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Understanding your Mortgage

In interviewing new clients, I have found that many are not as familiar with their mortgage as they should be. In considering how important it is to overall financial health, having a clear understanding of the terms of your home loan and the provisions within the mountain of paperwork can help save you money and avoid unexpected surprises that may arise.

Listed below are the key points that I feel every mortgage holder should know and understand about their home loan:

• What is the interest rate of your mortgage?
• What is the term of the loan and how much longer do you have to pay?
• Who is your lender? NOTE: This is a different question than asking who you make your monthly payment to:
• Is there a penalty if the loan is paid off early?
• What is the penalty if you miss a payment or are late making a payment?
• How is your home vested? Does the vesting protect you and your family against creditors and lawsuits?
• Do you know who to contact if you have a problem with your mortgage?
• In what situation, if any, could your loan be called due and payable?
• What happens if you cannot make your monthly payments?
• What happens in the event of death?
• Most importantly, do you understand the documents that you signed at closing?

What Type of Mortgage should you have?

In addition to understanding the terms and provisions of your mortgage, ensuring that your home loan is appropriate for your individual situation is also crucial. I see many clients in adjustable rate mortgages that would benefit from a fixed rate loan and others who have interest rates that are well above current market rates. Further, there are many homeowners who pay mortgage insurance who now have enough equity in their homes to remove the additional premium from their monthly payment. The process of a free mortgage review is simple and may end up saving you thousands of dollars in the long run.

A Tragic Case Study

I had a case a few years ago where a husband unexpectedly passed away. His wife assumed that the home they owned together would automatically be passed on to her. She was shocked to learn that their home was vested in a way where she owned 50% of the home and he owned 50% of the home. As heirs to his estate, his children from a prior marriage then had claim to his share of the equity. She ended up having to sell her home to pay off her step children. Through this tragic situation, she learned the hard way the importance of having an estate planner review their home’s vesting.

If you would like to learn more about your home loan, or if you are interested in a no-cost mortgage review, please call me at 801-501-7950 or e-mail me at mike@citycreekmortgage.com.

The Financial Consequences of Paying Off a Mortgage

The decision to pay off a mortgage is one that stretches beyond the emotional benefit of owning a home free and clear. There can also be a significant financial cost to paying off a mortgage. Depending upon the overall profile of a homeowner, maintaining a mortgage may be the most financially sound option.

Consider the following investment and its characteristics. How much would you feel comfortable depositing or investing?

1. The monies you deposit are not safe from a loss of principal

2. The monies in the account are not liquid

3. Your income tax liability increases with every contribution

4. Your money earns a 0% rate of return

5. When the investment is fully funded, there is NO income paid out

The investment described above is home equity obtained through a larger than necessary down payment or through pre-payment strategies to pay down or pay off your mortgage. The key point here is that home equity is not an investment at all. It does not earn a rate of return and will not increase in value. The home as an asset may increase or decrease in value depending on the market; however, the cash invested into home equity does not.

A $100,000 Investment VS a $100,000 Mortgage

The primary reason homeowners want to pay off their mortgages is to avoid paying interest. As you may know, the interest paid on a home loan over 30 years can be more than the amount of the original loan! That sounds terrible until you consider the cost of liquidating the investment funds. If you are contemplating pulling cash from an investment account to make a large down payment or to pay down your current mortgage balance, consider the following example:

• $100,000 borrowed at 5% over 30 years will require 360 payments of $536.82, or $193,256 over the life of the loan.
• $100,000 invested earning a return of 4% will be worth $324,339 in 30 years. If the rate of return is 7%, the investment would be worth $761,225.

The True Definition of Being Mortgage Free

If you have a $200,000 mortgage as well as a liquid investment account with at least a $200,000 balance, then having a mortgage becomes a choice. By building your investment account balance and through the power of compounding growth, you have the ability to reach the point where a mortgage is optional more quickly than by making additional principal payments on your home loan. In essence, your investment will grow at a greater rate than the speed at which your mortgage balance will drop.

