Homeowner Magazine

Homeowner Trading How to Handle The Mortgage On Your Next Home

David F. Bailey NMLS #658734

Branch Manager

Providing Valuable Mortgage Advice During Uncertain Times to Enable The Best Financial Decisions

Homeowner Welcome I hope you enjoy this magazine. Included is a collection of articles from national bestselling authors designed to educate, inspire and entertain.

David F. Bailey NMLS #658734 Branch Manager

As trusted mortgage advisors, our role is to help local homeowners make informed real estate decisions about their personal and business investments. If you have questions about your current mortgage, refinancing your home or wanting to purchase a new home; I hope you give me a call. I look forward to serving all of your mortgage needs. Sincerely,

David F. Bailey David F. Bailey Weststar Mortgage

David F. Bailey

Office: 817-527-2936 | Cell: 214-682-9175 1450 Hughes Road, Ste. 220 Grapevine, TX 76051 dbailey@westloan.com www.WeststarMortgageTeam.com

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STRATEGIES MORTGAGES

Trading

How to Handle The Mortgage On Your Next Home

UP by Ric Edelman

ust because you bought a house once doesn’t make you an expert. Buying your next home is different from buying your first, and nowhere is that more true than when it comes to your mortgage.

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The Big Check The price you paid for your first home was determined by your mortgage company. They told you how much money you could borrow and how much cash you needed in order to complete the deal. You had no choice but to agree, so in the weeks and months before you bought the home, you scrimped and saved, you stopped eating out, you sold assets, you received gifts and loans from family and friends, and in the end, you became cash-rich. Then, on settlement day, you wrote the largest check you had ever written and in an instant you went from cash-rich to house-poor. You were never happier, more excited—or more scared. The reason you wrote that large check is because the mortgage company said you had to, and as big as that check was, it was the least amount required in order for you to qualify for the loan. So you wrote a check for $20,000 or $30,000 or whatever—not because you wanted to but because they required you to write it. By brute strength, through sheer force of will, you came up with whatever cash was necessary to get yourself into that house.

“...in an instant you went from cash-rich to house-poor...”

“...never pour all the proceeds from a home sale into the next home.” Same Old? Well, now you’re in the house. What’s next? If you sell it, after commissions and other selling expenses, you may have $50,000 left in equity. That is enough to buy a new home that costs $300,000. Most buyers pay for their second homes the same way they bought their first home: By writing a check for 100% of their assets. There are two reasons people do this: (1) because they did it before, and (2) because the price of their new home is frightening. When you bought your first home, you did whatever it took to raise the money your lender required. Since you emptied your bank account last time, it seems natural to do it again. And you’ve got another reason to make a big down payment: The bigger the down payment, the lower your monthly payment. But while it made sense for you to devote all your financial assets to a down payment when you bought your first house, it does not make sense to do it when buying your next house. Last time, you bought your house on brute strength alone. This time you can do it with finesse. You see, you must recognize that there’s a big difference between what the lender requires and what you can afford. The first time you bought a house, there was no difference. Then, what your lender required was what you could afford (barely!), so the two numbers were the same. Your lender required that you put down a certain amount, so you scraped the money together and wrote a check.

Downpayment 2.0 But this time, it’s different. This time you’re buying a $300,000 house, and the lender is requiring just 10% down. That’s $30,000. Yet you’ve got $50,000 from the sale of your first house. So this time, what they require is not the same as what you can afford. This time, you can afford to put down even more than what is required. Don’t do it. Don’t put down more than what is required. Instead, give lenders only the minimum they require and take out as big a mortgage as they will give you. This way, you’ll have cash on hand to cover your new, bigger mortgage payment in the event of financial hardship or to pay the plumber, roofer or other professional in the event repairs are necessary. Murphy’s Law practically guarantees that something will go wrong. It’s smart to have money available to pay for it. And, of course, until you do need it, that money can be invested where it can grow! So never pour all the proceeds from a home sale into the next home. Why give all your money to the bank when you can make it work for you? ■

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Rick Edelman is the author of five books on personal finance, including the #1 New York Times bestseller “Ordinary People, Extraordinary Wealth.” Learn more at www. RicEdelman.com.

