14 Fourteen I.docx

HP Fourteen I The ability to purchase a house and homeownership is the cornerstone in the accomplishment of your ‘American Dream’ and is one of the foundations of building wealth. The financial knowledge, life skill tools and financial wisdom you have gained from implementing many strategies from th...

HP Fourteen I The ability to purchase a house and homeownership is the cornerstone in the accomplishment of your ‘American Dream’ and is one of the foundations of building wealth. The financial knowledge, life skill tools and financial wisdom you have gained from implementing many strategies from the previous chapters have given you the confidence and saving for the next step of becoming a homeowner. Homeownership will give you the ability to control your housing cost for the rest of your life. There are examples of the benefits of homeownership versus being a renter for life. Homeownership would be the start of your possession of an asset that is an investment, unlike a vehicle. Investment – the use of money to put you in a position to receive interest, income, or appreciation in the future. It also can be beneficial to you when it is used as collateral for your wisely planned future interest borrowing needs. Collateral is something pledged as security to ensure repayment of a loan, to be forfeited in the event of a default of the loan. It should never be used for reckless behaviors such as gambling or loans for pleasure trips. ‘Soaring Toward Financial Freedom’ has helped you build bridges and clear paths to homeownership. Homeownership seems to be a badge of confirmation for your success, a statement that you have arrived and achieved a portion of your ‘American Dreams’. It is like at the carnival when you were to grab the ‘Brass Ring’ on the merry-go-round. What a great feeling of accomplishment. Homeownership is a huge accomplishment, a great investment, and a solid foundation for building wealth, but homeownership also comes with great responsibilities. You will receive an insurance discount for home and auto insurance. Try to view your home as a ship at sea, you must do everything needed to keep it seaworthy. That means having to make all repairs immediately such as leaks, painting, and keeping all systems safe and fully operational. If needed, you should consider taking a home purchasing and homeownership course to guide you through the process of buying and maintaining a house. These courses will also help you navigate through the responsibilities and expectations of being the captain of and the management of your home. One of the major benefits derived from homeownership is the ability to start building equity in an asset, and it puts you on a path to acquiring wealth. The purchase of a house is an investment that when you take proper care of and maintain it, builds, and increases in value. This is known as appreciation, the house is a ‘liquid’ asset, that appreciates in value over time when maintained. Liquid or liquidity means it can be converted into currency if needed and it allows you to acquire loans against it at a better interest rate than a non-collateral loan. In financial accounting, an asset is any resource owned by an individual or company. Equity is ownership of assets that has more value than the total liabilities attached to them. Equity is the difference between what the asset is worth and how much you still owe. Wealth is the abundance of valuable financial assets or physical possessions that can be converted into a form of currency that can be used for financial transactions. Wikipedia The acquisition of your new or starter house kept in good repair starts you on the path of, in essence, renting your current residence from yourself. Therefore, you are the ‘landlord’ and have all the responsibilities of repairs and maintenance to keep your ‘investment’ house in peak working condition. You also receive all the benefits of the growth of equity as you pay down your mortgage and your property appreciates over time. This creates a stream of positive cash flow for you which contributes to your wealth and can be passed on to the next generation. All of this positive progress was made possible because you made a few behavior modifications, managed your credit portfolio well, and kept a very good to excellent credit rating. You have earned the credit for the sacrifices you planned, budgeted, and worked hard at cutting back unnecessary wasteful expenditures. You lived within your means, you took the advice from the previous chapters on eating out, impulsive purchases, vehicle purchases, and budgeting, and are now able to reward yourself. You were provided with many strategic solutions for reducing your wasteful discretionary income expenditures and it worked. Now you are able to use the savings for a down payment on the purchase of a house. We also thoroughly went over the credit and vehicle chapters showing you how much money you can save when you qualify for the best loan interest rates. Well, now it’s time to further reward yourselves for keeping an excellent credit score and making sacrifices. Let’s review the following information. When your credit score, credit rating, and credit report are kept at the best highest levels possible, it allows you to increase your purchasing power and generate huge