Real Estate Tips and Links
Leveraging Your Money
Making Money with Mortgages
What You Shouldn't Do Before Purchasing a House
What to Consider When Making an Offer
Selling a House in a Buyer's Market
Leveraging Your Money
Buying a home allows you to leverage your money. It means that you use a small down payment to finance the purchase of a larger investment. For example, if you buy a $250,000 home with 10 percent down, you leveraged the $25,000 down payment to own an asset that is worth 10 times as much!
Appreciation of your property lets you benefit from value increases in the full amount. Looking at the example above. if that home appreciates within 5 years by 15%, the home will be worth $287,500. Basically, by investing $25,000 you now own a property that is worth $37,500 more.
In addition you are building equity. With every mortgage payment you are paying down part of the prinicpal balance you owe. Once you sell your home, you are not only realizing the profit from the appreciation but at the same time you profit from the increased equity.
Making Money with Your Mortgage
Published September 13th, 2006 by John Chow, www.johnchow.com
The day one becomes free of their mortgage is a big day and many celebrate by having a party and burning the mortgage papers. Yet most do not know that a mortgage can make you a lot of money if you know how to properly use them. Let me show you a little investment trick that can do just that.
If you have a free and clear home, congratulation! It’s time to get back into mega debt! You see, having the bulk of your net worth tied up in a single asset - your house - is a dangerous, unstable and dumb situation to be in. I know, this is going against everything your parents ever taught you. Well, if you want to end up like your parents, then do what they tell you.
The Home Equity Line Of Credit
Go to your bank and arrange a home equity line of credit, with interest only monthly payments. A home equity line of credit is basically a very big credit line secured by a mortgage on your house. A bank will extend a credit limit up to 75% of the value of your home. It’s just like a credit card. You should be able to get interest rate on the credit line at prime (currently 6%), and is charged to only the portion you use and you can repay it back at any time. However, you’re never going to want to pay this off.
Let’s say you get a home equity line of credit for $300,000 (75% of a $400,000 house). Take the money out and put into low fee equity based index funds (you can use mutual funds if you like but I hate them). You will be making interest only payments on the line of credits. Because the money is being used to buy investments, the interest is tax deductible. Still you will need to come up with the $1,500 interest payments each month. How do you do that?
The Systematic Withdrawal Plan
Have your financial planner set up a systematic withdrawal plan (SWP) from your index fund to cover the monthly interest payments on the home equity line of credit. Now the fund is actually making the loan payments, rather than you. But every year when you fill out your tax return, you’ll be able to deduct the $18,000 of interest off your taxes! That will trigger a $9,000 tax refund if you’re in the top tax bracket.
Despite the fact you have removed money through the systematic withdrawal plan to cover all interest charges, the index fund should give you substantial capital growth. It doesn’t even have to grow 6% per year in order for you to be ahead because of the deductible interest. This is a win-win situation: you’re leveraging your house with a fully deductible mortgage and you’re using a systematic withdrawal plan so no money comes out of your pocket for financing.
What if you borrow against your home, and buy index funds that decline in value? Don’t worry about it. Unless history is no guide, equity investments increase in value over the long haul. Of course, there are years when markets decline, but they are far outnumbered by years of gains. As long as your investment performs at a rate that exceeds your withdrawal rate, your investment will continue to grow. This is not a short term investment. You will be holding it for a long time (min 5 years), the longer the better. As a matter of fact you may want to increase the size of the line of credit as the value on your house goes up so you can buy more and get an even bigger tax deduction!
The above strategy can be done even if you don’t have a free and clear house. Banks will lend up to 75% on a home equity line of credit. So if you already have 50% equity in your house you can get a home equity line for the remaining 25% and increase it as your home mortgage gets paid down (Smith Manoeuvre).
This is how you built real wealth. Creating wealth by saving your pennies is a really slow and painful way to do it. If you want to get rich, you have to use a lot of leverage and get heavy into debt. Just make sure it’s good debt!
What You Shouldn't Do Before Purchasing Real Estate
No Major Purchases
This includes, but is not limited to purchasing a car, appliances, furniture, jewelry, or spending money on expensive vacations. Basically any type of larger expense you put on your credit card or get financed. When a lender qualifies you for a home mortgage they will determine your "debt-to-income" ratio. Your debt includes your monthly principal, interest, taxes, insurance and any association fees if applicable. In addition, they will also look at your credit card debts, car loans, and other regular payments. Your debt-to-income ratio is the percentage of your debt in relation to your gross monthly income. Higher personal debts (car loans, credit cards, student loans, etc.) will reduce the amount of mortgage you might qualify for.