STRATEGIES DOWNPAYMENTS

DOWNSIZE your

Down Payment by Dave Muti

Less Can Leave More for Investing, Retirement

ow much money should you put down when you purchase a home? This is one of the oldest questions faced when purchasing real estate. The rule of thumb has always been to put down 20% of the purchase price if you can. Of course, if you had more available, then you were advised to increase the amount. This article will offer a contrarian viewpoint to this established way of thinking. The general principle behind a large down payment is that you will have a smaller mortgage and therefore a smaller mortgage payment. While that may be true, the operative question is: does a large down payment make the best use of your money?

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In order to address this question, we must first visit a common misconception regarding home equity and its rate of return. No matter how much (or little) equity you have in your house, the rate of return is always the same: zero. This is important to understand because you would not put your hard earned money into a mutual fund that advertises a 0% rate of return, so why put it into your house? It is dead money that provides the same return as it would if you had literally buried it in your backyard or put it under your mattress. Now you might think: How is that possible? I put down $100,000 on the purchase of a $500,000 home five years ago and it is now worth $600,000. This is a 100% return on my investment of equity. The common mistake most people make is confusing return on equity with the appreciation of real estate values. True, the house went up in value, but you would have realized this gain regardless of whether you had a mortgage on the property. Indeed, you would have realized it even if you had financed the entire purchase. A home’s appreciation in value does not depend upon the size of the down payment. Real estate values go up and down irrespective of the size of down payments and mortgages. Real estate value is a factor of market supply and demand. The analogy is that boats on the bay will rise and fall with the tide no matter how big or small they are.

“...purchase your home within a range that gives you comfortable payments and invest the difference.”

Purchase Price Down Payment Mortgage

The Smiths

The Joneses

$250,000

$200,000

$50,000

$200,000

10 YEARS LATER

Future Home Value Mortgage Future Equity Less Original Downpayment Gain

$411,752

$50,000

$200,000

$361,752

$211,752

$200,000

$50,000

$161,752

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Ten Years Later As you can see, 10 years into the future both homes will appreciate to the same value of $411,752. Remember, the value increases or decreases based upon market demand. It has nothing to do with the size of the mortgage or the amount of equity in a home. If they both then decided to sell, at the closing they would both have the same gain. The Smiths would pay off their mortgage of $50,000 leaving them with $361,752 from which they will deduct their original down payment of $200,000 leaving them with a gain of $161,752. The Joneses on the other hand will pay off their $200,000 mortgage leaving them with $211,752 from which they will deduct their original down payment of $50,000 leaving them with a gain of $161,752. As counter intuitive as it seems, this illustration proves that regardless of the size of the down payment, the gain is always the difference between the original purchase price and the future value of the home. After 10 years of the home appreciating at a rate of 5% per year, both homes have gained $161,752 in value despite the different down payments. This analysis demonstrates that home equity has a 0% rate of return. Again, you would not put your hard earned money into a mutual fund that advertises a 0% rate of return. Why do the same with down-payment funds?

Now that we have illustrated this critical point, let’s get back to the original question: how much should you put down? Obviously the smaller the down payment you make, the larger your mortgage and corresponding monthly payments. So I recommend that you take out as large a mortgage as you can comfortably afford and place the remaining money you had planned on using as a down payment in an investment account. I am not advocating that you buy a bigger house and place less down; I am saying that you should purchase your home within a range that gives you comfortable payments and invest the difference. The actual amount depends upon your household income viewed in respect to how many children you have along with the amount of assets you have earmarked for retirement and how much you contribute to those accounts each month. The moral of the story: Don’t put all of your money down on a house. Invest it in yourself instead and give yourself a chance at creating a retirement. ■

David Muti JD, RMA is the author of “Mortgages: What You Need to Know” and the President of Forgotten Equity, Inc. You can learn more about his book by visiting www. pocketguidepress. com or go to www. MyFICO.com for a free “Understanding Your FICO Score” booklet.

“...you would not put your hard earned money into a mutual fund that advertises a 0% rate of return.”

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Dec 2013

TOOLS TAXES

Tax Secrets Revealed

Maximize Home Mortgage

INTEREST

by Sandy Botkin

or most Americans, their home is their single biggest portion of their net worth. Many Americans believe that you can deduct any interest, especially interest incurred on your home. This myth is partially true. The general rule for home mortgage interest is that you may deduct interest paid on the acquisition debt and home equity debt secured by a qualified home — either your principal residence or a second

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home. That means you must be the person liable on the debt and the debt must be used to either purchase or improve a qualified home.

