of your
    lenders
  • Determine the amount time you estimate you will
    be in the home.
  • Take the various loan offers from the lenders to
    calculate your lowest Effective Interest Rate

72
Buying a Home (continued)
  • Determine (as best you can) the investors rate by
    finding the minimum brokers will allow you to buy
    down to
  • Find the best rate from the prospective lenders
    chosen
  • Take the best rate to your favorite (nicest)
    broker, and ask them to beat it by ¼ to ½.
  • See the Interest Rate Commitment sheet
  • Fulfill the covenants of the loan and have the
    loan funded.

73
Buying a Home (continued)
  • 4. Enjoy home ownership
  • Maintain it well
  • Take care of your purchase and it will take care
    of you
  • Generally it will take roughly 1-2 of the homes
    value annually for upkeep
  • Put this amount into your annual budget
  • A professional cleaning a few times a year can
    help retain a homes value
  • Now keep the value of your home up!

74
Questions?
  • These were the questions that were sent to me.
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