savings. It’s like having an unforeseen saving account in the background where you receive the lowest interest rates over your credit and loan borrowing lifetime for your higher credit scores. Many people don’t realize how valuable and how much having an excellent credit score can actually save them just over a 30-year mortgage. You will be very appreciative of this when it’s time to purchase a home. The difference between four percentage points on a mortgage loan for a $250,000 house when borrowing a $200,000 loan over 30 years will amount to huge savings over the loan. The following charts show the monthly payments and savings at different interest rates and APRs. Since you’ve easily saved the $50,000 needed for a 20% down payment by making the decision to change, start implementing and using many of the saving strategies suggested in previous chapters. Now let’s put all those sacrifices to work for you. Mortgage lenders usually require a 20% down payment to eliminate the need for you to purchase PMI Insurance, which is Private Mortgage Insurance. It reduces the probability and protects the Lender from losses if you default on your mortgage obligation. If you don’t have the 20% for a down payment your mortgage payments may be about 0.05% APR to 1.00% APR more with PMI. On this $200,000 mortgage, it could cost you about $2,000 additional dollars. As you will see in the charts below there are several calculations using different interest rates from 2.0% APR to 4.0% ARP. The interest rates are increased by half of a percent each time. For simplicity of the interest rates illustrated calculations there is no Principal Mortgage Insurance included. TOTAL MORTGAGE PAYMENT BY RATE $200,000 Loan over 30 years or 360 Months Interest Rate 2% 2.50% 3% 3.50% 4% Payment 739 790 843 898 954 Total Interest 66158 84523 103592 123325 144016 Total Payments 266158 284517 305586 323320 344016 TOTAL MORTGAGE PAYMENT BY RATE $200,000 Loan over 30 years or 360 Months Interest Rate 2% 4.50% 5% 5.50% 6% Payment 739 1013 1073 1135 1199 Total Interest 66158 164961 186794 209178 231711 Total Payments 266158 364962 386788 409128 431705 Please note: The monthly payment and total interest paid for the interest rate at 2% interest APR, is $739 per month while paying only $66,158 in total interest. The total cost of loan payments is $266,158 ($200,000 borrowed + $66,158 in interest). The monthly payment and total interest paid for the interest rate at 6% interest APR, is $1,199 per month while paying $231,711 in interest. The total cost of loan payments is $431,705 ($200,000 borrowed + $231,711 in interest). As you can see your $200,000 mortgage loan over 30 years means your monthly mortgage payment will be $460 per month more ($1,199 - $739) than if your interest APR rate was four percentage points lower. This savings amount would allow you to pay a lease for two new vehicles on a three-year at $200 per month each. As the chart indicates you will pay an additional whopping $165,600 more in mortgage interest payments over 30 years ($460 x 360 months = $165,600) for a 4% higher interest APR rate than you would on a 2% interest APR. This is like a penalty for having less than a very good credit score, higher interest rates will always cost you more even as the rates go up. What could you do with that extra $165,600 over a 30-year period? It’s too late now, if only you had sacrificed, had the discipline, and better managed your credit score. This money would be yours to perhaps, send two children to college. To pay Tithes and make donations to your church and or charities? Plan and budget to buy a summer home? Start a business? To buy a second or sports car? Treat yourself to some of those things you cut back on earlier like designer purchases. You’ve earned it. Add those premium cable and sports channels you crave in moderation. You can choose to attend more sporting, concert, and theater events if you like. Take family vacations or trips to one of the major theme parks, put more money in your savings, investment, and retirement accounts. Pay-off student loans? The bottom line you would find something to do with this amount of money rather than just giving a lot of extra money in interest to your mortgage company. You are paying more in interest payments and losing this money just because your credit score didn’t warrant you receiving the lowest interest rates available. If you plan you could use the $460 per month difference in the higher interest payment to pay down your mortgage. This would generate additional savings by making additional principal payments each time you pay your mortgage. You don’t have to use the entire $460 for the additional principal payments, you could be as little as $25 per month. It’s like having a savings account that is paying you the same interest rate you are paying your mortgage company for your mortgage. Of course, the more money you pay each month the less total interest you will end up paying over the mortgage term. If you can pay a couple of hundred dollars in additional monthly principal payments, you could end up paying off your mortgage in only fifteen years or less. This would save you tens of thousands of dollars if not hundreds of thousands of dollars in your total interest payments. So, please refer to and review your specific mortgage’s