The case for restructuring debt using home equity in the absence of low interest rates

This article will not be for everyone. If you have a low interest rate on your home loan and have no debt and no use for extra money in your life, then you can stop reading.

That said, if you have high interest credit cards or medical bills, really need to remodel and don't have the cash on hand, want to start or grow a business or have any other important (yes, ONLY important) needs for cash, then your home may be a great place for you to turn to help with your financial needs.

You may be saying right now, "but Jeff, I have such a low rate on the home how can it possibly be a good idea to take money out of the home now that rates are up some?" To you, I say, you have a good point. As I said at the beginning of this email, this isn't for everyone.  Consider this though, if you have credit card debt it is likely to be in the high double digits in interest rate (up to 26%) and the minimum monthly payment is typically close to a thirty-year payoff, just like your home loan. 

For many people it's not about the rate on the mortgage, it's about the "blended rate" on all the debts you pay.  The blended rate is a weighted average of all the debt you carry. Even when the home debt is 60 -80% of the balance of all the debt you have having credit card debt in the high teens or even 20s can skew your blended rate to 7-9%. Refinancing and renegotiating that debt could easily lower monthly payments by $300 to $600 a month and I have personally seen people save over $1200 a month in payments not to mention simplify their life dramatically by reducing the number of accounts they have to pay each month.  Imagine how life changes and how much easier it can be to reach other, more important, financial goals.

This doesn't even consider the fact that you may increase your available tax-deductible interest by converting non-tax-deductible debt into debt that can be deducted (in most cases) off your taxes.  This would also include a line of credit on your home which under the new tax code cannot be deducted any more.

Speaking of lines of credit, many of these loans have grown very expensive as the Fed has pumped up short term rates and many are coming due. People will be forced to begin the process of fully repaying the loan which can easily result in a doubling (at least) of the current payment they have been making.  If you have a second line of credit you need to check your current rate and find out when it converts. That alone may make it worth considering a change.  

The Fed has made it clear they are still not done raising rates. At this time the official line is that they expect to raise rates three times in 2019.  This doesn't include the likely .25% increase that is planned for this month.  All told, a year from now the likely scenario is that your line of credit and adjustable rate credit cards will be another full one percent higher in rate.

Let's quickly touch on remodeling.  Maybe right now you don't have a lot of debt, but you really want a new kitchen or need more room. Maybe the roof, flooring and paint need done. Did you know that remodeling a house that's fewer than 1,000 square feet costs an average of $18,347, while a 3,000- to 4,000-square foot home costs an average of $36,121? Many of these home improvements end up on credit cards. In fact, in 2017 alone, U.S. consumers charged more than $141 billion in home improvement products and services to their credit cards. Does this really make good financial sense?

As I said at the beginning, this message isn't for everyone. However, if you or someone you know is considering tapping into your home equity, let me run the numbers for you. I have a great calculator that I use that can help you make a clear determination if this is a good move or not.  Give me a call or email me.

Home Buyers Face Decisions that Affect Their Long-Term Financial Picture

Taking the step into home ownership is one of the most important financial decisions a person will make in their lifetime. There are many factors to consider when embarking on this venture. Literally hundreds of loan programs are available, and it is important to find the one that best fits your personal long-term goals.

 

First and foremost, you must have a mortgage consultant in your corner that is willing to take the time to know what your long-term goals are. Communication is the key factor here.

Curious prospective home buyers sometimes turn to Internet-based services just to see what current interest rates are. But a faceless web site will not take the prospect's future financial planning into consideration or guide the potential borrower through the many nuances of the loan process. When shopping for a home loan, be wary of web-based services that offer programs to reel prospects in with attractive rates that are based upon unrealistic time frames.

If a lender is offering a terrific rate based on a 10-day lock-in period, it is unlikely that the potential home owner would actually be able to find their dream home, get through the negotiation process and win approval from a lender within such a short period of time. This is called short-pricing, and when it comes time to close the transaction, the rate that was originally offered is simply no longer available. As a result, the unfortunate prospect is bulldozed into a loan program with a higher interest rate.

It is highly unlikely that a qualified loan originator whose business is based upon referrals will use unscrupulous tactics such as this to get new customers in the door!

