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Which Type of Loan Is Best? We’re Doing an Apples-To-Apples Comparison.
by [email protected] (Jaymi Naciri) on August 14, 2019 at 12:25 pm
FHA. 30-year conventional. 15-year term. With so many loan options out there, how do you know which is best? There is not one across-the-board winner because everyone’s situation is different. But there are pros and cons of each that might make one loan work better for you. We’re comparing and contrasting some of the most popular options to help you make the best choice when buying a house. 30-year fixed-rate conventional This is a 30-year loan with rates that are fixed every month. These loans follow Fannie Mae and Freddie Mac guidelines and are not backed by the government like FHA loans. Pro: With set payments, there’s no need to worry about rising rates. Loans are available for a range of buyers, with options like HomeReady and Conventional 97 that offer as little as 3% down. Also, there is no upfront mortgage insurance fee like you have on FHA loans. Con: You have to pay PMI if you put less than 20% down. There also may be higher credit score requirements than FHA loans. 15-year fixed-rate A 15-year fixed-rate option also has fixed rates for the life of the loan. If you’re the type who wants to pay your home off more quickly, this could be a good choice. Pro: You pay far less interest over the life of the loan and pay off your home in half the time. Con: Monthly payments are higher. FHA FHA loans are federally insured, which is why down payment and credit score requirements are more relaxed. Pro: FHA loans require as little as 3.5% down. Credit score requirements are also lower than conventional loans. You can typically qualify for a loan with a 3.5% down payment at a 580 score, and may be able to get a loan with a score as low as 500 if you have 10% down. Con: You’ll have to pay mortgage interest, which you can’t get rid of unless you refinance. FHA loans also come with an upfront mortgage insurance fee. Adjustable rate “An adjustable-rate mortgage (ARM) is a type of mortgage in which the interest rate applied on the outstanding balance varies throughout the life of the loan,” said Investopedia. “Normally, the initial interest rate is fixed for a period of time, after which it resets periodically, often every year or even monthly. The interest rate resets based on a benchmark or index plus an additional spread, called an ARM margin.” Pro: Rates are often lower during the introductory or fixed period than what a borrower can get with a fixed-rate loan, making homeownership more affordable initially. Con: Once the ARM gets past the fixed period, monthly payments can skyrocket, leaving owners unprepared and possibly in danger of defaulting. USDA loans Looking to buy in a rural area? You may qualify for a USDA loan. USDA-eligible homes may also be located in some suburban areas. You can check eligibility on their website. Pros: USDA loans offer low or even no down payments and low interest rates. Rates can be as low as 1% with subsidies on direct loans. Cons: Household income is capped and a mortgage insurance premium is required for down payments under 20%. VA loans Veterans Administration (VA) loans help military members and veterans purchase homes. Pro: VA loans tend to have the lowest average interest rates, and loans are available with no down payment. In addition, there is “no monthly mortgage insurance premiums or PMI to pay,” according to VAloans.com. Con: They’re not available to the general public, and veterans must meet a list of conditions. &nbs
Tips on Designing Your Own Floor Plan
by [email protected] (Carol Evenson) on August 14, 2019 at 12:25 pm
Building a new home can become a great source of stress if you haven't done thorough planning. In addition to choosing finishes, you will need to determine the best layout for you and your family. It's also important to consider any custom electronic options you want. Finally, your security is key. Keep Things Easy While simple living is all the rage, you may not be interested in minimalist design. However, it is important for busy adults to design their homes in a way that keeps things easy. Do you enjoy outdoor activities such as working on your own lawn or in your own garden? Make sure the entrance you'll use the most after these activities is easy to access and that you have a place to dump your muddy shoes. If you have or are planning to have young children, make sure that the first stop in from the garage or the bus has a durable floor that's easy to clean. Focus on Flow As soon as you step into your very own home, you'll likely start shedding things. It may be a briefcase or work boots. You'll also want to de-stress as you move into your home. Design choices may include an easy-to-access closet with cubbies and chargers for electronics. If you're planning a custom home sound or lighting system, create a spot for those controllers. For those who like to entertain, it's critical to have plenty of kitchen space for people to gather. An open floor plan is a wonderful way to invite guests into the heart of your home. Plan for an island or a peninsula if you'd like your guests to gather in this crucial workspace. A Word on Security Security cameras aren't just for your front door anymore. If you're away from home for long periods of time, or will have children home alone