amortization tables to determine how quickly you can pay off your mortgage by making additional principal payments monthly. Call your mortgage lenders to get the necessary information to make the best decision. Now, this is living your best life, this is the payoff benefits from the fruits of all your planning, budgeting, sacrifices, and disciplines you have voluntarily incorporated into your lives. These are the benefits of skipping the mistakes, and pitfalls, not having to stumble your way through life, and attending life’s ‘School of Financial Hard Knocks’. You were able to develop and achieve your goals and dreams by building bridges and paving clear paths from financial illiteracy to financial capabilities. Simply by following many of the ‘Food for Thought’ strategies and solutions in ‘Soaring Toward Financial Freedom’. At the end of the chapter there are several chart showing you how much you will pay in rent if you rent for 30 years, and you landlord raises your rent only 4% per year. This will also be a chart showing your rent increase if your rent is raised 6% per year. Then there are charts showing you how much money you will pay in rent over the next 30 years versus what the total cost to purchase a house with a 30-year mortgage. These charts will also show you that the difference in what to will pay in rent versus purchasing a home is that wealth you are accumulating instead you are giving it away because you didn’t even know it existed to acquire. There will also be an opportunity for you to use your current monthly rent to calculate how much your rent will increase over the next 30 years. Then you can use those numbers to calculate how much money you will pay in annual rent to someone else when you could be using that money saved to purchase a house. It will confirm that even at a higher interest rate than your annual rent increase you are far better off as a Homeowner than as a Renter. Please feel free to use your notebook to calculate and forecast your future annual rental contract increases. Homeownership is a great responsibility, however when you purchase something with your own ‘sweat equity’ or hard-earned money you tend to take much better care of it. Now that you are aware of the ‘term’ appreciation, your efforts to maintain your home is like money in the back. Yes, you could be acquiring an asset, a house which will appreciate and start building the foundation for your own wealth, if only you know how. This is the primary goal of ‘Soaring Toward Financial Freedom’ to teach you, that building wealth is the accumulation of making good sound financial decisions whenever you have the opportunity. But you must have the financial literacy knowledge to do so. Here are a few suggestions for you now ‘new’ proud homeowners. Do your research and learn some basic repair and maintenance skills to maintain your house and purchase several basic tool kits. You should include hammers, at least a 10-piece screwdriver set, tape measure, power drill, flashlights, socket wrench set, step stool, ladder(s), paint brushes, duct tape, etc. Those big box home improvement and your local hardware stores offer you free home improvement workshops. The basic home maintenance repair shows you how to change your furnace filter, electrical & plumbing 101. There are many Internet How To videos. They are great resources of references for your DIY (do it yourself) small jobs. This can save you hundreds if not thousands of dollars in maintenance costs. These big box stores are great resources for all your home improvement supplies for DIY projects. If you have their credit card, you can request that your contactor purchase your project supplies from them to earn reward points. Make sure you research the buyer’s real estate agent’s responsibilities to you when purchasing a pre-existing home. Read the responsibility of the home inspector and don’t initial or sign away your right to limit the home inspector’s financial liability to you if they miss existing problems with the house that you are buying. Don’t agree to limit their liability only to the cost of the home inspection. Especially, because those missed issues may end up costing you thousands of dollars in repairs. Article: In most areas without rent control, there is no limit on the amount your landlord can increase the rent. But landlords cannot raise the rent at whim. The timing of a rent increase, and the way your landlord communicates it, are governed by statute in most states. By: Marcia Stewart Source: Nolo. The benefits of purchasing a home versus renting an apartment. The primary benefit of purchasing a house is by obtaining a mortgage to ensure your monthly payments will remain the same over 30 years. Plus, you are renting from yourself, and you have a tax deduction, building equity, and appreciation. Here’s a cost justification strategy for and how purchasing a house versus continuing to rent an apartment. In addition to starting to build a portfolio of assets, many people purchase houses to allow them to have predictable and fixed monthly overhead living expenses over the next thirty years, with no rent annual housing increases. Article: If you’re ready to buy a home, you might wonder how to budget for your target house cost. There would usually be a down payment required to purchase a home. Here’s