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. Another suggested strategy mentioned earlier to reduce the cost of your house purchase is to consider making additional principal payments with your mortgage payments. Those additional payments are applied directly to the outstanding principal mortgage balance, effectively reducing the total interest paid and the number of payments during the loan period. These extra principal payments are a great opportunity to save additional money during the term of your mortgage. As mentioned earlier, effectively you’ll receive the same interest rate you’re paying the mortgage company on the money you are pre-paying to reduce your total mortgage interest paid on the loan. These interest rates are much higher than your banks. In essence, this is saving you tens of thousands of dollars if not hundreds of thousands of dollars in interest over the term of the loan and at the same time paying your mortgage off much earlier. Please review your mortgage payment amortization schedule to see exactly how much interest you are scheduled to pay over your 15, 20, or 30-year mortgage. You may elect to start making additional payments toward your principal balance immediately. Many experts say that homeownership is the foundation and cornerstone to building wealth. Once you purchase a home with a mortgage you have controlled and fixed your largest and most expensive overhead monthly expense for the next 30 years. You now have become your own landlord, and you are paying yourself monthly. When done correctly, this monthly payment builds equity in your home assets and provides you with a huge tax deduction. As you know, the present Global inflationary economy has raised prices of just about everything. The Federal Reserve has raised interest rates five times this year through October 2022, in an attempt to slow down inflation. They raised interest rates by 75 basis points or ¾ of a percent since January 2022, with the possibility of two more before the end of 2022. This has caused mortgage interest rates to double in the last 12 months and they have gone from 2.8% to 7.08% in October 2022. That 2.8% mortgage interest rate was the lowest mortgage interest rate had been in the past 20 years. Last year a $300,000 30-year mortgage monthly payment would have cost you $1,300 per month. Today, that same $300,000 30-year mortgage will now cost you $2,000 per month in payments. That’s $700 per month more over 30 years or for 360 payments, which comes out to be $700 x 360 equal $252,000 you will pay in additional interest for a 4.285 higher mortgage rate. It cannot be stated any plainer, this is the exact same which happens to you when your credit score is less than excellent or very good. You will always pay a much higher interest rate and more interest for a lower credit score. The lower your credit score the higher your financing interest rate will be. The above paragraph represents the same amount you will end up paying for a house with a low credit score. That additional $252,000 you will pay in interest is your money, the money you should be saving toward your retirement and personal wealth. Please, don’t leave it on the table by giving it to your multi-billion-dollar mortgage company. Even with these higher mortgage interest rates homeownership is still a good investment for those who qualify for a mortgage, lower scores will just pay more. You see later that is still more favorable than renting over your lifetime. You may not be able to control interest rates, but you darn sure can control your credit score to ensure you always receive the lowest interest rates available. No matter what the best interest rate are, it will increase your ability to make your mortgage payment on time. The higher interest provides you with the opportunity to pay an extra toward your loan principal from your lower interest earning savings. Here's a quick reference of how the current 7.08% interest rate effect different mortgage loan amounts with respect to how much additional interest is paid over the 30-year term of the mortgage. Inflation caused these higher mortgage rates; your lower credit score can double the amounts you end up paying. It also shows the additional monthly interest and the total additional interest you will pay over the 30-year mortgage, which is the money you should be saving for yourself. Mortgage 2021 Rate New Rate Add’l Monthly Total Interest 2.8% 7.08% Payments Paid in 30 Yr. $100,000 $ 434 $ 667 $ 233 $ 83,880 $200,000 $ 868 $1,334 $ 466 $ 167,760 $300,000 $1,300 $2,000 $ 700 $ 252,000 $400,000 $1,734 $2,667 $ 933 $ 335,880 $500,000 $2,168 $3,334 $1,166 $419,760 Inflation is cylindrical and should improve within a few years, lowering interest rates and providing you an opportunity