Should I pay off my Home's Mortgage?

Is paying off your home necessary? There are some who say that paying off your home mortgage is the best thing you can do and others who say your regular monthly home payment pays you some important financial dividends. Who’s right? They both are. You just need to decide which course is right for you.

What are your benefits if you continue making your regular monthly payment on your home loan?

·         You will continue to have a tax write off of the interest and property taxes you paid on your home. This can save you on your taxes provided the deduction is more than the U.S. IRS standard tax deduction.

·         Money you might add to your payment to pay off your loan early can be dedicated to retirement investments. Enlarging your account and improving your overall retirement plan.

Recent surveys show that 50% of seniors aged 65-74 still have a mortgage or other loan on their homes. This debt can be difficult to pay off if one no longer has earned income. There is a lesson we learned during the last recession; adjustable mortgages and fixed incomes do not mix.

Important Tip: If you are approaching retirement and still have an adjustable mortgage, it is time to refinance and get a fixed rate loan as soon as you can. A one percent increase in a $300,000 mortgage can make the monthly payment go up well over $200! Can your retirement income survive an increase such as that?

Many of us think about paying our home off early. Homeowners often dream of the day they can have a mortgage pay off party where neighbors and family come for the ceremonial burning of the deed papers. What are your benefits in making larger payments during your peak earning years on your mortgage?

·         You will pay less interest for your home over time.

·         After the home loan is paid off, you will have more liquid money available to you on a monthly basis. These are funds that can be dedicated to IRA’s and other retirement programs.

·         If you remain in the home when you retire, you will not have a monthly mortgage payment so your retirement money will go farther and your home will still have equity. This gives you greater financial security.

·         You will still get to write off your property taxes provided the standard deduction is less than your total tax deductions for your income level.

·         Should you need it in your future for personal care as a senior, your home equity is available for a reverse mortgage.

For seniors who have owned their homes for many years, the income deduction on their home may be minimal and, even with property taxes, inadequate as a tax deduction. It may be time to start thinking about your time horizon. When will you retire? Would you benefit most from a mortgage payoff or would maintaining your mortgage be a better plan?

If you have a specific time horizon in mind for paying off your loan, go to an amortization calculator on the web, (we have them at www.meriwest.com/calulators) enter your principle and interest rate and the term in which you wish to pay it off and the program will return a monthly payment for you. That payment will make it possible to pay off your loan within your time horizon if it is maintained throughout the remaining term of the loan.

Remember that any additional money you include with your payment will always be applied to your principle balance. You can do this on a regular monthly basis or apply a lump sum annually to reduce your principle amount. Either method will pay your loan off faster.

Please be aware of any prepayment penalties that may be included in your loan paperwork. These can make it difficult to pay a loan off early as it charges you a penalty amount for paying off your loan prior to maturity or a certain time period, such as the first five years of the loan.

For many, the only acceptable home loans are those that do not have prepayment penalties for early payment of principle. These penalties can prevent you from paying off your mortgage and prolong the pain of paying interest to the funder.

Interest expense is the largest single expense we have in our home purchase. It will be more than our downpayment. Often, if you pay your loan for the total of the thirty year term, you will pay out an interest amount more than the original amount of the first mortgage. This is dependent on the interest rate.

As homeowners, we need to decide if paying interest after retirement makes sense for us in regard to our personal tax and income situation.

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Would you like to learn more about retirement planning? Cetera Advisors LLC* have formed a partnership with Meriwest Credit Union to offer a complete array of financial investment options and personalized financial planning designed for your specific personal needs. Comprehensive financial planning, long-term and short-term investment strategies and retirement planning are available to all of our members on a confidential basis.

You can discover your options by meeting with one of the registered representatives in the convenience of any of our Meriwest financial centers or by calling (408) 866-1002.

* Security and advisory services offered through Cetera Advisors LLC (doing insurance business in CA as CFGA Insurance Agency), member FINRA/SIPC. Cetera is under separate ownership from any other named entity. The products offered are not insured by the NCUA, NCUSIF or any other regulatory agency, are not deposits or obligations of, nor guaranteed by the credit union or any affiliated entity, and may lose value.