a breakdown of what you might face monthly, in interest and over the life of a $100,000 mortgage. At a 4% fixed interest rate, your monthly mortgage payment on a 30-year mortgage might total $477.42 a month. Other costs and fees related to your mortgage may increase this number such as property taxes and homeowner’s insurance. Your total interest on a $100,000 mortgage for a 30-year mortgage with a 4% fixed interest rate, you'll pay $71,869.51 in interest over the life of your loan. That's about two-thirds of what you borrowed in interest. This $71,869.51 in interest payments would be an income tax deduction over the 30-year mortgage loan. Then there is the actual acquisition of the house that is an asset with liquidity. By: Katie Levasi, Source: Finder To make the above article a more realistic illustration, let’s double all that numbers to better reflect today’s current rent of $1,400 per month. On a $200,000, 30-year mortgage loan at a 4% interest APR rate the monthly payments would be $954.84. Then you’ll have the cost of property taxes and homeowners’ insurance. This would make the total monthly expenditure approximately $1,400 similar to the rental cost of a two-three-bedroom apartment. The total interest paid over the 30-year mortgage would be $143,740. There would also be tax deductions for the property taxes that may be about $102,000 over 30 years. The total cost of the mortgage interest of $143,740 and the school and property taxes of $102,000 amounts to a total of $245,740 paid. If you divide this number by 30 years, ($245,740 divided by 360) you get about $8,192 per year. This $8,192 represents your annual mortgage interest paid plus a property tax deduction on your income taxes. The interest paid and your annual property and school taxes paid would come directly off your gross income when doing your income taxes. Now, if you can add back the cost of the original mortgage of $200,000 to the $245,740 you get a total of $445,740 paid for your house. The privilege of homeownership would include three components. Those are maintenance, repairs, and home improvements. Even if you add in the additional $200,000 for these three components you would get $645,740 for the total cost of your house over 30 years. If you divide the $645,740 by 360 months (30 years) you get a monthly payment of $1,794 over 30 years. Plus, you now own the house as a paid-in-full asset that has appreciated well beyond what you have spent on it. The renters who are paying $1,400 per month today, with only a 3% annual rent increase will end up paying over $813,596 in total rental payments over a 30-year period. The total rental payments equate to an average of $2,260 per month ($813,596 divided by 360) over 360 months or 30 years. The average mortgage payment per month for the homeowner was only $1,794. The renter will pay an average of $466 more per month ($2,260 - $1,794) than the homeowner. But the homeowner has a paid-off asset of $250,000 we still need to add in appreciation. Therefore, the renter’s payments are 20% higher ($1,794 divided by $2,260) than the Homeowner’s mortgage payments. The difference of $466 more per month times 360 months equals a total of $167,760 more than the renter paid in rent. More than the homeowner to own a house. This confirms renting can be far more costly than the purchase of a home. The illustration only uses a 3% annual rental lease increase. The landlord can increase your rent annually at any amount they choose to increase it, some have increased rent up to 20% at a time. The homeowners versus renters’ illustration did not even include the benefits of the $8,192 annual income tax deductions for the mortgage interest payment and property taxes annually. Again, over thirty years ($8,192 x 30) that amounts to about $245,740 of income tax deductions the homeowner receives that the renters are not entitled to. The income tax deduction amount benefit is a net adjustment reduction in the amount of the homeowners’ income they don’t pay income taxes on. The homeowners also receive the benefit of appreciation of their house over 30 years. Let’s estimate the value for a $250,000 house if the property is maintained and upgraded it could appreciate to a minimum of $200,000 or 80% in equity over thirty years, which would make it now worth $450,000 or more. You have the difference between what the renters have paid, $813,595 versus the total cost of what the homeowner spent $645,740 in mortgage payments. This $645,740 includes the added $200,000 for maintenance, repairs, and upgrades. Now, let’s look at how much you saved and earned in appreciation from purchasing a house. The homeowner’s income tax interest deductions are $245,740 plus the appreciation of $200,000 over 30 years in the amount of $445,740. This number represents the total income tax deduction savings and appreciation value you received by owning the house. If you take the 30 years of rent of $813,595 minus the $645,740 cost for home ownership that would equal $167,855 less paid for your residence over the same thirty-year period than the renters paid for an apartment. The $200,000 in the appreciation of the house wasn’t added to the house value, Therefore, the homeowner now has an asset worth over $845,740 after thirty years if you included what they save by not renting. The