to refinance your mortgage at a lower rate with your very good credit score. However, if your credit score is poor even when the economy improves you will never get the best rate even if you qualify for refinancing. Just a few more ‘Food for Thought’ ideas on the importance of maintaining a very good to excellent credit score. It’s your money, plan to get it. It will be much easier for you to maintain a very good or above credit score if you start by making sacrifices, first by living within your means, what your job affords you. Having a ‘living wage job’ allows you to pay your monthly overhead expenses and hopefully leaves you a lit bit to save before making frivolous purchases. If you plan, budget, and sacrifice now, you will be rewarded with a very good credit score and pay you back in savings tens of thousands if not hundreds of thousands of dollars less in interest payments. If you exercise patience, this will give you the money to indulge in some of the finer things in life in moderation later in life. Energy costs are unpredictable, if you live in an area where you have multiple seasons there are additional challenges in managing your air conditioning and heating utility bills. It’s important to keep your windows and doors closed when your utilities are running. You need to dress accordingly for the seasons, in winter months try to keep the thermostat somewhere in the area of 68 – 72 degrees. This may mean wearing a sweater, sweat, and or lightweight turtlenecks around the house. You may consider turning the heat down 10 – 15 degrees when you go to bed or consider wearing heavier pajamas or adding another blanket if needed. In the summer season find a comfortable temperature that works for everyone. That temperature may be around 72 – 76 degrees. It may take a few days, but your body will adjust to whatever temperature you decide works for everyone. Your utility bills will determine if further adjustments are needed. Consider investing in a Programmable/Smart thermostat it allows you to program it to your schedule. So, when you are home the temperature is set where you need it. It will manage your systems for you by turning the heating unit down and turning the air conditioner unit up to a higher or less cool temperature when you are not at home. You can program the thermostat unit to accommodate your sleep and weekend schedules as well. You will be amazed how much a Programmable/Smart thermostat can save you in real dollars while keeping you comfortable whenever you’re at home. It was mentioned earlier that you have no control of the cost of utilities which is true, but you can control the amount of the utilities you use. These simple thermostat adjustment suggestions can save you up to 10% on your utility bills. But, if you like it a bit warmer in the winter or a little cooler in the summer, you can make the conscience decision to increase your utility budgets. If you have the money, then go for it, sacrificing has earned you this privilege. Even the current apartment rental market can be subjected to supply shortages, creating bidding wars by prospective tenants for available units. It seems the only way to control your major overhead living expenses, which is your ever-increasing monthly rent, is to buy any acceptable house you can afford. This keeps your highest monthly expense, and your mortgage payments constant and fixed for the next 30 years. Homeownership is by far the best way to ensure your housing budget doesn’t get out of control, making it easier to keep your budget in control. Homeownership is also one of the best ways to create wealth with the least amount of risk of losing your principal investment. Mortgage loans usually have loan terms of 15 to 30 years. Whereas your rent is subjected to annual lease increases without any increase percentage limits. Sometimes landlord sells their properties, the new owner raises the rent because either they have overpaid for the property and or underestimated the expenses to maintain the property. Article: CityLab Housing - What’s Driving the Huge U.S. Rent Spike? Rent increases of 20% or more are making life difficult for low-income tenants in many cities, just as eviction bans and unemployment relief are running out. It’s a nationwide phenomenon that’s having a significant impact on housing markets, affordability and access. Every one of the nation’s 100 largest metro areas has seen month-over-month rent growth over the last five months, according to Apartment List economist Christopher Salviati “We’re seeing an unprecedented level of rent growth,” Salviati said. “Our national index shows rents up 12.4% year over year, after a pretty modest dip early last year due to the pandemic.” Gilbert, Arizona, a suburb south of Phoenix, saw rent skyrocket 