Setting Financial Goals...And Reaching Them!

Are your financial goals set in concrete or can they be blown away as easily as a dandelion? 

Achieving your dreams and creating the financial future you want always begins with one important first step: a goal. Whether you're looking to help your child set goals so she achieves academically or have your own financial or self-improvement goals for the New Year, there IS a science to setting and meeting them.

A 2010 study in Applied Psychology followed college students who went through a multi-step goal setting program. Those who followed it completely showed significant improvement in their grades compared to those who did not.

While New Year's resolutions are notoriously short-lived, a clear process will put any objective you've set for yourself within reach. No matter what you have in mind, you can apply these steps to whatever goals are important to you, and the whole process should take less than 90 minutes.

1. Take a few minutes to write about the financial future you'd like to achieve. It's okay to start with a vague idea, but include as many specific details as possible.

2. Looking at the financial future you've envisioned for yourself, pick six specific and attainable financial goals that could help you achieve that future.

3. Number your goals according to their order of importance.

4. Look at each goal and write a paragraph about how achieving that specific step will benefit you.

5. For each financial goal, break it into smaller more manageable steps.

6. Identify obstacles that may get in the way and come up for a strategy for overcoming them should you need to do so.

7. Write about your commitment to reaching these ultimate financial goals.

That's it. Sound easy? Perhaps. But by taking the step of committing your goals to paper and working through these steps, you've laid the groundwork for success.

A goal is simply a dream with a deadline....may all your dreams come true!

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Reality Based Budgets for Teens and College Students – Jan. 16^th

Our next Financial Education Workshop will be Reality Based Budgets for Teens and College Students. It is a post college simulation of renting an apartment, buying a car, and developing a spending and savings plan. It is a fun and interactive session for the whole family and really opens the door to discussions about managing money. If this is something you or a member of your family needs, please feel free to join us. These workshops are open to the public.

Reality Based Budgets

6:30pm January 16^th at our Chesbro Main Office Location

5615 Chesbro Ave, San Jose CA 95123

Please RSVP with Gmeyer@meriwest.com.

Does Good Debt Exist?

Good debt does still exist. Home debt, if you are not dramatically underwater is still good debt. Please remember that the majority of home owners have seen some degradation of their equity, but most homeowners are not underwater. The generally accepted number is somewhere between 20-25% of all homeowners have a home that is underwater. Most of these were either purchased or refinanced during the recent boom in prices, especially 2005 to 2008. It is a simple truth that 75% or more of all U.S. homeowners are not underwater. Homes purchased today with a reasonable downpayment of 20% or more may have some stagnant price growth in the near term, but historically, owning a home is a sure path to wealth creation. When you consider the tax advantages of owning a home and the increase in value even if it only follows regular inflation rates, new homeowners will incur good debt.

Is college debt good debt? Many are of the opinion that education is important and the resulting debt from financing it is still a good debt. That is provided the student finishes and graduates. Statistics show that lifetime earnings of those with bachelors and masters degrees are substantially higher than those with only a high school education. I have many former college students in my workshops who have not graduated and have substantial student loan debts. Those debts become good debt and will be well worth it when they finish their degrees.

Is all credit card debt bad debt? Not necessarily. Often, young persons will use a credit card like it is going out of style. They will pay for movies, dinners out, concerts, and other fun items with their credit cards. That is some bad debt; debt where you have little or nothing but memories to show for it. I think the responsible use of credit cards is in purchasing assets for your home or car. Use the card for furniture, needed appliances or a major car repair. That way, when you are on your couch writing a check for your Visa card payment, you are sitting on your asset. (A little finance humor.)

Vehicle debt can often be termed good debt. Your car is an economic development vehicle. It gets you to work on time and gets your kids to school. Is spending 2 hours plus on a bus or train daily the best use of your personal time? It is a matter of opportunity cost. How much is your personal time worth?

In the end, I think that the difference between good debt and bad debt is subjective. Our income, education, and cultural background all play a role in how we view the value, really the personal value, of our debt. 