before you get home from work, the ability to check in on your kids and make sure the interior of your home is secure and safe is crucial. Plans for these tools will need to be made before the walls go up. Natural Light for a Healthy Brain The placement of windows and skylights can go a long way to making your home both happy and healthy. Natural light is critical to good brain health and quality sleep. If nearby houses are closer than you would like, consider putting in frosted or textured windows to allow for natural light without the view. Also, skylights that allow venting are a great way to bring in both sunshine and fresh air. Not a morning person? Plan your sleeping space away from the rising sun, or avoid a lot of east facing windows. You can enjoy plenty of light with south-facing windows and still sleep in! Build In Some Decadence Everyone needs a little pampering. As with keeping things easy, it's different for every one of us. If you need surround sound in the laundry room, plan this while the walls are open. For those who've always wanted a giant tub, now is the time to treat yourself. Let this spill into your yard. If your spouse loves to grill, consider building a deck with plenty of space and wiring for a smoker or pellet grill. Few of us can get every luxury we've ever wanted in our homes, but with proper planning you can get at least one feature you've always wanted. Home design is a lot of fun but also puts a lot of responsibility on the shoulders of the buyer. Work with a designer or architect that is willing to put in the time discussing the things you need and the items you really want.
Comparing Investing in Individual Deeds of Trusts with Investing in Funds
by [email protected] (Edward Brown) on August 13, 2019 at 12:30 pm
Investors clamoring for yields are often faced with choosing to invest in individual assets, be they dividend paying stocks, bonds, alternative assets such as mortgages, and the like, versus investing in pooled funds such as income mutual funds, or alternative funds such as REITs, or mortgage pool funds. This article focuses on the alternative market, and, specifically, individual deeds of trust with mortgage pool funds. More often than not, individual deeds of trust [DOTs] provide a higher coupon than mortgage pool funds [Funds], but there are some specific downsides to choosing individual DOTs instead of Funds. First, choosing the right DOT takes due diligence and a certain amount of expertise in many cases. Investing in extremely conservative DOTs that have LTVs at lower than 25% may not need a PhD in economics, but the yields on these types of DOTs are usually much lower than one can earn in a Fund; thus, one has to start looking at less conservative assets in order to produce the desired yield. Another advantage to investing in individual DOTs is that the investor can pick and choose which DOT to in invest in compared to having the manager of a Fund choose which mortgage fits the desired yield. This is really not much different than an investor choosing to invest in specific stocks instead of investing in a mutual fund; for some reason, however, the public seems to be more at ease in trusting a mutual fund manager than a Fund manager. Could this be because mutual funds are regulated under the Investment Act of 1940? Could it be the relative liquidity of a mutual fund? Could it be the perception that mutual funds are considered regular investments as compared to Funds that are categorized as alternative investments? The answer is probably a combination of these. Although most, if not all Funds are not regulated under the 1940 Act, they are regulated in most circumstances by some division of either a Federal Government authority or the state in which they do business. It is rare that a Fund has no oversight. With regard to liquidity, most Funds have a lock up period in which liquidity is either non-existent or comes with a penalty, similar to an early withdrawal penalty imposed by a bank CD. After the lock up period, withdrawals may be somewhat limited by the manager. Some individual DOTs may be able to be liquidated in a secondary market, but most offers, even for a high quality DOTs, are at a discount. Those DOTs that are 50% LTV or more will usually have a substantial discount associated with it should the investor need to liquidate, making liquidation much less desirable and quite a hardship for many investors. There are some advantages for investing in a Fund [as compared to an individual DOT] that may outweigh the negatives. For one, there is diversification in a Fund, so the risk is spread amongst many DOTs. Unless the Fund experiences a major disaster, distributions to the investor should be uninterrupted. With an individual DOT, a default usually means months or possibly a year or longer [as in the case of a bankruptcy by a borrower]. If foreclosure proceedings are necessary, the Fund will usually handle them without the need for the investor to get involved or have to come up with money to pay the trustee or other costs, such as an attorney. In the case of an individual DOT, the investor/lender has to front these costs. If regular distributions are a must, a Fund is a more conservative route. Although individual DOTs usually earn a higher interest rate than a Fund [about 1-1.5% on average], Funds may offer the advantage of offering a reinvestment program whereby the