24% between March 2020 to September 2021, said Jeff Andrews, data journalist at Zumper. Metro areas that are primarily single-family suburbs, such as Orlando and Atlanta, are also seeing big spikes (21% and 15%, respectively). Patrick Sisson October 5, 2021, Source: NATIONAL MULTIFAMILY HOUSING Private Company Is the Rental Industry booming because people can’t buy houses because they can’t get a mortgage or is it because they think they can’t afford the payments? Either way, perhaps a budget may be the solution. “The takeaway message here is, to do the necessary research and planning before you purchase a house. Choose an ‘affordable’ area where you want to plant your roots. Know the property and school taxes to confirm they are affordable today, tomorrow, and once you are retired, because taxes will continue to increase year over year. Make sure you have at least a 20% down payment ensuring there will be no PMI Insurance. Knowing you’ve managed your finances and credit score as close to an ‘excellent’ rating as possible are the things to help keep your mortgage interest payments as low as possible, making it much easier to manage your mortgage payments. This will make your homeownership experience so much more enjoyable for years. Maintaining a very good credit score is the single most important ‘Key’ to paying lower interest rates for all the high-ticket items you must finance. These lower-interest loan payments will exponentially increase your life’s overall purchasing power. These financial life skill tools will keep you from ever needing to borrow money or finance purchases from sub-prime lenders. This alone is paramount for building bridges to achieve your dreams and creating personal wealth. Other critical things you can do to build financial security and wealth in your lifetime are to have a plan, budget, spend wisely, and maintain a very good to excellent credit score. Last and most important acquire assets like the purchase of a house and save wherever you can. One interesting FYI, let me try to explain to you just how much money you are actually leaving on the table. What is a billion of anything? There are people who are billionaires, meaning their net worth is at least $1 billion dollars and some have over $200 billion dollars. Please research the Riches People in the World and Forbes List of Billionaires, you’ll be surprised how much money some folks have. The number one billion looks like this 1,000,000,000. Yes, that’s a 1, followed by nine zeros. FYI, this is what a trillion looks like 1,000,000,000,000, a 1 followed by twelve zeros and it’s one thousand billon. Putting it in a perspective you can ‘relate to’, here goes. It takes 32 years for one billion seconds to pass in time. That also means a billionaire has enough money to spend one dollar every second of every day, seven for thirty-two years. I think you know this is going a person worth $2 billion dollars could spend $2 per second every day for thirty years and so on. You didn’t know that did you? This is why you can’t keep up with the Jones, so stop trying to. Some people just got it like that! Now, here's something you can do if you really want to know how much a large sum of money looks like. Take your time over a week or throwing 100,000 grains of rice out just to see how much it really is and looks like. That’s how much of your money you are losing or leaving behind every time you pay $100,000 in additional interest simply because you have less than a very good credit score. If counting out 100,000 grains of rice seems a bit too hard to do. Then there is a short, count out only ten thousand grains of rice, then get nine additional same containers and fill them up with the same amount of rice. Now you have a visual of the money you are leaving behind, you’re not collecting simply because you didn’t know it was available to you until now. This confirms that ‘living within your means’ and maintaining excellent credit pays off exponentially. Here is that R-word again, the Internet says that there are approximately 8,000 to 9,000 grains of uncooked rice in a cup. This means it takes eleven to twelve cups of rice to make up 100,000 grains of uncooked rice. Measure out ten cups of uncooked rice and dump the rice into a large pot to see how much it is. Then imagine each grain of rice is a one-dollar bill, it’s a lot of money, isn’t it? Here’s a last bit of FYI trivia for you, $100,000 in one-dollar bills would stack about 36 feet high. This way too much money for you to let slip through your fingers, isn’t it? I stand corrected unless you ‘got’ it like that! If you actually do this, I’m positive you will change your behavior, and spending habits. You will seriously start implementing many of the suggestions and solutions you’ve read