When to Make a Lump Sum Mortgage Payment

When to Make a Lump Sum Mortgage Payment

MYBANKTRACKER.COM Jeff Yoncich/Feb 6, 2015

Claire Tak in Mortgages and Buying a Home

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We’ve heard from a reader who’d like some investment advice — specifically, on whether he should use a recent inheritance of $30,000 to pay down his mortgage loan. This person has a 15-year mortgage with a balance of $200,000, at a 5 fixed interest rate.

If you also have a lump sum of cash to pay your mortgage, read on so you know what you should consider, before making the decision to liquidate your hard-earned money.

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What does your money situation look like?

Before you think about using a financial windfall of any kind for investments, it’s a good time to take an inventory of your personal money situation and make sure you’ve already got all the financial essentials covered.

Is your budget for emergencies flush? You must have an established emergency fundwhere you set aside money for unexpected expenses. A major car breakdown will not be in most common budgets, but they are pretty common occurrences. Similarly, we don’t plan or budget for out-of-town travel to family funerals, or minor medical emergencies, or natural disasters, but they do happen.

Is your retirement fund on track? Your employer’s tax-free retirement savings plan is a priority. If your budget allows, you should max out your contributions, including a 401(k) (if your employer offers it), so you can receive for the company’s matching funds (free money!). Also be sure to fund to the max the health savings accountprovided at work.

How much credit card debt do you have? Credit card debt is the most expensive, so pay down credit accounts and aim at maintaining a maximum 30 percent credit utilization ratio. In other words, keep your card balances at 30 percent of the total credit limit. If your total credit line is $10,000, owe no more than $3,000 (and spread the same ratio over multiple accounts). Auto loans and other personal financing can be expensive, too. Those big ticket purchases should made in cash if you’ve got it.

Paying down a current  mortgage

If your financial inventory shows you’ve got the basics covered, then consider using your financial windfall to pay down your mortgage. As long as you don’t have any complications like mortgage prepayment penalties, you will shorten your loan term and reduce your total interest expense substantially by making an additional big principal payment.

Making an added $30,000 payment will not recast your scheduled monthly payments (meaning, they will stay the same as you’ve been paying). But more of each of those ensuing payments will be going towards the principal balance on the loan. And so, because of that lump sum payment, your loan payoff will advance by years. Considering this was only a 15-year mortgage to begin with, you could be cutting your loan term in half.

Paying down the mortgage vs. Other investments

So how does this compare to other possible investments for our reader’s $30,000? His mortgage interest rate is 5 percent — by using the lump sum to pay his mortgage, he’d be earning about four more points than if he were to dump that $30,000 into a bank’s savings account (currently, UFB Direct is offering 1.25 percent interest on theirsavings accounts). The choice to whittle down his mortgage with that lump sum is also safer than the stock market.

On the other hand, if our reader wanted to use that money to invest in something else, he could still pay down the mortgage by making smaller additional principal payments each month instead of writing that one big $30,000 check now. Adding $300 per month in principal prepayment will get him to about the same place as that $30,000 check, and allow a similar way to pay down the mortgage.

Why refinancing should also be considered

There is another mortgage payoff option for the $30,000 investment. If your plans are settled and you and your family expect to remain in your home for several years, you should consider refinancing into a new mortgage loan (that is, again, if there’s no prepayment penalty on the current loan). If you qualify for the best rates currently being quoted (see below), you’ll likely reduce the interest you’ll pay in the long run if you stay with a 15-year loan.

More importantly, if you didn’t have the 20 percent to put down on your original loan and you’ve been paying mortgage insurance (PMI), this could be the opportunity to free yourself from that expense. If you’ve made more than $10,000 in payments against the loan principal — or if the home has gained $10,000 or more in proven market value — you can combine that with your $30,000 for a 20 percent down payment. No more PMI!

When weighing whether to refinance, calculate how many months of lower payments it will take to recoup the closing costs of the new mortgage. Closing costs can amount to $2,000 on each $100,000 financed. Again, you have to plan to be in the house for a while for refinancing to make sense. So, the number of months it takes to recoup closing costs is a key calculation to do with the refinancing calculator.

Final thoughts

Remember, true savings comes from reduced interest expense, not lower monthly mortgage payments. If you get a lower interest rate but extend the mortgage term, you can wind up spending more in interest in the long run. Substituting a mortgage that has 10 years remaining with a 30-year mortgage will result in higher interest expense over the life of the new loan.

