Coffee to Car Payments

I'm Normally Not This Tall. I'm Sitting On My Wallet

What's in your wallet?  If you're like a lot of us, you have several different cards for different things.  You've got the card that pays you cash back for gas purchases.  Then there's the one that earns you airline miles...the one that pays you 1% back on all purchases or, the one that pays you 3% back for the category where you spend the most.  On top of that, you may even have little sticky notes on each card to remind you which one to use for what.  Then there's your Barnes & Noble or Border's membership card, Petco, Petsmart, T.G.I. Friday's, etc...  You really can't afford to leave any one of them at home unless you know before you leave the house in the morning exactly where the day will take you.  As a result, if you spend more than 20 consecutive minutes in the car, your butt starts to fall asleep.  OK, maybe that's just me but, at one point, I actually tried to put together a weekday wallet and a weekend wallet since the weekend is when we do most of our shopping and consequently need to stop at T.G.I. Friday's. 

The number one reason people choose the Home Ownership Accelerator is simplicity.  You can clean out all of those cards and just use the debit card associated with your account since your entire income gets  deposited directly into your account and then every dime you spend, from coffee to car payments, stays parked against your mortgage balance until the day you actually spend it.  So, if your interest rate on the Home Ownership Accelerator is 4.5%, it is equivalent to earning 4.5% on your checking and savings.  You can still juggle all those cards if you want to but, it really isn't doing as much for you as your Accelerator loan is doing automatically with only one card in your wallet.

Will it work for you?  Contact me to find out.

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?

I'll pay for your appraisal.

Did you know that only $13 of every $100 spent at a big-box retailer stays in the local economy while $45 of every $100 spent at a local merchant stays local?

With the help of Sherry Borzo over at dsmbuzz.com, Des Moines area business owners are able to promote their business by offering discounts to her consumer members.  You can check out her merchant list to see some of the perks currently offered.   

I have agreed to reimburse DSM Buzz members the cost of their appraisal at closing.  This usually runs between $300 and $400.  So, if you're considering the Home Ownership Accelerator, stop by her site first and sign up for only $10/year, show me your membership card, and get your appraisal cost refunded at closing.  It's a great return on your investment....spend $10 to get $350.

My Intermittent Quest for Washboard Abs

Last spring my girlfriend and I were over visiting my Grandma.  While we were there a lady from her church popped in to say "Hi.".  I used to go to the same church but I hadn't seen this lady in ten years or more.  She took one look at me and said "Derek!!  It's been years.  You look good fat!!"  Now the last time I'd seen her I probably weighed about 165 pounds but, as human nature goes, I wasn't happy because I couldn't see my abs.  Fast forward to last spring, I'd lowered my expectations and was pretty OK with myself at 210 except for the first 30 minutes after my Men's Health magazine came in the mail. 

A couple weeks later I went for my annual physical.  My politically correct doctor informed me that "..my body mass index was a little high."  So, for the next 2 or 3 months my girlfriend and I started walking at least 3 times a week and we even lifted weights like 6 times (total).  We both lost 10 or 15 pounds but then the progress started to slow and we lost interest.

It's all too common to get discouraged or just plain lazy once the new wears off.  You go back to relaxing and cussing those people who can eat anything they want, don't exercise, and still are the same size they were in high school...all because they have "good genes."

"Okay, Derek.  That's great but what's it got to do with money or financial planning?"

I was getting to that.  One thing that comes up often when I'm talking to people about the Home Ownership Accelerator is that they could just do it themselves without refinancing.  The fact is it's true to a point.  There are software programs that you can buy that range in price from $99 to $3500 or more.  Some of them are sold directly and some through "network marketing."  Don't you feel sorry for your relatives when they try to explain "But it's not MLM!!!  It's network marketing."  Anyway, I digress.  There have been surveys done to follow up with people who have purchased these programs and the truth is that, within 6 months, close to 70% of them are not using it anymore because they still require extra effort and discipline.  It's sort of like the 2 1/2 months worth of Nutri System food you've got left in you pantry right now.

The #1 reason people choose the Home Ownership Accelerator over other options is because this loan allows them to set it and forget it and get on with living their life.  Sort of like being born with "good genes"

Oops!  Gotta run.  I just got an email about washboard abs.

Different Strokes for Different Folks

  I try really hard to emphasize on my site that there is no one-size-fits-all approach to any type of planning.  That is why you need to make sure your "tax guy, financial guy, mortgage guy, whatever guy" takes the time to understand your priorities.  The same goes for the decision to rent or buy a home.  I received this comment from a lady who calls herself "People Power Granny"

"For the last 32 years we have made house payments. We're out of that maze now, and are renting and liking it very much. Plus we're saving gobs of money. Check out why at peoplepowergranny.blogspot.com. And of course, vote in my poll on which you prefer."