throughout this book course, making the necessary changes to increase your future financial security. Can afford to leave this money on the table? So why aren’t you interested in finding ways to make sure you get those tens of thousands, if not hundreds of thousands of dollars available to you over your lifetime just by simply managing your credit score and making good sound financial purchasing decisions? Hopefully, you’ve been introduced to enough strategic ways to save money and start collecting your ‘sums of the lottery winning’ with your name on it. The following Tables show you how much it cost to continue rent versus purchasing a house and why purchasing a house is the best way to keep your housing cost under control over your lifetime. You will see that you may not be able to afford your annual rent increases over the next 10, 20, or 30-plus years. These numbers also represent your lost savings, retirement, and wealth over your life as a Renter rather than a Homeowner. Cost of Renting Over 30 Years Monthly Annual 4% Annual 6% Monthly Annual 4% Annual 6% $240K Mortg Rent Increase Increase Rent Increase Increase Mthly-Paymt 1 1000 1000 1 1500 1500 1800 2 1040 1060 2 1560 1590 1800 3 1082 1124 3 1622 1685 1800 4 1125 1191 4 1688 1786 1800 5 1170 1262 5 1756 1894 1800 6 1217 1338 6 1826 2007 1800 7 1265 1420 7 1900 2128 1800 8 1316 1505 8 1976 2255 1800 9 1370 1596 9 2055 2390 1800 10 1425 1691 10 2137 2534 1800 11 1482 1793 11 2222 2687 1800 12 1541 1900 12 2312 2848 1800 13 1603 2015 13 2404 3020 1800 14 1667 2135 14 2500 3200 1800 15 1734 2264 15 2600 3392 1800 16 1803 2400 16 2704 3596 1800 17 1875 2544 17 2812 3811 1800 18 1950 2697 18 2925 4040 1800 19 2028 2858 19 3042 4282 1800 20 2110 3030 20 3164 4540 1800 21 2195 3212 21 3290 4812 1800 22 2281 3405 22 3422 5101 1800 23 2373 3609 23 3560 5407 1800 24 2468 3825 24 3702 5731 1800 25 2567 4055 25 3850 6076 1800 26 2670 4298 26 4081 6440 1800 27 2776 4556 27 4244 6827 1800 28 2942 4830 28 4414 7237 1800 29 3060 5120 29 4590 7671 1800 30 3182 5227 30 4775 8131 1800 This Chart shows you how purchasing a house allows you to control your living expenses over 30 years. Otherwise, your rent could go up 3 times to 5 times over your current payment in 30 years. Will you be able to afford your higher monthly rent payment 30 years from now? Your Rent Increases Over 30 Years Example Your Your Monthly Annual Increase Monthly Rent Annual Increases Rent 4% 4% Yrs 1 1000 1 2 1040 2 3 1082 3 4 1125 4 5 1170 5 6 1217 6 7 1265 7 8 1316 8 9 1370 9 10 1425 10 11 1482 11 12 1541 12 13 1603 13 14 1667 14 15 1734 15 16 1803 16 17 1875 17 18 1950 18 19 2028 19 20 2110 20 21 2195 21 22 2281 22 23 2373 23 24 2468 24 25 2567 25 26 2670 26 27 2776 27 28 2942 28 29 3060 29 30 3182 30 Your - Total Rent Cost vs Buying Over 30 Years Monthly Your Annual Your Annual $200K Mort@ 6.6% Anal Mortg Rent Increase 4% Rent Payments Monthly-Paymt Payments 1 1500 18000 2 1500 18000 3 1500 18000 4 1500 18000 5 1500 18000 6 1500 18000 7 1500 18000 8 1500 18000 9 1500 18000 10 1500 18000 11 1500 18000 12 1500 18000 13 1500 18000 14 1500 18000 15 1500 18000 16 1500 18000 17 1500 18000 18 1500 18000 19 1500 18000 20 1500 18000 21 1500 18000 22 1500 18000 23 1500 18000 24 1500 18000 25 1500 18000 26 1500 18000 27 1500 18000 28 1500 18000 29 1500 18000 30 1500 18000 Totals 0 540000 House Owned 0 250000 Appreciation 0 300000 Total Wealth* 0 550000 This represents $550,000 how and why homeownership is the foundation of building wealth. In essence, you have been your own landlord over the past 30 years. Cost of Renting vs Purchasing Over 30 Years Monthly Annual Rental Total Rental $240K Mortgage Mortgage Rent Increase 4% Payments Monthly Payment Annual Payments 1 1500 18000 1800 21600 2 1560 18720 1800 21600 3 1622 19464 1800 21600 4 1688 20256 1800 21600 5 1756 21072 1800 21600 6 1826 21912 1800 21600 7 1900 22800 1800 21600 8 1976 23712 1800 21600 9 2055 24660 1800 21600 10 2137 25644 1800 21600 11 2222 26664 1800 21600 12 2312 27744 1800 21600 13 2404 28848 1800 21600 14 2500 30000 1800 21600 15 2600 31200 1800 21600 16 2704 32448 1800 21600 17 2812 33744 1800 21600 18 2925 35100 1800 21600 19 3042 36504 1800 21600 20 3164 37968 1800 21600 21 3290 39480 1800 21600 22 3422 41064 1800 21600 23 3560 42720 1800 21600 24 3702 44424 1800 21600 25 3850 46200 1800 21600 26 4081 48972 1800 21600 27 4244 50928 1800 21600 28 4414 52968 1800 21600 29 4590 55080 1800 21600 30 4775 57300 1800 21600 Totals 1015596 648000 Asset Owned 0 300000 Appreciation 0 300000 Down Payment 60000 Total Wealth* -1075176 660000 Just two more points that need mentioning, in times of high inflation, rising rents, and mortgage interest rates many people may start cohabiting to reduce their monthly living expenses and to be better