You need to make sure you’re in a solid place financially, first, before you decide to invest that money into a lump sum mortgage payment.

CONTACT ME FOR ALL YOUR MORTGAGE QUESTIONS! 

RE/MAX REALTY CENTER- PROPERTY SEARCH HERE!

262-443-2672 HEIDI BUCHBERGER

Buy a House Now or You’ll be Kicking Yourself Later

Marc Robinson/Feb 10, 2015

Claire Tak in Mortgages and Buying a Home

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You’ve spent years building up your savings, but don’t own a home yet? If you aren’t in the market to buy a home now, you should reconsider. Here are reasons why you’re missing out if you don’t get in on buying a home now.

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Reason #1: Deals like these won’t last long.

Those words are pretty bogus in car commercials, but they couldn’t be more accurate for the housing market. Home prices are starting to go up after having plummeted during the last 5-10 years. If you don’t seize the moment (which, to your benefit, happens to be lingering much longer than most moments worth seizing), home prices will start to get beyond your reach.

Reason #2: Interest rates are dirt cheap, but won’t stay that way forever. 

Mortgage rates are ridiculously low (historically), and everyone’s expecting rates to rise, maybe sharply, before the end of this decade. Until a few years ago, getting a mortgage rate for 8 percent to 10 percent was considered a good deal. Now, you can find mortgages around 4 percent.

Is that difference meaningful? If you were to own a house for 10 years, the difference in mortgage payments between a 4 percent mortgage and 8 percent mortgage paid over 10 years is about $37,000 for every $100,000 you spend on the house. So, if you had a $400,000 mortgage at 8 percent, after 10 years, you’d have paid $148,000 more to the bank than if your rate were 4 percent rate.

Reason #3: A valuable financial opportunity will pass you by.

Imagine yourself on a riverbank, watching people in boats going past you, on to new places. At some points, the river picks up speed then, later, slows down. You can only just stand there on the side as all these people flow past you and out of sight. This is analogous to the home ownership market.

Other people are buying homes, waiting for them to appreciate in price, selling for more than they paid, and using the profit to buy a nicer home. Many of them hope to do this same thing a few times or more in their lives, until they can afford a much better home than their first home, even though essentially they only had to use their own cash for that first home, their least expensive home of all. Imagine you, on the other hand, just continuing to pay rent and have nothing to show for it.

Here’s a simplified example. You buy a house for $150,000 and pay a 10 percent down payment ($15,000). Three years from now, your income has gone up somewhat, your house is worth $200,000, and you’ve paid your mortgage down to $145,000. So, you sell the house for $200,000 and (after paying off your mortgage, paying broker fees, etc.), say, you’re left with $50,000. You now decide you can afford to buy a $350,000 house if you make a $50,000 down payment.

OK, say the housing market shoots up in the next 10 years (as has happened before), your income has gone up some more, and your house has doubled in value to $600,000. If, for example, you’ve paid down your mortgage to $300,000 and sell the house for $600,000, you might have $250,000 or so after costs. This time, if your family has grown in size, you might decide you can buy a $900,000 house, make a $250,000 down payment, and be able to afford a $650,000 mortgage. You’re now living in a $900,000 house — and the only true out-of-pocket cash you ever laid out was your original $15,000.

Or, you could’ve just chosen to stay on the riverbank and never jump into the flow.

Reason #4: You get to keep more of your earnings.

In the year you buy your home, you’re allowed to take a tax deduction for some of the costs of buying. Best of all, though, you get to deduct your mortgage interest payments and your property taxes every year. This can really add up in extra annual spending money.

For example, if you’re in the 25 percent tax bracket and you were to pay $24,000 a year in mortgage interest ($2,000/month), you’d pay $6,000 (25 percent) less in taxes than if you were pay rent of $24,000 a year. What would you do with an extra $6,000?

Final thoughts

So, it stands to reason that you’d probably really love to be able to buy what might be the most expensive material object you will every buy — a house — use mostly other people’s money to pay for it, see it increase in value over time, and live in it the whole way through.

What are you waiting for? You’d rather put your cash into a savings account (so a bank can pay you almost nothing), than buy a home now?

CONTACT HEIDI BUCHBERGER RE/MAX REALTY CENTER TO START YOUR HOME SEARCH IN SOUTHEASTERN WISCONSIN! 

