14 Fourteen II.docx

HP Fourteen II 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 th...

HP Fourteen II 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.