able to make ends meet. There are situations where some adult children are moving back in with their parents and in other situations where some older citizens are moving in with their adult children. This could be a great short-term solution to keep them from depleting all their savings or allow them to continue saving for the future. If you really need to purchase a house now, you may also want to consider an adjustable-rate mortgage, a.k.a. ARM, the interest rate may start out 40% lower than the current 30-year fixed rate. However, the ARM will adjust annually by a maximum of 2 percentage points up or down based on the current mortgage interest rate. You can lock in a fixed mortgage rate when the mortgages come down. Some people have begun sharing apartments and renting houses together so they can split the overhead living expenses. As mentioned earlier in the Chapter ‘Let’s Get Started’, if they are not your immediate family be very selective in whom you chose as your roommate(s). Lastly, use this article as a reference guide to give you an idea of what price point house your salary will enable you to purchase in the Bottom 5 Cities and the Top 5 Cities. Your first house purchase is likely closer to the bottom 5 house prices or twice as much. This information will help you plan, budget, and save for a house you can comfortably afford based on your income(s). If you are having problems paying your mortgage, you really need to reduce and change your spending behaviors. There are a huge number of houses between these two examples. Article: Here's How Much Income You Need to Afford a Home in These 5 Hot Cities Published on Sept. 11, 2022. By: David Chang, ChFC®, CLU® Writer, Consultant KEY POINTS To afford the United States median home price of $413,500, you need to make a salary of $95,694.82. Not surprisingly, the top five metro areas are on the West Coast, with four out of five in California. The most affordable metro areas are in the Midwest and South. Your housing dollars will go further in some areas than in others. The median home price in the U.S. is $413,500. Assuming a 30-year fixed mortgage with an interest rate of 5.48%, the salary you would need to afford this home comes out to $95,694.82. This is almost double the annual average salary in the U. S. of $58,260. With both real estate prices and inflation surging, the cost of owning a home has become more unaffordable. Many people are moving to cities with lower costs of living, hoping to achieve their dream of owning a home. The salary you need to purchase a home varies widely depending on where you live. Here is what you need to afford to pay the principal, interest, tax, and insurance payments on a median-priced home in these cities. Bottom 5 cities The most affordable metro areas tend to be in the Midwest, South, and Mid- Atlantic regions. Pittsburgh is the most affordable metro area. To afford a house in the Steel City, you need a salary of close to $55,000, just under the annual average salary. Rank Cities / Metro Area Median Home Price Monthly Payment (PITI) Salary Needed 1 Pittsburgh $215,000 $1,268.86 $54,379.57 2 Cleveland $225,600 $1,348.23 $57,781.38 3 Oklahoma City $231,900 $1,359.79 $58,276.52 4 Louisville $263,500 $1,422.17 $60,950.24 5 St. Louis $258,000 $1,482.66 $63,542.63 Only two metro areas in the U.S. are below the annual average U.S. salary of $58,260 -- Pittsburgh and Cleveland. It's not cheap to live in a large city, and the rise of remote work has allowed many white-collar workers to move out of high-cost cities. As a result, the 20 largest metropolitan areas in the country shrank by a combined 900,000 people in 2021. Top 5 cities The top five metro areas are all located on the West Coast, with the top four landing in California and one in Washington state. San Jose, which is number one, is Silicon Valley's largest city. To afford a house in the most popular destination for tech workers and entrepreneurs, you need a salary of close to $385,000, which is 6.6 times the national average. Rank Cities / Metro Area Median Home Price Monthly Payment (PITI) Salary Needed 1 San Jose $1,900,000 $8,982.85 $384,979.14 2 San Francisco $1,550,000 $7,424.45 $318,190.69 3 San Diego $965,900 $4,839.14 $207,391.93 4 Los Angeles $825,700 $4,217.47 $180,748.69 5 Seattle $818,900 $4,168.82 $178,663.57 Before purchasing a home, you should consider the other expenses of homeownership. The monthly payment consists of the principal, interest, property taxes, and homeowners’ insurance (PITI). Buying a home should be based on your personal financial situation. With many employers allowing employees to work from home, there are many desirable opportunities for first-time home buyers to buy an affordable home, particularly in the South and Midwest.