What is a qualified home? ■

Your principal home, which is the home that you live in for most of the year. ■ One second home selected by you for purposes of deducting home mortgage interest.

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■ A

home can be a house, condominium, coop, motor home, house trailer or boat as long as these provide basic living accommodations such as a sleeping place, a toilet and cooking facilities.

Acquisition debt Deductible acquisition debt must also be carefully defined. It is debt: ■ Incurred to purchase, construct or substantially improve any qualified home and ■ Secured by that home. Thus, you acquisition debt is not debt incurred on your primary home that you use to buy another property such as your second home. It would be acquisition debt if it were secured by your principal residence to purchase or improve your principal residence. ■ You must reduce your acquisition debt by any principal payments. You can increase your acquisition debt by borrowing money on your home equity to make improvements to your home. Example: Charles buys a home for $400,000, incurring $300,000 of debt. This $300,000 constitutes acquisition debt. If he pays off $20,000 of principal over the next two years, his acquisition debt is now $280,000. Thus, if he refinances his home for $400,000, he can deduct interest as acquisition debt on the remaining balance of the original debt, which is $280,000.

Home equity debt In addition to being able to deduct your interest on acquisition debt, you can also deduct interest on your home equity debt up to $100,000 of debt. This debt can be used for anything from your children’s college educations to gambling. There is no limit on what a home equity debt can be used for.

Limitation on acquisition debt Sadly, what Congress giveth, they taketh away. There is an overall limit on acquisition debt of $1,000,000 for married filing jointly or for single taxpayers and $500,000 for married filing separately. B.I.S.T Strategy (Botkin Interest Shifting Technique): There is an old saying in Washington DC: “Where there is a will.....

there’s a lawyer.” You can get around the $1,000,000 limitation for interest on acquisition debt by: ■ Paying enough cash down so that your total acquisition debt doesn’t exceed $1,000,000, plus another $100,000 for home equity debt. Thus, your total debt should be limited to $1.1 million. This may involve liquidating some investments such as stock or bonds in order to raise the cash ■ Waiting 91 days ■ Refinancing your home equity to take out much of the down payment that you made at closing ■ Buying back your stock and bonds with the refinanced money. Result: You now can deduct not only the interest on the first $1.1 million as acquisition debt, but you can deduct all of the other interest incurred on the rest of the refinanced debt as investment interest. Pretty neat, huh?

Graduated payment mortgages (GPM)

A number of mortgages allow for a lower payment than what a current amortization would require in order to allow buyers to afford housing. The difference in what would be needed to amortize the loan gets added to the mortgage balance. In future years, when the buyer’s income presumably rises, the mortgage payments increase to eventually amortize the whole mortgage. Example: Mary buys a home taking out a loan for $500,000 at 4 percent interest. However, if her payments including taxes would have been $30,000, she might Investment interest now be able to afford the payments. She is deductible to the takes out a Graduated Payment Mortgage extent of any investwhere she pays only $25,000. The $10,000 ment income. Any difference gets added to the mortgage. In excess of investment future years, her payments would increase interest, gets carried to eliminate the mortgage in 30 years. over forever to be Tax Effects of GPM: All payments used against future made on a GPM while there are additions investment income. being made to the principal are deemed interest and, thus, fully deductible if for If you own several second homes, you acquisition debt. As payments are made to can pick the one start reducing or amortizing the deferred each year to qualify interest, these payments would likewise that gives you the be deemed interest and fully deductible. biggest deduction. If the loan is refinanced with a different lending institution, the whole portion of the deferred interest will be deductible! ■

TAX TIPS

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Sandy Botkin, CPA, a CPA and attorney is the principal lecturer at the Tax Reduction Institute. He is a former trainer of IRS attorneys. He is also the author of “Lower Your Taxes: BIG TIME” and “Real Estate Tax Secrets of the Rich,” from which this article was derived. For more information on Sandy’s products, go to www. taxreductioninstitute. com.