 

Once you have found a mortgage consultant that you feel comfortable working with, lay your goals out on the table because it will have a tremendous impact on choosing a loan program that meets your specific needs. One of the most important factors to consider is how long you wish to borrow the money for. For example, if you know you will only be in the home for five years, it wouldn't make sense to opt for a 30-year loan program or pay points up front to secure a lower interest rate. You would not be in the home long enough to benefit from such action.

Your mortgage consultant should be able to narrow down a selection of programs based on the information that you have provided, and present you with an easy-to-read spreadsheet that clearly defines viable options for your interest rate and amortization schedule, monthly payment and any potential savings you may realize by paying points up front.

 

Moreover, a reputable loan originator will not hesitate to share this information with your tax consultant or financial planner so they may offer additional feedback on your behalf.

 

Home ownership imparts a rewarding vehicle for building wealth and a strong financial future. The mortgage consultant that you choose should be there not only when your loan closes, but should also provide you with ongoing service to assist you in managing that debt over time.

Dubai and Interest Rates

On Friday morning Dubai World, a government owned investment company asked for deferment of payments on approximately $80 billion in debt to various banks and investment companies around the world. Although a relatively small problem in this world of trillions stock markets around the world were rocked by the news. Indeed, it seems that the global financial markets may be more fragile than we had suspected.

As money left the stock markets it flew into dollars and US Treasuries and mortgages. This is actually good news for a couple of reasons. First and most obvious is that when bond prices go up the yields drop. This is good for interest rates on borrowed money like mortgages that no longer have to compete against higher yields driving rates down.

The second, and perhaps more important implication, is that for all the talk of the decline in the dollar as currency of choice and decline in US dominance when push comes to shove the world would still rather be in US dollars and US treasuries than in other secure investment alternatives. This sort of market activity is normal and it is exactly what should happen in times of economic uncertainty. It's nice to see the markets acting like they should when problems occur.

One last word of caution. With all of the investment companies, banks and governments involved in the Carry Trade Dubai's troubles could be the least of our worries. At some point in the very near future inflation will begin to real it's ugly head and rates WILL rise and probably quickly. When this happens all of those highly leveraged trades will have to be unwound and we may have a whole new round of write downs, this time on safe secure holding like treasuries that have been levered up by 10 times or more and rely heavily on a weak dollar. When this happens rates will already be on their way up and this unwinding will exacerbate the problem further and could drive rates higher faster than we would expect.

I don't want to sound doom and gloom here or imply that Dubai's problems are the beginning of the end. Ultimately, they are a small blip that probably got a lot more attention by the market here in the US than they should have because it was the day after Thanksgiving and their wasn't anything else to talk about till Monday or Tuesday when we start getting Black Friday numbers back. Just be cautious and don't get greedy. If your looking for a mortgage or other loan rates are at or near the lowest point they have been in a generation and holding out for an extra 1/4 point is not only foolish but dangerous to your bottom line. Get you loan, put a big smile on your face and enjoy the holidays.

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Why Are Rates So Low?

People call in every day looking for loans. Business is brisk and rates are still really low. Frankly, I was a little puzzled about this most recent rate drop because the data suggests rates should be higher. After all, the Fed has stopped buying treauries while our government continues to borrow money like a shopoholic with a new credit card. At the same time they are also slowing down the purchase of mortgage backed securities and will stop next March. Don’t forget that all this spending WILL cause a spike in inflation and rates MUST go up as a result.

This is all public knowledge so why then are rates down near their lowest level of 2009? The answer lies in supply and demand but not how you may think. In June and July, when rates were up, fewer loans were closed. As a result, as these loans come to market about 3 months later there are fewer loans to available to buy. So even though the Fed has slowed their buying substantially they still made a significant purchase of the AVAILABLE supply of mortgages. Once the current, much higher, volume of loans hits the market supply and demand wins and rates must go higher. The only way this would not occur is if a buyer came in and soaked up the increased supply. This is not likely given inflation concerns and the availability of other well perfoming investments.

So there you have it. Rates will be higher and we can predict with relative certainty when this will occur. Like all markets things don’t move in a straight line so there will be opportunities to lock in on dips in rates as we move higher but expect to see rates in the high fives or low sixes by the middle of next year.

Mortgage Rates Stay Below 5%

Mortgage Rates Stay Below 5%

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Great Video on the Homebuying Process

This is a great recording I had prepared to review the homebuying process. It does a fantastic job of explaing the entire process without getting bogged down in all of the fine details.

Take a few minutes to watch and listen and make sure to pass it on to anyone you know who needs the info.

Jeff