Real Estate Archives - Lazy Man and Money

Is it Time to Refinance your Mortgage?

August 22, 2017 by Kosmo 8 Comments

We are in the process of refinancing our mortgage – again. We bought our first home in 2005. Due mostly to the expense and uncertainly of kids, we took out a thirty year mortgage. In 2014, we moved to a different, larger house with a different, larger mortgage. My mom’s estate was recently settled, and we decided to pay down the principal refi the 30 year mortgage (which has 27 years remaining) into a fifteen year mortgage at roughly the same cost (about $15/month more).

[Editor’s Note: I wanted to emphasize that again… he reduced 27 years of paying a mortgage to 15 years!]

While the optimal choice for us would have been to start with a 15 year mortgage, this really wasn’t feasible at the time. We wanted to be able to fund retirement plans, 529 plans for the kids, pay for day care (a big cost, especially before the kids reached school age), have a sufficient emergency fund, and have the flexibility to deal with other costs that popped up along the way.

One thing we did do over the years is refinance. In the nine years that we owned the first home, we refinanced it twice. In each case, the break-even point was between eighteen and twenty-two months. After each refi, we continued to pay the amount of the original mortgage, but with additional money going to principal (shortening the length of the loan). A key part of understanding the break-even is understanding what portion of closing costs are actual incremental costs and which are not.

Pre-paying the escrow is money that you pay to ensure that there is a enough money in your escrow account to pay for homeowner’s insurance and property taxes. Why is this not an additional cost? Because you’re spending money up front to fund the escrow on the new mortgage, but you’ll be getting a check for the amount that is in the escrow account for your old mortgage (this may take a month or two, depending on your state and your lender). Regardless of whether you kept the old mortgage or refinanced, you would have had to had sufficient funds in the escrow account to cover the taxes and insurance when they are due. Once the escrow on the old mortgage is refunded, it’s a wash.

You’ll also have some pre-paid interest. This accounts for the interest in the partial month between your closing date and the first of the month. If you close on the 30th, this cost will be minimal. If you close on the second, it would be almost an entire month’s worth of interest. But this is interest you would have paid regardless if you refinanced or not. It’s important to note, though, that if you close on the 2nd, you’re skipping an entire month’s worth of principal payments, pushing your payoff date nearly a month past what it would be if you had closed on the 30th.

What remains are the actual incremental costs to refinance. In my specific case, these come to around $1500. To illustrate the break-even calculation, let’s assuming you are saving 3/4 of a percent and have a mortgage balance of $150,000.

The monthly interest savings would be (180,00/12)*0.0075 = $112.50
Here’s the tricky part. While mortgage interest is tax deductible, the closing costs generally aren’t. Let’s assume your combined federal and state income tax rate is 25% (note: you’ll want to use your marginal rates, rather than your effective rates, since you’re calculating an incremental effect). This means the actual cash savings from the reduced interest is ($112.50 * 0.75) = $84.375.
$1500 / 84.375 = 17.77 months

While this is a reasonably accurate quick calculation, it will be slightly off, because you’re saving slightly less in interest every month. You’ll save $112.50 ($84.375 after adjusting for impact of taxes), in month one, but you’ll save a dollar or two less in each additional months. So to be safe, just round-up and add another month to the break-even length, bringing the break-even to 19 months.

Some other notes about mortgages and refinancing:

Some people have a rule to not refi within X years of taking out the mortgage or doing a previous refi. This is not a good determiner of whether the time is right to do a refi. If you close on a mortgage today and rates drop a full point tomorrow, you absolutely should refi. You can’t change the fact that you had bad luck in the past – but you can change your future rate. The key thing to look at is how many months it will take to break even on the refi costs.
When buying a house, some people will approach the lender and ask what amount they can be pre-approved for. My advice is instead to settle on a price point and get pre-approved for that amount, plus a small cushion. If you ask the lender to set the amount, odds are good that it will be higher than the price point you would have chosen, and you may end up purchasing a more expensive house than you really need.
A lender will often allow – or even encourage – you to roll the closing costs into the mortgage amount. If you have the ability to pay these amounts up front, it can save you quite a bit of money in interest. We’ve never rolled the closing costs into a mortgage or refi.
Shop around. You may be able to find slight differences in rates between lenders.
Watch for coupons. We routinely get coupons in the mail for $100 off closing costs. When we knew the a refi would be imminent, I made sure to save one of the coupons. In comparison to the mortgage, $100 is a very small amount – but it’s still $100.