interest can compound, usually adding about 35 basis points, whereas an individual DOT has to take the monthly distribution with no ability to reinvest. The gap between interest rates of Funds and DOTs gets even narrower [for most investors] when considering the income tax issue because of the new QBID [Qualified Business Income Tax Deduction] introduced in 2018. Congress decided to allow Funds the benefit of reducing the income that has to be reported on an investor’s tax return [subject to certain income limits]. Investing in individual DOTs does not allow for this tax benefit. This 20% reduction in reporting can have a significant impact on the after tax rate of return of a Fund compared to an individual DOT. For example, if a Fund is paying 7%, and an individual DOT is paying 8.5%, the after tax return [presuming a 40% tax bracket] of the Fund is 4.76% whereas the DOT’s after tax return is 4.80%. This 4 basis point difference is not significant, especially if one were to reinvest the distributions in a Fund. The most important factor nowadays [at least in California] is the continuity of a investing in a Fund compared to investing in individual DOTs due to the downtime experienced in many investor’s portfolio when a loan gets paid off. In these circumstances, the investor usually calls his broker for another DOT to invest in and may be told that there are no good loans to look at for the moment. The investor is asked to be patient or may be forced to look at less quality DOTs. There is tremendous pressure in the market right now for loans to fund, as there is significant capital looking for a home. This competition for loans has driven down interest rates that an investor can earn on a DOT as well as adding to the length of time to reinvest capital that has been returned due to payoffs from borrowers. When one looks at the time value of money, this delay in redeploying capital can significantly lower the net, after tax, rate of return desired by investors. Money that is not deployed in new DOTs sitting idle in low earning bank accounts bring the net yield down for the investor. For example, if an investor desires an 8% return on an individual DOT, having money sit idle for three months at 1% produces a pre-tax return for the year of 6.25%. Money sitting idle for four months lowers the net yield to 5.67%. In addition, in many cases, Funds snap up the better quality DOTs, leaving the less quality loans available for individual investors. The main reason for this is that Funds want to produce steady, uninterrupted returns for their investors. They usually desire to avoid loans that have a more likely default rate, even if the yield could be higher by taking on a bit more risk. Some investors lower their quality investing standards in order to keep their money working; thus, investors have to carefully consider whether the benefits of investing in individual DOTs outweighs the benefits of investing in a Fund. Edward Brown is an investment expert and host of the radio show, “The Best of Investing.” He is in the Investor Relations department at Pacific Private Money, and has multiple published works, including an interview with the Wall Street Journal, and has also served as a chairman of the Shareholder Equity Committee to protect 29,000 shareholders representing $500 million REIT. Edward is also a recipient of a prestigious MBA Tax Award.
FHA Curbs Cash-Out Refi Limits
by [email protected] (Jaymi Naciri) on August 13, 2019 at 12:00 pm
Want to tap your home equity? If you have an FHA loan, the amount you can access just shrunk. “Refinancing your mortgage to take cash out using your home’s equity may not be as easy to do under new limitations on cash-out refinances released by the Department of Housing and Urban Development,” said Realtor Magazine. The previous loan-to-value (LTV) limit on cash-out refinances was 85%; effective for loans on or after September 1, 2019, HUD is lowering the requirement to 80%. This change “seeks to mitigate risks…associated with increasing levels of insured loan balances on cash-out refinance mortgages,” said HUD in a Mortgagee Letter announcing the change. “This new requirement is a prudent safeguard that permits FHA to ensure it stays ahead of any shift in housing stability.” The last time HUD adjusted the max LTV for cash-out refinances was back in 2009, when they set the current benchmark of 85% “in response to the weakening housing market” and in recognition of a rapid increase in “the share of cash-out refinances…as housing prices increased through the mid-2000s. Subsequent studies have shown that a significant increase in foreclosures may have been the result of a high number of cash-out refinances completed prior to the collapse of the housing market,” they said. Prior to that shift, homeowners could tap up to 95% of their home equity. The letter also noted that FHA cash-out refinances have swelled by more than 250% from 2013 to 2018, HUD reported. There were more than 150,000 of these transactions last year. “Cash-out refinances comprised 64% of all FHA-insured refinance transactions, up nearly 39% from the year prior,” said Realtor Magazine. “The increase in home prices has prompted more cash-out refis, according to the annual Report to Congress issued last fall.” Cash-out refinances are a popular option among homeowners whose houses have appreciated because, while rates vary depending on many factors including the strength of the borrower’s credit, the money is often less expensive than in other types of lending. And, if the money is used for smart updates or improvements, it can increase the home’s value and provide some safeguards should there be market adjustments. “This option can be beneficial to consumers who have seen the value of their home rise in recent years,” said Bankrate. While many financial experts caution against taking too much money out of your home—and this move by the FHA is intended to help keep owners from ending up under water—“Taking the money from the cash-out refi and putting it towards paying down high-interest debt or home repairs can be a financially sound decision.” &nbs