Granny's post is titled "Wanting a New Home?  You'll Save $$$ if You Rent!"  She definitely makes a valid point; however, I'd suggest that the real savings is in the headaches that come with being a homeowner.  You are responsible for repairs instead of being able to call your landlord.  You put a lot more of your own hard work into the home.  That's why they call it "sweat equity".  Then, at the end, you get to cash out of your "investment" and down-size or even rent to eliminate these headaches when you retire.

I think back over the last five years and recall how every weekend is spent either working on a home-improvement project or feeling guilty for not doing so.  I remember how excited we were when we gutted our bathroom and made it bigger,  included a monstrous whirlpool tub and then found out the hot water heater didn't have the capacity to fill the dang thing.  I remember having guys at the house until midnight in the ten days leading up to our Christmas party two years ago getting all the finishing touches put on our remodeled living room so we didn't have to have HGTV show up with cameras so we could pretend it was a theme party.  Now, we're getting ready to do the kitchen.  The end result will be great but, we'll be using a toaster oven, microwave, and hot plate to prepare meals for a couple months.  Not to mention we'll have to walk through the mess to get to the back door since that's our primary entrance. Oh, the joy of owning a home!  I kinda agree with Granny.  I'd at least like to rent for two months and come back when the kitchen's done.

Lawrence LaRose even wrote a book call "Gutted: Down to the Studs in My House, My Marriage, and My Life"  Luckily, Sheri and I will agree immediately on every single detail of our project so I don't have to worry about reading it.  Anyway, home ownership may not be for everyone or at least you may consider other alternatives after you retire.  Fortunately, the Home Ownership Accelerator can also be used to hasten the day and increase your equity position should you decide to cash out, start renting, and spend your weekends doing whatever you like.

Niche and grow rich

People questioned my sanity last summer when I chose to add mortgages - more specifically, the Home Ownership Accelerator - to the list of services available through Bridges Financial.  Seems like a particularly foolish time to be getting into the mortgage business.  Since then, whenever I mention mortgages to someone in conversation, they say something like "Boy!  You guys really have it rough right now.  Huh?".  I always try to explain that the Home Ownership Accelerator is a loan program designed for an entirely different type of borrower.  This is not another program for the borrowers who are costing taxpayers, investors, and people in the industry a lot of money and possibly even their jobs.  No, this loan is designed for responsible borrowers who have a fair amount of equity in their homes, good to great positive cash flow, and a demonstrated pattern of financial responsibility.  It's just a matter of time before this program becomes incredibly popular and I'm excited to be the first guy in Iowa talking about it.

Anyway, yesterday I came across this news story about how CMG Mortgage Bucks Mortgage Industry Collapse, Doubles Sales of New Home Ownership Accelerator^® Loan in 2007 .  The story has been featured on several U.S. and even a couple international news sites.  The story confirmed for me what I'd been thinking all along.  Any company that can double their sales and maintain strong underwriting profits (i.e. NO loans in default) is probably a pretty good partner for me to help my clients reach their financial destination.

The Home Ownership Accelerator Explained in 60 Seconds or Less.

I've spent a lot of time writing about this revolutionary new loan program and various ways that you can use it.  I just felt like I should try to explain the basic concept in one post.  So here goes:

The Home Ownership Accelerator saves you thousands of dollars in interest by converting all of your purchasing power from credit and cash reserves to equity in your home which can be accessed at any time through a full-service checking account built right into your mortgage.  In the meantime however, the unused money is used to offset the principal balance of your mortgage resulting in interest saved.

"Sounds like an interest-only loan.  How do I pay down my balance?"

The key to this loan is "no change to your spending habits".  That means you don't go out and buy a new boat or car or spend money that you wouldn't have otherwise spent.  If you continue your current lifestyle and spending habits, then the money that would have gone to pay interest pays principal instead.

One last note: With this loan you get everything you would get from you current local bank or credit union except for a "brick and mortar" location that you can visit in person.  All transactions on this loan are conveniently done on line, by mail, or through a dedicated CMG "Concierge" service center that you can call.  Ironically the difference between the rate you earn on checking and savings and the interest you pay on your mortgage normally is what pays for a the "brick and mortar" bank you can visit.  With this loan that money goes to you instead to pay for your "brick and mortar" home.

"Home Ownership Accelerator" and the yellow flying house logo are registered trademarks and used by permission.

Mortgage Interest is deductible but...

  In talking with people about the Home Ownership Accelerator, I am often confronted with the question "Won't I lose my tax deduction for mortgage interest if I pay off my mortgage early?".  The answer is always "Yes, you will but, that's a good thing."  The reason is clear once you understand what a deduction actually is.

You are very good at what you do for a living and you are confident that your CPA or Turbo Tax are good as well.  You provide them with whatever information they ask for and then trust them to prepare your return.  When it comes time to file your return, you only look at two lines.  Line 73 is the amount you overpaid or your refund.  Line 76 is the amount you owe.  You then either write a check or wait for one.