Getting that Real Estate Buying Itch Again

July 31, 2017 by Lazy Man 5 Comments

A few months ago, I had this weird little “thing” happen. I thought, “Hmmm, that’s odd”, bookmarked what I was reading and moved on. About 6 weeks ago, I had another “thing” happen, and after some discussion with my wife we kind of moved on. About 3 weeks ago, I was on the verge of a life event that made me think of finances in a new way. About 10 days ago, I published my alternative income update and I started to notice a pattern.

And recently, a cartoon sealed the deal. Let’s enjoy that cartoon before I clarify all that boring stuff in the last paragraph:

I used to think Teen Titans Go! was just really weird. Now I realize it is awesomely weird. In around 90 seconds, someone could learn more about real estate investing than 90% of the population.

If you didn’t get it from the title or from the cartoon: I’m starting to get excited about real estate investing again.

What I was Reading

I’ve been following Rental Mindset from its very first post. As you can tell from the website, Brian thinks a little differently than many people about their path to financial freedom. Most seem to take the path of acquiring stocks and mutual funds to build a nest egg over time. Brian may be doing that as well, but Rental Mindset shows that much greater returns are possible.

Many people don’t like the idea of being a landlord (including me). However, he shows that with turnkey properties and property managers, it doesn’t have to be a ton of work. Specifically, he’s been writing about how we finds a turnkey rental property and how he recently bought another one.

The following thought crept into my mind… what if I streamline the management of these rental properties? If, and this is a big if, that were true, adding another rental property would be much more feasible.

The Discussion with the Wife

I get the feeling that my wife is getting frustrated with work. Well, it’s more than “getting the feeling”, but I’m trying to be diplomatic. All careers have their ups and downs, right? About 6 weeks ago, my wife had a down around the same time that we were taking a vacation at a beach.

It’s not to hard to figure out which way the work/life scale tipped. It’s natural for people to plan their escape from their cubical in such situations. It’s probably 10x more natural when your spouse has more or less done that.

It is worth exploring whether adding to our rental properties would speed that escape along. My initial thought is that it would not. While we might have a a lot of passive income in 10 years, I can’t see how adding more properties now would speed that up. I’m not giving up on the idea though.

Before you think I’m evil for not taking the corporate job, I’d love to switch places. However, my wife is 90% of the way to a sizable military pension. The golden handcuffs don’t get looser for a couple of years.

I Thought I Might Get a Windfall

There were some rustlings that a windfall might be headed our way. That fell through almost as quickly as it came. For a few days though, it was fun to imagine how I might invest the money. Adding a rental property wouldn’t be the worst plan. However, since this hypothetical thing didn’t happen, I have to move on. I feel like I had already “mentally” acquired the money, so to a degree, it is difficult to imagine it never happened.

The Pattern of My Alternative Income

Each month, I look at how much income my investments should give me. If you are looking to get $25,000 a year from dividend stocks paying 2.5%, you are going to need to have one million in that brokerage account. My wife and I have been diligently saving in our Roths/401Ks/TSPs for nearly a decade now. We usually max out our contributions. The markets have been doing quite well. We aren’t at a million and we really aren’t all that close.

That’s not to say it is “a million or bust.” I’m just picking nice round numbers. I can see the amount of money we’d make from those hypothetical 2.5% dividend stocks grow each month the market grows. However, it only grows a relatively small amount.

I also calculate the percentage of profit we’d get based on the equity we have in our properties. The mathematical explanation is too long here, but the link a couple of paragraphs up, explains it well. I’ve been seeing this number jump a lot more throughout the year. It feels like real estate is actually beating stocks. My guess for why this is happening is that our properties are getting more valuable while the tenants are paying down the debt. We also have the benefit of leverage.

I think our investment in rental properties has been quite a bit lower than what we’ve poured into our retirement accounts. That small fraction of an investment has slightly surpassed what I expect to make from stock investing. Again, it’s not nearly as passive, but it definitely seems to be a plus

Conclusion

While I’m getting excited about buying another rental property, it won’t likely happen. If that windfall did come through (again, it didn’t), we’d think about investing it in a way that got my wife to retirement faster. Adding another 15 year mortgage is probably not going to get it done.

Don’t Get Buried in Debt: Find the Right Mortgage

July 3, 2017 by Guest Poster 7 Comments

Editor’s Note: The following is a guest post by George. He’s a Baltimore Oriole’s fan who is trying to become a better writer. (I think he’s a pretty good one already.)

I’ve been scouring the market for a property. After years of going nowhere paying rent, I decided that my money could be put to better use paying down an investment than making somebody else rich.

I’m not sure why I paid rent for so many years – perhaps it was because we never felt sure about where we wanted to lay down roots. Regardless, it’s better to own the asset and enjoy the benefits of ownership than to have nothing to show for all your hard work.

This got me thinking: How do you find the perfect mortgage for your needs?