If you are considering using investment account assets to pay off or pay down your mortgage balance, I would be happy to discuss the pros and cons of your individual situation and determine the most appropriate solution. We can run specific reports for you that will detail the current and future implications of liquidating investments to pay down a mortgage. Call me at 801-501-7950 or send an e-mail to mike@citycreekmortgage.com.

Security VS Risk

We are all wired with the drive of two opposing needs in our lives: The need for certainty and the desire for risk. Although each of us may feel the drive of one to be stronger than the other, in a marriage there is often one partner who is more of a risk-taker and one whose drive for security is their dominant need. How do we develop a balance where both partners’ needs in the relationship are recognized and fulfilled?

I often meet with couples who live each day in constant turmoil over their inability to come to terms with their opposing needs. For example, while one pursues their dream of being self employed, the other deeply longs for the stability of a consistent paycheck and cash in the bank. This is frequently the primary conflict in a relationship with each person fighting for their core beliefs. Since neither can control the way they are innately wired, this battle often leads to relational destruction.

The human need for certainty is one that can never be ignored. Those who have this as their primary need will have a difficult time experiencing internal peace until this need is met in their finances. Although sometimes this can be challenging, it is often as easy as making a few key decisions that will lead to the fulfillment of such desire.

When advising couples who face this relational battle, I suggest the following to help find common ground:

1. Establish a budget and live within it-This will help provide security that cash will be available to meet the needs of the family, as well as the comfort of knowing that the spending will be controlled.

2. MAKE SURE you have a cash reserve-This is especially true if there is a self employed income earner in the household with unpredictable levels from one month to another. When there is a cash reserve, money is available to balance the lean months and it can be replenished in the higher income earning months.

3. Eliminate all consumer debts and free up the burden of monthly expenses-Eliminating consumer debt frees up cash flow. The extra cash flow can increase savings and thereby increase financial security.

4. Always accommodate the needs of the more conservative partner-The needs of a risk-taker as well as a certainty driven person can only be met simultaneously if the financial security is in place for the more conservative partner.

As a part of the services we provide, we advise clients on steps to help fulfill the need for financial security. There are often opportunities to reallocate how the assets and liabilities are held to expedite the process. Otherwise, the solution lies in establishing a plan and a budget that will accomplish the goal over time. For some, the results are fast and easy. For others, it will be a process that will require patience and determination. Call or e-mail me to discuss your individual situation in greater detail, and to see the tools we have available to assist you.

When structured properly, a home mortgage can be a tool to help you build net worth. However, when not properly managed, a mortgage can cause excess burden and be a financial and emotional drain. In the current environment of distressed home values and inevitable interest rate increases, now is the time to ensure your mortgage is properly structured and in line with your long-term goals.

Over the years I have witnessed many homeowners make significant mistakes in how they obtain a mortgage, as well as the way their loan is structured. Below is a list of the top 5 mistakes I continually see homeowners make:

1. Paying closing costs to refinance their home loan each time interest rates drop. Many homeowners have refinanced their mortgage three or more times since mortgage rates began their historic drop in November of 2008. For those who paid several thousand dollars each time, their balance now is significantly higher than it was before the initial refinance. If a no-cost loan is available, I strongly suggest this option. That way, you are able to take advantage of a declining interest rate environment without increasing your mortgage balance. Feel free to call my office for a free analysis and explanation.
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I am often asked when a homeowner should put the focus of paying off their mortgage. Although the answer to this question is specific to each homeowner, my general recommendation lies within a 4-step plan that I use to advise each of my clients.

Each step is numbered based upon the priority. In other words, step one should be on track before moving on to step two, and so on. The problem is that many homeowners jump ahead before the prior step are mastered. This typically leads to living paycheck to paycheck, getting stuck in the consumer debt rut, or reaching retirement to find that you are equity rich and cash poor. By following the steps below, you can help ensure you reach retirement having achieved the long-term goals you desire.

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