Top First Time Home Buyer Tips

Top First Time Home Buyer Tips

First time home buyer tips are something everyone who is going to purchase real estate for the first time should seek out and use to their advantage. Buying your first home is a big deal! If you are like most it will be the biggest purchase you have ever made. This naturally leads to a mix of emotions including excitement, anticipation and anxiety. While it may be impossible to eliminate the stress that comes from your first home purchase, you can certainly minimize it by going into the situation prepared.

Do your research and follow reliable information as it applies to you, so your first home buying experience is a good one.  Let these tips for buying a first home home be your guide to a stress free real estate transaction!

Our first home buying tip is not to rely on family to know everything about purchasing real estate!

When you set out to buy your first home you are more than likely going to get advice from a number of people including family and friends. Many of them have been there and done it already so you can expect they would want to lend a helping hand. 1st time home buyer tips will be plentiful from lots of sources! Do keep in mind though that some of the people giving your first time home buying advice have only purchased a home one or two times in their lives. This does not make them real estate experts.

When it comes to the hard decisions always rely on the Pro’s who will be involved in the transaction including your mortgage broker, attorney, real estate and insurance agent. While family and friends have great intentions, there are times where I have seen some of the worst advice you can image given to first time home buyers.

Get Specific About What You Want

2K+Make sure you have a general idea about the type of property you would like to buy. You could be in the market for a million dollar home or a simple condominium purchase. Regardless of what you can afford, it is worthwhile to really think about what you want. How your purchasing power compares to others is not really important. This is still your biggest expenditure thus far and it is important to get what you want out of it.

Decide on basics like neighborhood, size, number of bedrooms and bathrooms. It is perfectly fine to be more detailed than this, though. You can consider what you really care about – a garage for working on your car, a play room for children, a basement for your wine collection. Personal choices are important.

Prioritizing what you want makes it easier to recognize it when you find it. It is unlikely you will get everything you dream of but you will more happier with your purchase if it fits your wants and needs. When meeting with a Real Estate agent for the first time they will most certainly be asking you what your topic considerations will be in buying your first home. Giving the agent an accurate picture of what you hope to achieve with makes the process of finding a home for you much easier.

Get Pre-Approved For A Loan

2K+Another very important first time home buyer tip is to get your financial house in order! You can’t really start shopping until you know how much money you have to spend. Your idea of what you will qualify for my be accurate, but it may not be. Find out what your maximum loan amount will be and consider how you want to use that money. One of the first things you should do when setting out to buy your first home is to get pre-approved for a mortgage! Keep in mind that there is a distinct difference between getting pre-approved vs getting pre-qualified over the phone.

While a pre-qualification letter may help you understand how much you can afford to pay each month towards a mortgage payment it does very little to solidify your position as a legitimate home buyer. When the time comes for you to submit an offer on a specific property the owner and the sellers Realtor are more than likely going to want you to be pre-approved!

A savvy Realtor or seller is not going to accept a pre-qualification letter as it isn’t worth the paper it’s written on. The only way a seller is going to have some reasonable assurances you will get the loan is by providing them with a pre-approval letter. Providing the seller security especially if you are competing with other buyers is one of the best tips for buying your first home.

Getting pre-approved is also for your own piece of mind as well. You may be able to only afford $200,000 when you really wanted $300,000. You may also qualify for $500,000 – but can you afford to keep a half-million dollar home in good repair? While getting a mortgage is a big part of buying your first home, keep in mind that it is only part of the home buying expenditures. Taxes, insurance, buying furniture and other household goods can add up quickly.

Find out how much you have to spend and then decide how much home you can really afford keeping all these other expenses in mind.

Look Thoroughly For Potential Homes

It is important to make sure you do some home buying research before making a purchase. Your agent will be able to help significantly with finding the perfect first home. However, it is still worthwhile for you to do your own searching using as many avenues as you can think of – including driving around favorite neighborhoods in search of for-sale signs, searching online listings and putting the word out to family, friends and co-workers. You never know where the perfect home will come from.

There are many buyers who enjoy going out and looking at Real Estate open houses before actually committing to an agent. This allows you to freely peruse homes at your leisure typically on a Sunday. When you are really ready though seek out a great real estate agent to work with you!

Get A Good Real Estate Agent

2K+One of the best first time home buyer tips I can give you is to hire an outstanding Real Estate agent! You do not have to go through the home buying process alone. In fact, you probably shouldn’t. There are numerous reasons to hire an exceptional Realtor, including gaining access to the best available homes, having someone working regularly to find the house you really want and having an agent on your side in negotiations.