We’re living in difficult times. The Federal Reserve Bank – the Fed – is increasing interest rates, and this means the cost of credit is going up. This has a profound effect on long-term debt, especially if you do not to lock in a low rate with your mortgage broker, bank, or financial institution.

That’s the short-term perspective, but with increasing global uncertainty it’s never a sure bet which way interest rates will go over 10, 20 or 30 years.

Consider the people who locked in their mortgages at fixed rates 10, or 15 years ago, and then the Federal Funds Rate was eroded away to historic lows since the 2008 global financial crisis.

Nonetheless, this highly charged topic requires careful thought, planning and decision-making.

What are the benefits of a variable mortgage versus a fixed mortgage?

Let’s say you are considering purchasing a property worth $300,000, and you’re looking to put down 20% ($60,000) and take out a variable mortgage. That leaves you with $240,000 to pay back over the lifetime of your loan. A variable rate mortgage, often known as a floating rate mortgage, means that the interest rate on that home loan will fluctuate according to what the federal funds rate is doing.

More specifically, it moves in tandem with the prime interest rate. This is true in all countries that offer variable mortgages and/or fixed mortgages.

What will the Central Bank Do?

If you have an inkling as to how the Fed, the Bank of England, the Bank of Canada, or the European Central Bank is going to move with respect to interest rates, you may be inclined to lock in a fixed interest rate or a variable interest rate. In the US now, the trend appears to be moving in favor of increasing interest rates, making a fixed mortgage more attractive.

However, nothing is ironclad. Floating mortgages can go in any direction. People who opt for them are hoping that the interest rate that have locked in will be better than the interest rate by the time they are finished paying their mortgage.

Truth is: nobody knows which way interest rates are going to go over the long-term.

A fixed mortgage by contrast is fixed at the current rate. If you like certainty, and you’re not interested in the current state of the economy, a fixed mortgage is something that you can bank on not to change. People in many countries around the world prefer fixed-rate mortgages, since they provide that certainty that is so absent in the broader economy.

Of course, there are alternative options available to homeowners in the form of hybrid mortgages which allow a specific portion of the mortgage to be fixed, and a specific portion to be variable. Think of it as a compromise solution which gives you the best, or the worst, of both worlds.

Understand your options with mortgages

When you’re evaluating the pros and cons of variable and fixed/closed mortgages , it’s important to understand all options available to you based on your current financial situation. A closed mortgage and a mixed mortgage are also available. These refer to your ability to repay your mortgage prior to full duration of the mortgage term.

If you have excess funds available, or you will be coming into excess funds, you may wish to repay your mortgage ahead of time, to save on interest-related payments. Be advised that if you have a closed mortgage, you will have to make payments until the final payment is due on your term. Occasionally, banks and financial institutions will permit prepayments, but this is at the discretion of your mortgage provider.

By conducting the necessary research, you can avoid a lot of headaches, and possible financial ruin. Don’t get sucked into the wrong mortgage, because you may pay dearly for it over the long-term.

Surprise! Condo Assessments

April 10, 2017 by Lazy Man 16 Comments

Real estate investing, like many investments, seem to have a lot of twists and turns. For the last year or more, I’ve been appreciating (in both senses of the word) the gains that our real estate “empire” have made. (For new readers, we invested in real estate reluctantly.)

Recently, we got notice that two of the condo properties we own in the same complex need major renovations. The whole complex needs renovations. This means having to pay for special assessments.

While I wrote “Surprise!” in the title, we had an idea that this was coming eventually. The property hasn’t renovated for more than 30 years. In the last few years they’ve raised the condo fees significantly (I think nearly 100%), but it simply was too little, too late.

(I can’t understand why places don’t plan ahead for these renovations. It’s as if they consult NFL owners about how much revenue they set aside for creating a new stadium every 20-25 years. The answer always seems to be, “Not the vast amount of money necessary.”)

The surprise is around $20,000… each. The Zillow estimates for the condos are around $115,000, which I believe to fairly accurate. Essentially, more than 1/6th of property value disappeared overnight thanks to a ~~pen stroke~~ keyboard press.

Fortunately the property isn’t looking for people to cut a check on the spot. They were able to secure financing. Unfortunately, that financing seems like a parade of stinky skunks (a reference from Nickelodeon’s Blaze).

Specifically, the financing is a 20-year loan at 5.20% for 11.5 years. After that “it will adjust for the remainder of the term.” I did a quick search and 30-year fixed rates are around 4.30%… and 15-year fixed is around 3.25%. In fairness, these are the top rates for people with top credit. The bank has to balance their offering for the others.

