Mortgages? What do I do?
Updated: Jul 26, 2020
Everyone has this concept that mortgages are bad. Well, for some they might be, but since you have landed here we suspect you might not be the one that is unable to manage your debt to income ratio, and you just want a little bit of clarity. So let’s clear some of the air.
As in most cases, your scenario is unique so some points won’t be clarified until an advisor can look at your individual scenario (income, cash reserves, locked-up investments, etc). First off, let’s clear the air on fixed versus floating rate mortgages. Fixed mortgages lock’s in the interest rate while floating moves with what the Fed does based on economic conditions. Currently, we are at artificially deflated and historically low rates, so locking that in is probably a good bet. If they by chance go lower, you can always refinance. You get the best of both worlds with the fixed.
Secondly, how much do I put down? Well this depends on the cash reserves, but if you can skip the PMI (the insurance the bank makes you purchase, to protect them, from default since they feel they are taking more risk as you have less skin in the game) and place the 20% down, then do so.
How long? I can afford the 15 year payment, should I take it? We don’t think so, we think you should take advantage of someone else’s money, especially at these interest rates, so that you can also save money and have more on the side. This logic will allow you to have more opportunity to save and have your money also earning money. So even if you save a percent with payment, you cannot earn anything on that money because it is no longer yours, and that reduces your effective interest in a sense.
Finally, let’s talk a bit about points and lowering interest rate. Well, this is a little tricky. First, points are a process by which you pay upfront monies to reduce your overall interest payment. Ultimately, you need to understand the amount of money you are paying in points reduce and save you money monthly to make it worth it. This goes back to your personal cash reserves and income, but there are many times where paying points, if possible, turns out to be beneficial for mortgage applicants.
Rental Properties, do I do it, keep it, or stay away and get out?
We get this question a lot, and it is a good one no matter where you are in the process. It means you are thinking about it and seriously taking inventory. Congratulation on that at least!
But let’s talk about our view on being in the business of Real Estate. Yes, that is right, you read correctly, being in the business of Real Estate. Most people do not look at it like they are entering into a new business, which comes with all sorts of headaches as with any other business, but instead an opportunity to have additional income. Well, there are a lot of ways to have additional income without being in the Real Estate business – so move cautiously and informed.
In general, we like real estate for those that can hack it. Why, well if you read anything about what we wrote or recorded about retirement, it is a way to augment your ‘needs’ in retirement and provide for a potentially better lifestyle in retirement – potentially!
With that said, it is not for everyone. Having a rental property, especially one geographically far away, is a decision that needs to be thought about in terms of ‘work’ related activities. Repairs, late payments, taxes, accounting, etc. You get the point.
Learn more about the <<rental properties>> business that you may not have thought about!