Coffee to Car Payments

This ARM could cost you an arm and a leg

Whenever I meet with a homeowner to discuss the Home Ownership Accelerator,  I always look at different scenarios based on their actual cash flow.  The Home Ownership Accelerator is an adjustable rate loan that adjusts monthly based on the 1-month LIBOR index.  The loan allows you to take a higher margin and pay less up front or, you can buy the margin down.  You pay 2 points up front to buy the margin down 1%.  In general, your break-even point is two years because you prepaid 2% interest up front to pay 1% less per year thereafter.  However, your cash flow may be so strong that the higher margin makes sense.  I've seen this happen several times.  Here's an example.  I had a husband and wife come to see me and they have good but modest income and no outstanding debt other than their 15-year mortgage on which they had about 10 years left to pay.  I ran the simulator using a margin of 3.25% over the 1-month LIBOR which historically has averaged about 4.5%.  That makes for an average rate of about 7.75%.  Then I added 5 points to the starting balance to reduce the margin to .75% which would mean an average of about 5.25% over the life of the loan.  Here are the results:

• Using the high margin, their home would be paid off in 6 years and 9 months.
• Using the low margin, their home would be paid off in 7 years and 4 months.

This example shows that the actual rate you get is not as important as the actual dollar amount you pay in interest.  You can't take your family to Disneyland with an interest rate.  You can with the thousands you save in actual interest paid.

So the conclusion we can draw from this is that if your cash flow is strong enough, you may not want to buy down the margin.  On the other hand, if two years is the break-even point for buying down the margin, this loan could cost you an arm and a leg but you get your arm back the first year and your leg back the second year.

How powerful is your cash flow?

Des Moines Real Estate Professional: Becca Hendricks

About me: I grew up in Manhattan, KS and moved to Iowa in 2000.  I have an extensive background in market research.  I enjoy helping people find the right home or sell their home-and making the process as painless as possible.

What I do to get away from work:  I love to travel; my most recent excursion was to the beautiful country of Ireland.

Words to live by:  Trust: give it to others and earn it yourself

The best place in central Iowa to entertain clients or colleagues and why:  I love local sporting events.  Even though Des Moines doesn't have any pro teams, it's great to treat clients (and myself) to local team spirit.

One thing I would change about the Des Moines area:  I wish it were in Arizona

What Iowa can do to attract more people like me:  Des Moines has really grown in size and in culture over the last few years...keep it up!

My mentor:  My father...he taught me how to work hard and really loved the earned-right to play.

My leadership philosophy:  Be what you want in others.

Contact me.
Becca Hendricks
Realtor
JDR Group
4520 University Ave. STE 130
West Des Moines, IA 50266
cell: 515-778-7763
office: 515-224-4002
fax: 515-224-4452
bhendricks@jdr-group.com
view my current listings at www.beccahendrickshomes.com

All Shook Up: Check Your Homeowners Insurance

One of my favorite things to do on the weekends is to sit and watch the History Channel.  A few weeks ago, I was watching a program about the 8+ magnitude New Madrid earthquake that rocked the Midwest in 1811.  Tremors were felt right here in Des Moines, IA (520 miles away).    This massive quake changed the landscape of the Midwest, permanently changing the course of the Mississippi River, and temporarily causing it to flow backward.

This morning, 197 years later, a smaller 5.2 magnitude earthquake again rocked the ground.  Fortunately, so far, there are no reports of damage or injuries.  However, my girlfriend's sister, who lives in Martinsville, Indiana (just south of Indianapolis) said she thought her house was going to fall down.  Here in Des Moines, WHO radio morning co-host, Bonnie Lucas, was sitting in her office and felt her chair move, grabbed her desk, and heard the ceiling panels start to shake.  At first, she thought it was Van Harden working on another invention (like cheese-crust pizza).  Then she read the newswire and realized it was just an earthquake.

This morning's quake likely didn't change the course of the Mississippi but, maybe you should check the fine print of your homeowners insurance to see if it covers earthquake damage.  This is NOT included in most homeowners insurance policies.  It is an available, affordable endorsement that can be added to most policies.  But, especially here in the Midwest, with the last major earthquake happening nearly 200 years ago, it probably wasn't even something you asked about when you took out your coverage.  The risk is nominal but so is the premium.  On the other hand, in the even of an actual loss, it could be financially devastating.

Want a free checkup?

Static to Dynamic: What's a Sweep Account?

What normally happens when you get your paycheck?  If you're like a lot of people, it gets deposited into your checking account.  From there, you manage all of your spending.  You first make sure that you meet all of your monthly obligations (credit).  These are static obligations.  Then, you probably have a pre-determined amount that you allocate to savings for vacation, college, and unforeseen expenses.  Then there's the long-term investments that you don't plan to touch until retirement.  The money that's left is what you spend on groceries, coffee, dining out, and clothing.  This money is your everyday spending.  You've been doing it for so long that it's practically automatic.  You've got it figured out.  It's called a budget.

What if there were an easier way to make your money work harder for you?  Check this out. This chart shows you how businesses and higher-net-worth individuals manage their cash flow using sweep accounts.

What does this mean to you?  Well, your home is likely the biggest investment you'll ever make, and the Home Ownership Accelerator is a sweep account linked to your mortgage.  It works for ordinary people with ordinary income, generally positive cash flow, and equity in their home.  It makes the money that would have gone to interest go to principal instead.   The result is a significant interest savings over the life of the loan, and more rapid equity buildup in your home.   The last and most important benefit is your mortgage is  "cheap money".   You can also systematically divert a portion of the equity you are rapidly accumulating to outside investments and still watch your mortgage shrink and your supplemental nest egg grow.

You've done it by switching your biggest investment from a static obligation to a dynamic tool to manage your money more effectively without any extra effort or change to your spending and lifestyle.