INSPIRATION ACKNOWLEDGEMENT

Improvising Your Approach To Improvement

Discipline, Honesty and Change by Dr. John C. Maxwell

ur well-being and happiness are tied to the notion that our lives can improve. We hope for a better future for our company, our kids, and ourselves. We dream of a tomorrow that’s better and brighter than today. Here are a few improvements many of us desire to see: • We hope to lose weight and improve our fitness • We hope to earn more money and improve our financial standiing. • We hope to argue less with our spouse and improve our marriage.

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“Your direction determines your destination.” - Andy Stanley

Over the next year, if we knew our health would deteriorate, our economic situation would worsen, and our closest relationships would unravel, then we’d be depressed. In fact, even if we knew our lives would stay the same, most of us would feel unsatisfied. We’re always looking to improve the quality of our lives—it’s human nature. Unfortunately, many of us never go beyond hoping for improvements to actually making them. I’d like to share some insights to help you improvise your approach to improvement. DEVELOP HABITS The secret of your success is determined by your daily agenda. People who make successful improvements share a common denominator: they form habits of daily action that those who fail to improve never develop. As my friend Andy Stanley says, “Your direction determines your destination.” The steps you make each day, for good or ill, eventually chart the path of your life. Consider the analogy of saving for retirement. Financial advisers counsel us to invest for retirement early in our careers and consistently throughout life. If we do, we can quit working at 65 with a sizeable nest egg. However, if we neglect funding our 401(k) each month, then we end up with nothing. We may still “hope” to win the lottery and secure our financial future, but we’ve lost the ability to control our fate.

BEFRIEND DISCIPLINE We live in the ultimate quick-fix culture. Everyone wants to be thin, but few people eat healthy and exercise. Everyone wants financial stability, but many refuse to be bothered by a budget. Rather than trouble ourselves with discipline, we opt for diet fads or speculate in the stock market. When we don’t see long-term improvements, we discard one fad in favor of another. In life, there are two kinds of pain: the pain of selfdiscipline and the pain of regret. The pain of self-discipline involves sacrifice, sweat and delayed gratification. Thankfully, the reward of improvement softens the pain of self-discipline and makes it worthwhile. The pain of regret begins as a missed opportunity and ends up as squandered talent and an unfulfilled life. Once the pain of regret sets in, there’s nothing you can do other than wonder, “What if?” ADMIT MISTAKES When trying to improve, we not only risk failure, we guarantee it. The good news is that mistakes generally teach us far more than success. There’s no sense pretending we’re perfect. Even the best of the best have moments of weakness. That’s why it’s important to be honest when we fall short, learn from the mistake, and move forward with the knowledge gained.

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“Continual change is essential for improvement.”

MEASURE PROGRESS You cannot manage what you cannot measure. Identify the areas in which improvement is essential to your success and find a way to track your progress. Keeping score holds you accountable and gives you a clear indicator of whether or not you’re actually improving. CHANGE CONTINUALLY Continual change is essential for improvement. One of the great paradoxes of success is that the skills and qualities that get you to the top are seldom the ones that keep you there. The quest to improve forces us to abandon assumptions, embrace innovation, and seek new relationships. If we’re complacent for too long, we’ll fall behind the learning curve. Once this happens, it’s a steep, uphill climb to get back to the top. The desire for improvement has a degree of discontent in it. Personal growth requires apparently contradictory mindsets: humility to realize you have room to grow but also confidence that improvement is possible. ■

John C. Maxwell is an internationally recognized leadership expert, speaker and author who has sold more than 12 million books. This article is used by permission from Dr. John C. Maxwell’s “Leadership Wired” available at www. injoy.com.

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We believe that lending is more than just processing loans. Itâ&#x20AC;&#x2122;s taking the time to educate homeowners so they can make informed decisions and secure a loan perfectly tailored to their circumstances and goals. To learn more, contact us today.

David F. Bailey

NMLS #658734 Office: 817-527-2936 Cell: 214-682-9175 dbailey@westloan.com www.WeststarMortgageTeam.com

Please Call to Schedule Your Complimentary Mortgage Consultation. All rates and programs subject to change without notice. Weststar is an equal opportunity lender. Weststar Mortgage Corporation dba Weststar Loan Company. NMLS #93243 | Branch NMLS #93488.