Archive for the ‘Financial Planning’ Category

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The Federal Reserve recently announced that it intended to keep “interest rates” low through at least mid-2013. This unprecedented statement shocked the markets and helped drive mortgage rates down to match historic lows. As investors digested this information, many concluded the Fed is essentially stating that they believe our economic growth will remain stagnant for some time. Although the markets appreciated the transparency of the Fed’s statement and assurance that lending rates will remain low, it was a sharp contrast to prior predictions that our economy would be at a healthy growth rate by the end of 2011. The acknowledgement that our economic recovery has been “significantly slower” in the first half of 2011 than previously expected was more in line with what many on “Main Street” have been saying all along.

How Will this Decision Impact Mortgage Rates?

There are two interest rates that are controlled by the Federal Reserve – the Fed Funds Rate (a lending rate at which banks with deposits at the Federal Reserve lend money to other banks overnight) and the Discount Rate (the interest rate that an eligible depository institution is charged to borrow short-term funds directly from a Federal Reserve Bank). Both of these are very different from mortgage rates. A mortgage rate can be in effect for 30 years while a rate set by the Fed can change from one day to another. Therefore, this recent statement by the Fed does not guarantee that mortgage rates will stay in current ranges until mid-2013, only that it is likely short term rates will remain at current levels for the next two years (home equity rates, car loan rates, credit card rates, etc.).

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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.

Pay off the account with the smallest balance first regardless of interest rate. As each account is paid off, apply those payments to the account with the next smallest balance, and so forth. Watch your debt begin to disappear. This is one of the most liberating experiences my clients have. Is it time for you to snowball your debt? Call me if I can help!

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.