However, they do have existing owners with a history of paying their condo fees every month. They are spreading this rate amongst many units, so I would think that they could use that to challenge the rates of a potential new home owner without the same “skin in the game.”

The 5.2% rate is bad enough, but the kicker is the adjustment in 11.5 years for the last 8.5 years. How will it adjust? Is it the prime rate plus 1%? Is it prime rate plus 6%? From the letter we got, there’s no answer.

And while I’m throwing the condo association under the bus, I’ll pause for a minute to acknowledge that they had a difficult job to do in explaining to unit owners why this is necessary.

Now I will resume throwing the condo association under the bus. In fact, I might hire a second bus for them. (Note: This is metaphorical. Never throw anything or anyone under a bus. Please consult your lawyer with regard to your actions involving buses. (Note: I feel that disclaimers like this are necessary in this day and age. (Note: (cons (car ‘(I spent too much of my life in emacs)) (cdr ‘(FML am so old)))) Note: The first person who leaves a comment explaining and deciphering the last note will receive $20 via Paypal. Please leave a valid email to claim giveaway.))))

I think there are a significant number of owners who were under the impression that they paid their condo fees to cover all this stuff. It’s a fair assumption for them to make. I view it as an admission that the condo association planned poorly.

Unfortunately for condo owners like me, we have to deal with the potentially exploding interest rate in 11.5 years. What’s that going to be? I’d estimate it around 8%. In 2004, I was very happy to get a 30-year fixed rate under 5% and that was historically great time. The average rate was probably 6% and times might be tougher in 11+ years. It seems to be around 100-200 basis points from what fixed mortgages are. Your estimate of interest rates is as good as mine… or maybe a monkey throwing darts. Overall, my thought is, “We’ve hit rock bottom… only one way to go, ‘Up’.”

I wonder if condo owners understand that. It feels like 2005 all over again. You can sign on for a simple payment, but it seems that it can (and will) explode. I find it unlikely that the rate in 11 years will adjust to something lower.

This brings me to yet another complaint against the association. (Who has another bus?) The Fed has raised interest rates a good amount over the last year. Lending rates have gone up. It wasn’t a surprise. The condo association has foreshadowed this by raising condo fees over the last few years. Could they have done an intelligent thing and locked in a lower rate? This massive, once in 30-year, renovation could have happened in 2015.

In the words of the greatest football coach of all time, “it is what it is.” We can play the the blame game all day, but it isn’t going to change anything.

My opinion on financing this is a topic for another day… maybe next week.

I have to give credit to one owner who is looking to sell. I got a recent Zillow alert for a property in the complex at around $150,000. I haven’t too many priced above $125,000 in the last five years. The unit was nothing special. Most of the pictures were of the utilitarian rug. This person has to disclose the assessment, so it’s like he’s asking for $170,000.

As my mother has said in the past, “Good luck to you and the Red Sox.” Hmmm, maybe that condo owner has a chance?

Your Bedroom or Your Life

April 5, 2017 by Lazy Man Leave a Comment

A couple of weeks ago, I wrote an article Rich Chicken, Poor Chicken, which was very loosely modeled after a popular book. I’m not a fan of the author since he seems to promote pyramid schemes. (And unfortunately, Dave Ramsey seems to as well.)

I apologize for the Debbie Downer lede. I got a little off-track there. Let’s start over.

Today’s title is inspired by Your Money or Your Life. It’s a book that all my favorite and like-minded bloggers recommend as a definitive personal finance “bible.” (Disclosure: I’ve never read it. From what I’ve heard it covers the basics very, very well. After 10 years of personal finance finance blogging (and 25 years studying personal finance), I’m not sure I’d gain too much from it.)

The bedroom part needs a little explaining. Yesterday Zillow released a study that moving from a home with 2 bedrooms to 3 costs $450 more a month. That’s an average. Bozeman, Montana will differ greatly from New York City. (Zillow has a lot more information at that link.)

The key takeaway for me is that mortgages were 50% more a month for an extra bedroom. For most people, housing is the biggest expense. You can cut lattes here and there, but they are proverbial drops in the bucket. A 50% change in your biggest expense is life changing…

… life changing in either direction. If you have a 3 bedroom home that you don’t need, you could reduce it and put the savings to good use. If you were thinking of super-sizing from your 2 bedroom home, it’s worth thinking twice whether you really need that 3rd bedroom.

What would do with an extra $450? Decisions, decisions. A-ha there’s the light-bulb above my head.

It turns out that $450 a month is $5400 a year. That’s almost exactly what it takes to max out a Roth IRA. Maybe I should have titled this article your money or your retirement?

Normally, I’d walk you through the math of what $450 more a month means. Today, I’m going to live up to my moniker. Everything I’d say is here: Compound Interest is a River.