Why an Investment Property Should Be Your First Real Estate Purchase
by [email protected] (Jaymi Naciri) on August 12, 2019 at 12:30 pm
Not ready to buy a home for yourself but want to take advantage of great market conditions? Consider buying an investment property! It’s a trend that’s taking over real estate as savvy investors look to put their money in an appreciating asset. Here are seven reasons to make this smart move. 1. Rates are crazy low. Lower rates mean more affordable lending, or more for your money if you choose to reach higher. 2. Because it will appreciate. According to CoreLogic, “The overall home price index (HPI) has increased on a year-over-year basis every month for seven years.” The long-term price appreciation of real estate can provide one of the safest investments out there. 3. Because passive income is good. Yes, it’s nice to know there will likely be appreciation over time, but the real key to success with investment properties is passive income. “The best part about rental properties is that they provide a stable income,” said Mashvisor. “What would be better than having a check sent to you every month? In order to have positive cash flow, you have to make sure you invest in a profitable rental property.” Many real estate investors use the one percent rule when looking for a cash flow-positive property. “Monthly rental income ≥ one percent of purchase price,” said Norada Real Estate Investments. “So according to the rule, a property with a total investment (price + upfront repairs) of $200,000 should rent for $2,000/month or more in order to be a good investment. If the rent is only $1,500/month, the $200,000 price would not meet the rule. Or if you had to pay $250,000 for a property that rents for $2,000, it would not meet the rule either.” 4. To turn it into a short-term rental. The short-term rental market has opened up a new world of opportunity for investors. By buying in the right location—by the beach, bear a ski resort, or in close proximity to a popular annual event like Coachella, you have the potential of making six figures in a short period of time. If you’re considering purchasing a home to turn into a short-term rental, be sure to check the local laws. Lots of cities have been cracking down on Airbnb and other services, stripping away some of the income potential for property owners. 5. Because you can be a homeowner without living in the home. What you can afford to buy may not match up with your expectations. Perhaps you don’t want to live in an attached residence or move to the suburbs, or even out of your current neighborhood. If you’ve been priced out of what you want to buy for yourself right now, you can still make a smart investment in the type of property other people are looking to rent. 6. Because it can help you buy the home of your dreams down the line. “Buying an investment property before your first home does not imply that you won’t have the funds to purchase your actual home at some point,” said Mashvisor. “In fact, investment properties that have been purchased wisely and have grown in value can offer you a sizeable amount of wealth and equity.” 7. Because there are tax benefits. “Rental real estate has more tax benefits than almost any other investment out there,” said Real Wealth Network. “Failure to take advantage of rental property tax deductions, can cost landlords thousands of dollars a year. So why are rental property owners paying more in taxes than they have to? Simply, because they have no idea there are multiple tax deductions they could be taking advantage of. Tax deductions include: Interest savings—“Interest on rental property is typically the biggest tax deductible expense for owners. This includes, interest on your mortgage loan, or other loans used to improve the property, and if you use a credit card for anything relating to the rental property, interest can be deducted.” Depreciation of Rental Property—Depreciation or wear and tear on the property is not tax deductible in the first year, but, after that, “Rental property owners can deduct depreciation in smaller amounts, over a longer period of time.” Claim All Property Expenses—Certain repair costs, furnishings, and insurance including “fire, flood, theft, and landlord liability insurance” can be deducted. Pass-Through Tax Deduction—“This is an income tax, not a rental tax deduction, made by the Tax Cuts and Jobs Act. Depending on your income, landlords can deduct (1) up to 20% of net rental income, or (2) 2.5% of initial cost of rental property, plus 25% of cost for any employees or independent contractors used (if applicable). This deduction is scheduled to end in 2025.&rdquo