I have also become aware in conversations with clients that they believe that their mortgage interest that they paid reduces the amount they owe dollar for dollar and that is what I am trying to clear up here.  Your CPA or software computes your adjusted gross income on page 1 of the 1040 and shows it on line 37.  This amount is carried over to page 2, line 38.  Your mortgage interest is recorded on line 10 of a separate form (Schedule A).  Then the total itemized deductions on Schedule A are recorded on line 40 of your Form 1040.  Line 41 is Line 38-Line40.  One more fuzzy calculation on Line 42 (that may or may not apply to you so, I won't get into it) and you have your taxable income. 

The amount of mortgage interest you pay directly reduces your taxable income and only indirectly the amount you owe.  So quick example and I'll wrap this up.  If you paid $10,000 in mortgage interest in a calendar year and your tax bracket is 28%, you save $2,800 on you total taxes. 

So, it's nice to be able to deduct it but, let me put it another way.  Would you invest $10,000 in anything that was guarateed to be worth exactly $2,800 a year later?  You bought your home because you wanted to own rather than rent so, doesn't it make sense for you to take control of precisely when you stop renting the money too?

No-Sweat Equity

Would you store 53% of your life savings under a mattress?  How about in a coffee can?  Would you go to the bank a put in a safe deposit box?  Of course not!  You probably want as much of your money working for you as possible at any given time.

We've heard time and time again that your home is your biggest investment.  We've also been told that the best mortgage is no mortgage but let me ask you a question.  Does your home appreciate faster or slower based on how much equity you've accumulated?  That's right.  It makes no difference how much or how little you owe on your mortgage.  The value of your home is what it is. 

Many equity harvesting gurus will recommend that you continue to refinance every five years or so to continuously tap the equity in your home for other investments.  Your parents and grandparents keep saying to pay off your home as quickly as possible.  I said "They're both right!"  That is you can do both.

In the first quarter of 2007, we Americans owned $20.8 trillion dollars worth of residential real estate on which we owed only $9.8 trillion dollars.  That's an average of 53% equity in our homes.  Let me just add right here that the sub-prime mortgages that are causing such a commotion and turmoil in the market represent less than 20% of all outstanding mortgages.  You've heard the saying that the squeaky wheel gets the most grease.  Well, This quarter 1 2007 balance sheet shows that while consumer debt is growing, overall we still have a positive net worth.  $65.6 trillion in assets-$12.5 trillion in liabilities equals a positive $53.1 trillion in collective net worth!

I agree with Marian Snow when she suggests that we stop sitting on our assets, but beware that an interest only loan or a series of them will leave you with a big mortgage during retirement that will eventually need to be repaid.   The Home Ownership Accelerator offers an extremely efficient platform for equity repositioning along with the ability to retire mortgage free.   

By combining this powerful tool and safe money savings vehicles, you could call it "no-sweat equity"

There's gold in them there walls!!

Let's pretend you just bought a house in an older neighborhood and you were told the following urban legend at your housewarming party:

The house and several others in your neighborhood had been built during the Great Depression.  It is rumored that some relatively affluent individuals had escaped without suffering total losses in the market but they were still panicked.  So, they cashed in their investments and converted the money into gold and then built a modest, comfortable home to ride out the storm.  They decided that since banks weren't safe, they would stash the gold between the studs of their new home and then cover the opening with plaster.  When things got back to normal, they would simply bust out the plaster, retrieve their gold, and start investing again.  After all, the cost of repairing the hole would pale in comparison to accessing their gold again.  Meanwhile, a handful of these folks passed away before things got better and obviously they hadn't told anyone for fear that some desperate soul would try to steal it.  They never even told their family.

Now, you have it from a fairly reliable source that your house is one such house.  Only trouble is you're going to have to gut it or at least start tearing into it until you find it.  The price of the gold will far exceed any cost you will incur putting your house back together.  You have a friend who is whispering in your ear that he found gold when he was remodeling his home so you really ought to try it.  All of your other friends are saying that your home is lovely and even though there may be gold hidden in the walls, you should just leave it the way it is because at least right now you know what you've got.

What would you do?  You've got a very distinct possibility that there's gold in the walls but, you also are very comfortable with your home just the way it is.  So, you live in your home for a few years and then sell it.  A few months later, you're watching the news and there's a story about a family who purchased a home, started remodeling, and discovered a tidy stash of gold hidden under the plaster.  You remember the rumor and upon closer observation you realize it's the house you used to own.  I'm not going to ask what you'd be thinking at that point. 

That is precisely what equity harvesting is all about.  Many folks including financial planners shy away from it simply because they don't understand it.  The view debt and assets as two completely separate parts of your financial plan.  Debt is bad.  Investments are good.  You get a 15 or 30 year fixed rate mortgage because at least you know what you've got.

The truth is that, with the right tools, you can efficiently siphon equity out of your home for outside, relatively safe savings vehicles and still live out your retirement years with no mortgage payments.  You don't have to choose between paying off your mortgage as fast as possible or staying mortgaged to the hilt and maxing out your retirement savings. 

You can do both!