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Our next financial workshop:

Today's Real Estate Market and Tips for Purchasing Foreclosed Property
Saturday, October 13, 2012 - 10:30 a.m.
Chesbro Financial Center, San Jose, CA

Qualifying for a Home Loan - Jumping through the Hoops

As a recovering banker and branch manager who has processed hundreds of home and consumer loans over 30 years, I would like to provide my readers some insights into loan qualifying for a standard conforming home loan of $417,000 or less. If you have not checked lately, the approval bar for loan qualifying has been raised over the past few years. The first adjustment to the bar was on credit qualifying. The credit score required for a typical home loan five years ago was 680. That was the score everyone was shooting for. Today, that can be 720, 740, or even higher depending on the underwriting standards to which the borrower is being held. Each financial institution sets its own criteria based upon their risk tolerance.

The next criteria we will look at is the borrower’s income. Do they have enough to make their loan payments and other obligations? Lenders use a debt to income ratio to determine someone’s ability to make their monthly payments. The ratio usually varies between 30% and 40% of monthly income; meaning that the borrower’s loan payments and other credit obligations should be no more than 30%-40% of their total gross monthly income. If someone is at or below this ratio, they are in good shape for an approval. If they are over, they may need to consider a smaller house, paying off other debt, or adding a second job to improve their debt to income ratio.

We have looked into credit and income. There is a third rail in this mortgage process and that is the value of the home. Today, for the best interest rates, lenders are looking for borrowers to put down 20% of the appraised value or sales price of the home. What this gives the borrower is equity. In this case, equity is the amount of the value of the home that is not encumbered by a loan. So, if we are buying a $200,000 home, we would need to put down $40,000 as a down payment. This would mean you would be financing $160,000 and your payments would be based on that amount. Making a down payment can help with your debt to income ratio as well.

Why do lenders require so much equity? There are many reasons. There may be a downturn in the market and the lenders want to protect their loan and prevent the home from being “under-water” should a real estate market downturn take place again. If the lender needs to foreclose on the property, there is a cushion of equity to cover costs of the foreclosure process. But the main reason lenders require equity is that now the borrower has some skin in the game! In the case of the $200,000 home, the borrower has $40K invested in the home. Anyone with that sort of personal investment is not likely to walk away from the home should they have some hard financial times.

Qualifying for a conforming mortgage loan is no different today than it was ten years ago before the residential real estate bubble started. A borrower has to meet credit standards, income requirements, and the home must qualify under the loan to value ratio which is generally 80%, requiring a 20% downpayment for a standard conforming home loan of $417,000 or less.

Final Word to the Wise: This Spring, I refinanced my home with a new lender. It took less than thirty days to process my loan. Why? I provided all the documentation that was asked for up front with the application. If a borrower provides all the statements, taxes, paystubs, and other documents that the lender asks for to process the loan, their loan approval answer can be had very quickly. The thing that holds most loan approvals up is a lack of documentation. I have waited weeks for some clients to provide the required documents. If a person waits too long they may miss their window of opportunity for the interest rate. A rate “lock in” is where your interest rate is reserved for a fee paid to the lender. If a borrower is not forthcoming with the required documents in a timely fashion, the borrower may lose their preferred rate and the fee they paid for the interest rate lock in. Best advice, do your homework, research the rates, and have your documents prepared before you start getting serious.

Also, consider getting “pre-qualified” or “Pre-Approved” by your lender. Pre-Qualification will help you determine how much home you can afford, and what type of home you should be looking at. Pre-Approval will do the same, but will include a review of your personal credit. Lender’s often charge a small fee for Pre-Approvals.

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If you are interested in purchasing a home and wish to get Pre-Qualified or Pre-Approved, please see Meriwest Mortgage’s website  or contact them at 1-800-364-6636. Today’s rates are available here.

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For all of you out there looking for our next financial education workshops, your summer wait is over. Our next workshop will be "Reality Based Budgets for Teens" at our Milpitas Financial Center at 6PM on Aug. 22nd. 

Our next "Credit Myths and Repair Workshop" will take place at our Milpitas Financial Center on Aug. 29th at 6PM. 

I hope I will meet you at one of our seminars! Have a great week!