Having a professional in your corner is always beneficial, whether it is a mechanic fixing your car or a real estate agent helping you buy your home. But, as with a mechanic, not all real estate agents are created equal. Some are far more motivated and skilled than others, so you need to screen agents before choosing yours.

This means interviewing several Realtors, getting current references and taking a hard look at their histories. You want an agent that has a history of successfully helping people in situations similar to yours. Hiring a Real Estate agent is important. You want someone on your team who will be fighting for you every step of the way. Finding an agent who gives you an out of this world Real Estate experience will be hard if you go at it willy nilly.

Make The Right Offer

Make sure you understand local home values! Negotiation is a fine art, not something learned in a day. This is part of why you search for agents that set reasonable goals for their clients and tend to obtain those goals. You want someone who understands what a home is worth and that can argue the right points reliably. There may be any number of things that can give you an edge in negotiations, from pet damage to kitchen appliances. The problem is knowing just how much those things should affect the value of the home.

A top notch buyer’s agent is going to be looking out for your interests. The best of the best will try to make sure you are paying fair market value or below for the home you are interested in. If you feel you are working with an agent who is concerned about their own pocket book and not yours dump them fast.

This is not the type of agent you want in your corner when it comes time to negotiate. I tell people all the time the best real estate agents are not worrying about where their next sale is coming from. An agent who needs a sale is going to give you different advice than one that doesn’t. Keep that in mind! As a first time home buyer it is important to realize that not all real estate agents are created equally.

Listen to The Home Inspector

2K+Another important first time home buyer tip is to find a top notch home inspector! If the seller accepts your offer the next step is a thorough home inspection. A home inspector will look over the entire property and determine if there are any common home inspection issues as well as anything out of the ordinary you should be aware of. In some circumstances depending on the loan product you use, it is possible you may be required to have a few more inspections done besides the general inspection. For example VA loans require a termite inspection.

You should listen closely to what the inspector has to say about the home even if you are madly in love with it. Serious home issues can quickly ruin any enjoyment you would get out of your new purchase and could turn your dream home into a nightmare. Almost every home even if it is new is going to have some issues. It is extremely rare to ever find the “perfect” house. The home inspectors job is to find these issues for you.

One thing to remember is that like any other profession there are some really good inspectors and some that are not so great. Much like Real Estate agents, home inspectors have two roles – do their job of discovering defects and then communicating the problems found to you. Don’t under estimate the communications skills! Over the years I have encountered some fabulous home inspectors who clearly are very thorough and find 99% of what they should be discovering about the home. There are some however that are very poor communicators.

Sharing information about a home to a first time home buyer is different than sharing information with someone who has bought multiple homes.  Frankly a first time buyer should be treated with kid gloves. Many home inspectors have great intentions but don’t realize that everything they say is treated like it’s the gospel. How information is presented to a first time buyer is critical. I have seen on numerous occasions where the delivery of discovered issues has made the buyer feel uncomfortable enough to want to back out of the sale! I am not talking about large issues but things that are common in many homes.

Some inspectors don’t care – in fact there is a small minority of them that don’t mind if you back out of a sale because they want you to call them back for your next inspection. While this is not a common practice because the majority of inspectors are true professionals, it is something to keep in the back of your mind. Your real estate agent will more than likely point out whether the inspector has gone overboard and the home owner more than likely will as well.

If there are problems but they are not complete deal breakers your agent will let you know the next best step. You should be able to renegotiate the price if the inspection shows you will need to make major repairs later on.

Be A Responsible First Time Homeowner

The last tip I will leave with you is to take responsibility for your purchase. Once you have closed on the house and moved in it may feel like all your work is done. It is important to remember though that you are just getting started in home ownership. Where before your landlord covered repair expenses, now those expenses are yours to bear. This can be quite a shock if you are not prepared for it.

Start saving for home maintenance immediately. Your home should last several lifetimes if properly cared for. If maintenance is ignored, though, you could find yourself losing out on your investment and your living quarters. Take care of maintenance and always keep a back fund for emergency repairs and you should be able to enjoy your home for many years to come.

Make sure to keep your home insured for an amount that will cover your loses in the event of a tragic event such as a fire. By following this first time home buyer advice you will increase your chances dramatically of have a smooth and pleasant Real Estate transaction. Best of luck!

CONTACT HEIDI BUCHBERGER RE/MAX REALTY CENTER 262-443-2672 IF YOU ARE A FIRST TIME HOME BUYER!!!