renter owns absolutely nothing after paying $813,595 in rent over thirty years. Looking at it another way, the total cost of owning a home is the total of the mortgage payments plus property and school taxes. You must subtract the mortgage interest payments, and school and property taxes. Then add appreciation and subtract all repairs and improvements and you get the amount you saved by investing in the house purchase. This is one foundation formula for building financial security and personal wealth. If you are not able to afford a house that cost $250,000 consider purchasing a home valued at $150,000 or less and obtain a $125,000 mortgage loan with a 20% down payment. The important message here is that purchasing a house in move-in condition is a better long-term investment than renting an apartment long-term. Even if you have to make some improvements to your house, it is better to own than to rent. It also guarantees your monthly overhead living expenses will remain constant and not drastically increase annually due to rent increases. Just as an FYI (for your information), your landlord can raise your rent annually as much as the market can handle. There have been stories of landlords who have raised the rent by over 36% in one year. If you have been living in your apartment home for at least ten years, you can recall when your rent was probably 40% less. If you stay in your apartment home for another ten years, it will properly increase another 40% if not more from what you are paying today. That would make it more than doubled since you have been there. Will you be able to afford the rent? Typical annual rent increases are 4%. The benefit of buying a home is your mortgage payment remains the same for 30 years. This is critical when it comes to maintaining your budget, credit rating, and building wealth over the years. As your life progresses financially and your income increases you may have the option of upgrading to a larger more expensive house. This new house upgrade will require more care and maintenance and will have the benefits of increased appreciation. If you’ve kept a well-maintained house, it may allow you to receive numerous buying offers when you put it on the market for sale. Over time this increased appreciation should make it easier to transition into your next house. You should plan to live in your house for at least seven years. When you change houses too frequently, you’ll create unnecessary closing and realtor commissions costs which will eat up your house’s equity, sometimes even costing you money. Please do your research on first-time home buyer programs that are offered in your area. This is extremely important, also, to make sure you have adequate Term or Whole-Life insurance to cover the cost of the house in the event of an unexpected catastrophic event. It is also important that you understand the difference, Term Life policies are only active for a specified term of years and will expire, whereas Whole Life policies don’t expire. You may need to have at least another one or two hundred thousand dollars in life insurance to cover your living expenses and please make a Will to describe where and how to disperse your assets. This is needed to assist in the financial needs and transition of your loved ones in the event of your early demise. It will be much less of a financial disruption and devastation to your beneficiaries to minimize their financial stress in the future. The value of the assets you acquire over your lifetime can be classified as your net worth. As your net worth grows, it becomes another part of your wealth. So, please consider developing plans, strategies, and budgets to allow you to sacrifice and save for the purchase of a house so you can make your home comfortable and enjoyable. Your house will become the asset foundation that you can use as security and collateral for future large purchases that require financing. When using the Renters vs. Homeowners analysis you can see the tremendous benefits of owning a home. If you are a renter and you want to one day own your own house, please follow the many suggested strategies and solutions to manage your money, credit, and finances. This should ensure you have the knowledge and financial skills to plan and budget to save for a house. Other than the purchase of a house, there are only a few assets you can acquire throughout your life that will appreciate in value over time. There are stocks and bonds over which you have very little or no control, and have a higher risk of losing money, and then there are properties. There is also art, but the collection of art that will appreciate is usually too expensive for most people to purchase. The one asset you can acquire, and control is a house. Using all those funds you had the opportunity to save in the previous chapters can be put toward a down payment for your house purchase. The house will serve as a vessel to allow you to reduce your overhead living expenses, and overall income tax obligations and keep your monthly overhead expenses from increasing annually as it does with renters. During times of high inflation, annual rent increases can be as high as 20% over a one-year period. Doing these things shows how managing your credit rating, savings, and the purchase investment in a house can empower can