Lazy Man and Money

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

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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

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Condo Assessments

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

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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.

The State of Real Estate Crowdfunding

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The following is a guest post from Soren Godbersen. He heads Marketing and Communications for EquityMultiple, and is a dedicated student of commercial real estate finance and investing. EquityMultiple is an online platform that connects accredited investors with shares of pre-vetted, institutional-quality commercial real estate deals. The company is based in Manhattan, and partnered with Mission Capital, an established commercial real estate advisory firm.

Intro: A Brief History of Real Estate Crowdfunding

Following the housing crash of 2007 – as regulations were introduced and credit tightened – emerging companies were left with little or no access to the capital markets. In an effort to ameliorate the credit crunch, Congress drew up the Jumpstart Our Business Startups Act (JOBS Act for short), broadening the scope of who can invest in startups.

Equity Multiple

While the legislation was conceived with startup businesses in mind, interested parties quickly realized that the new rules could extend to real estate equity investments, allowing real estate companies to essentially market shares of projects to individual investors – a method of raising capital that had been legally precluded since the Securities Act of 1933. While real estate companies are able to broaden the reach of their investor network through this new paradigm, individual investors also gain access to a realm of real estate projects that were previously available almost exclusively to very wealthy individuals and institutional players, lowering the barrier to entry and allowing many investors to participate in commercial real estate investing for the first time. This value was evident enough to encourage a number of hybrid real estate/tech companies to enter the space, with Fundrise, RealtyShares and RealtyMogul emerging as early leaders and raising substantial venture capital.

Growth Trajectory

The road hasn’t always been easy. While a handful of companies have grown impressively, many others have fallen by the wayside, as many investors and real estate companies have been cautious in pursuing real estate crowdfunding. Those without the requisite experience in tech and real estate have struggled to find scale. Still, the young industry continues to grow impressively year over year:

YoY Growth – Real Estate Crowdfunding

Year

RE Crowdfunding Numbers Worldwide

2012

$19m

2013

$400m

2014

>$1bn

2015

$2.5bn (150% growth)

· North America: $1.4bn

· Europe: ~$1bn

· Asia: ~$50m

2016E

$3.5bn (40% expected growth)

While growth slowed somewhat in 2016 (likely in response to top-of-market trepidation) the 40% figure is still robust, and the U.S. accounted for a large share of the $1bn of overall industry growth this year. In 2015, the $1.5bn in volume for U.S. real estate crowdfunding represented only 0.3% of total real estate finance transactions in the U.S., indicating that the sub-industry still has enormous room to grow, even while remaining modest as a share of overall commercial real estate activity in the economy. As time goes by, crowdfunding platforms have specialized and molded themselves around particular niches within the space, focusing the profile of their deals. While Fundrise and RealtyMogul saw early success marketing the opportunity to invest in distinct, tangible projects, both have pivoted to offering an ‘eREIT’ product that takes asset allocation out of the hands of their individual investors while providing built-in diversification. Meanwhile platforms like PeerStreet, RealtyShares and Groundfloor offer mostly or entirely single-family debt deals, offering investors a steady flow of fixed-rate, relatively-safe, relatively-low-upside investment opportunities. EQUITYMULTIPLE remains focused on institutional-grade commercial real estate projects while offering both debt and equity investments.

What Happens Next?

The trend of division and specialization among real estate crowdfunding platforms is likely to continue, with the potential for consolidation in the advent of a dip in the market. While more established players in the space have raised tens of millions of dollars of capital, even those with extensive track records over the past few years have recently experienced difficulty in sustaining quality deal flow, particularly with respect to high-upside equity deals.

The transition of the executive branch will likely have a major impact on commercial real estate capital markets, and therefore on the prospects for the young real estate crowdfunding industry. The trouble is, no one can credibly claim to know what that impact will be. If initial optimism in the public markets is to be believed, capital markets at large will benefit from a business-friendly regime and reduced regulatory oversight. However, uncertainty in the new regime’s attitude toward trade, fiscal policy and a host of other issues make it difficult to draw any concrete conclusions. What does seem certain is that we’re headed for the long-anticipated interest rate hikes, and that volatility in global markets is unlikely to disappear anytime soon.

In the near term, the real estate crowdfunding industry (and commercial real estate more broadly) should benefit from the age-old axiom that in unsure times, real estate holdings should be prized for their low volatility and the inherent worth of underlying assets.

What Retirees Don’t Know About Reverse Mortgages Will Hurt Their Retirement

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You have likely heard age-old sayings like “ignorance is bliss” and “whatever you don’t know, won’t hurt you.” But when it comes to retirement planning and where reverse mortgages fit into the equation, what you don’t know can actually be hazardous to your ability to live comfortably during your non-working years.

Retirement income planning is complex. More often than not, crafting a plan that best suits your individual needs requires the consideration of many moving parts, not the least of which requires answers to questions such as when do you plan to retire, for how long, and how far will your savings take you?

To complicate matters even more, there is also a wide variety of investments to choose from as you plan for your financial future. Often times, one of the most important assets retirees currently have at their disposal is one of the most overlooked investments that can support their retirement in a meaningful way. The answer: home equity.

A largely misunderstood asset

For homeowners age 62 and older, a reverse mortgage allows them to convert a portion of their home equity into tax-free loan proceeds, which they can use without restriction. Unlike a traditional mortgage, reverse mortgage borrowers receive payments from the lender in the form of their home equity.

As borrowers access their home equity, the reverse mortgage loan balance increases. Borrowers are not required to make monthly mortgage payments toward the loan balance, however, they must continue to pay their property taxes and insurance associated with their property. The loan balance becomes due and payable when the borrower dies or otherwise vacates the home secured by the reverse mortgage.

Retirees have typically turned to reverse mortgages to increase their cash flow in retirement, which has helped them meet a variety of spending needs, such as paying for the costs of in-home care and modifying their homes to better support their physical needs.

Aging in place is especially important for people nearing or already in retirement, according to a survey by The American College of Financial Services, which found that 83% of adults age 55 and older said they don’t want to relocate in retirement.

Despite this vast majority of retirement-age Americans who want to continue living in their current homes for as long as humanly possible, only 14% considered using a reverse mortgage to aid them in this desire.

One of the main reasons why reverse mortgage considerations fell short was because 7 in 10 survey respondents were generally misinformed about these products, especially when it comes to using reverse mortgages as a retirement tool.

Strategic retirement planning

As previously mentioned, reverse mortgages can be used to meet a variety of retirement spending needs. But they can also be used to supplement other retirement savings and investments a person might have.

Because there are a lot of misconceptions out there today—as evidenced by the survey responses—The American College says products like reverse mortgages need to be given a second look by consumers, as well as financial advisors who might not be up-to-date on the latest research.

Such research has shown that home equity, when accessed through a reverse mortgage line of credit at the beginning of retirement, can provide a valuable source of cash flow that takes pressure off of having to spend from investments such as 401(k)s and Social Security.

This occurs because the reverse mortgage credit line grows over time, typically at the same rate at which the loan accrues interest. If left untouched for several years, the balance in the credit line could grow significantly, thus giving the borrower a sizable pool of funds to help supplement their retirement.

“Hopefully that’s the biggest takeaway from this survey,” said Jamie Hopkins, professor of retirement income planning and co-director of The American College New York Life Center for Retirement Income Planning. “Advisors and consumers need to start thinking about home equity, including reverse mortgages, as part of the retirement income planning process.”

If you would like to know more about reverse mortgages and how they can be used as part of a strategic retirement income plan, contact your trusted financial professional or visit HUD.gov

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