No Large Deposits and Withdrawls - Don't Switch Banks
Lenders will review all your accounts, checking, savings, money market funds, stocks, mutual funds retirement accounts, etc. for at least the past two or three months. If you are moving money between accounts, have larger deposits or withdrawls, the lender will ask you to produce cancelled checks and deposit receipts, to document where the funds are coming from and where they are going. Determining the source of your funds for the downpayment and closing costs is of concern to the lender. Another tip, don't switch to another bank before trying to finance the purchase of a home.
Changing Jobs?
If you are an hourly employee or a salary based employee and your new employment is in the same line of work and earnings stay the same or increase, changing jobs should not affect your loan application. But if your income is mainly based on earning commissions or bonuses, changing jobs is not recommended. Lenders qualify you based on your ability to pay your mortgage with the income you will make in the future. Changing jobs in a commission based environment creates uncertainty for the lender. Lenders will use your past two years income and average it, to determine your income potential.
What to Consider When Making an Offer
Let's say you've finally found the house you were looking for and now it's time to make an offer, the big question comes up "How much should I offer"? There are various factors to consider.
First have your Realtor analyze comparable homes that sold recently. The Realtor will find properties through the MLS and Public Records that are similar in size and located in comparable neighborhoods. Your Realtor will give you information about their sales prices, number of days on the market, and their original listing price. In addition, you should consider the value of special features this home offers that make it worth more (or less) than the comparable homes (pool, bigger garage, updated baths or kitchen, etc.). Next, try to value your own motivations of buying this particular house (how much is it worth to you to get this house, in that particular neighborhood) and if you can, also weigh in the seller's motivations to sell. Last but not least, the market conditions will affect your offer price. In a "seller's market" properties often sell within days, have multiple offers, and even sell above asking price. In a "buyer's market" properties tend to stay on the market longer, prices start to go down temporarily, and sellers often become more flexible in negotiating a sales price for their property. A good Realtor will support you with providing comparable sales data to help you make a decision, but it is you who has to set the prce of the offer.
Selling a House in a Buyer's Market
By Holden Lewis, Bankrate.com
House prices are falling in much of the country, and more than 4 million dwellings are on the market. That's bad news for sellers, because buyers feel free to make lowball offers and then just wait.
It's a buyer's market, but don't despair.
Selling in a buyer's market:
You can increase your chance of selling your house in reasonable time by following a few good guidelines.
5 tips for sellers
1. Play the cards you're dealt.
2. Scope out other houses for sale.
3. Make it a turnkey, not a turkey.
4. Offer incentives.
5. Be realistic.
1. Play the cards you're dealt.
A successful poker night begins before you reach the table, when you resolve not to chase after hands that you have no realistic chance of getting. Similarly, a successful home sale begins before the house is listed, when you decide not to expect to make a killing.
"All you can do in a falling market, if you have to sell, is have the best possible product out there at the price it should be," says Diane Saatchi, an agent with Corcoran Group on Long Island, N.Y. "Not what you wish you could get, not what the neighbor got two years ago, but at the price you should get now. That's the reality."
It takes discipline to face that reality. Humility, too. For many sellers, "the only disappointment is that their friend, six months or a year ago, got more than they're getting," says Bill Christiano, a loan officer with MortgageIT in Westchester, N.Y. "Ego gets in the way when they're trying to sell. Or stubbornness, I should say."
2. Scope out other houses for sale.
Break through your ego and stubbornness by looking at the good deals that your neighbors are offering. "The most important thing is to really shop the competition on the market right now," says Elizabeth Razzi, author of "The Fearless Home Buyer," published in 2006, and of "The Fearless Home Seller," to be published in February.
Put on your shopping shoes and look at everything from a buyer's viewpoint. "Get out in the car and spend a weekend looking at everything you can," Razzi says. "Visit some weekend open houses. Just get a feel for what your buyers are looking at."
Visit newly built houses and find out which amenities and incentives builders are offering. Eavesdrop on other visitors to open houses to find out if there's something in particular they're looking for -- something you should do to make your house more presentable.
3. Make it a turnkey, not a turkey.
The word "turnkey" is used in commercial real estate. It means a property is ready for immediate use. Your house has to be that way when buyers have a cornucopia of houses to choose from. "You have to make it a 100 percent turnkey situation," Razzi says. "Everything has to be ready to roll, because buyers never want to buy a house that needs a lot of work unless it's an absolute bargain. You have to take away all their opportunities to say no."
Saatchi says that when buyers outnumber sellers, you can get away with selling a house with ratty carpet, smelly furniture and walls that need painting. The market was like that last year, but not now. Saatchi suggests hiring a house inspector before putting the house on the market. "Know now, and fix it," she says.
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