increase your personal wealth exponentially. There are several other important features you may want and need to take into consideration when purchasing a house. They are the quality of local school systems and the real estate tax rates. The mill rate or property tax rate is the amount of tax payable per dollar of the assessed value of a property. The mill rate is based on "mills." It is a figure that represents the amount per $1,000 of the assessed value of the property, which is used to calculate the amount of property tax. This tax mill rate is determined by the state and county you choose to reside in. The amount of property and school taxes can be a deal breaker with respect to your budget, your ability to afford that house, and your financial success. You will find there are actually opportunities where you could purchase the exact same configuration of a new house from the same builder in two different counties or states. Some states have an effective property tax rate of 2.76% or higher of the property value. There are other States whose effective tax rate is very low at only 0.056% property tax rate. The taxes on the same house in two different areas valued at $400,000 can be drastically different. In the area with the higher tax rates, property taxes is $11,040 annually versus only $2,240 annually in the lower tax rate area. These two locations could be within only 30 miles or 40 minutes apart, with research and another opportunity to save money. That is an annual tax obligation difference of $8,800 or a monthly difference of $733.33 per month at the higher tax rate. Over a thirty-year mortgage, you would have paid over $264,000 more in property taxes just to live in that higher-taxed county, township, borough, or state. What are you actually receiving for that extra $733.33 per month? Sometimes it may be a better school district, seldom true. Remember “every dollar you spent unnecessarily today is a dollar you will not have in the future for something you may need or ‘want’”. Could you use an extra $8,800 per year of discretionary income to save or put it into a college fund? Even after your mortgage is paid off, your property taxes will continue as long as you live in the house. If you stay in that house for another 20 years, you’ll pay an additional $176,000 more in property taxes in the lower tax rate area. If you live in that house for 50 years, you will pay an additional $440,000 over the house in a lower property tax rate area. That’s more than the original cost of the house. This is assuming there have been no tax increases over 50 years, that unlikely. This is money you should be saving for retirement and in a personal wealth portfolio. Your property and school taxes have the potential to continue to increase annually. So, in essence, these extra tax dollars are really taking money away from the amount of money you should be saving for yourself. Another concern is when you are ready to sell your house think about how the higher property taxes may impact the number of buyers willing to put in offers at your asking price or above! Will the higher property taxes reduce the number of interested buyers and prohibit those interested from having a ‘bidding’ war for your house? Two other things that need to be mentioned are that as a homeowner your mortgage loan and property/school taxes must be paid in full every year. Usually, when you have a mortgage your property and school taxes are added to your mortgage payments. Once your house is paid off, it becomes your responsibility to pay the property and school taxes on your own. This may require you to budget and save monthly to pay them when they are due. This should be no problem since you have been following the process and have a ‘Boat Load’ of savings. A failure to comply with these two-homeownership tax expense requirements could cause your house to go into foreclosure or have a Tax Lien placed on it. A Lien secures the government's interest in your property when you don't pay your tax debt. A levy actually takes the property to pay the tax debt. If you don't pay or make arrangements to settle your tax debt, the government can levy, seize and sell any real estate or personal property that you have interest in. Wikipedia Foreclosure is a legal process in which a lender attempts to recover the balance of a loan from a borrower who has stopped making payments to the lender by forcing the sale of the asset used as the collateral for the loan. Wikipedia If you fail to pay your property and school taxes your County will put a Lien on your property for the outstanding taxes. You will not be able to sell your house until this Lien is satisfied. If you neglect to pay your taxes year after year the County may sell your house for the Tax Lien amount in an auction with other properties that are behind in their taxes, giving you what’s about the tax debt. The other responsibility homeowners must manage is the repayment of their mortgage loan. If you get too far behind in your mortgage payments the mortgage lender can move to put your house in foreclosure. This means the lender has started the process to recover their back unpaid mortgage payments and will put your house up for sale because you defaulted on your payment agreement. You can lose your house if either one of these things happens.