Question of the week: How is a mortgage a financial tool?
Answer: Acquisition, cash-flow, capital improvements, debt management, partner buy-out, legal settlement, are some of the activities that businesses engage in using revenue, assets and debt.
Same with households. Your revenue (salary), assets (savings, equity) and debt (loans, revolving credit) enable you to acquire property and goods, remodel or maintain your property, restructure loans and credit, payout someone else on title either willingly or due to legal settlement, can all be enabled with a mortgage.
Financial tools are not just mutual funds, stocks, life insurance, annuities and retirement accounts. Those items are all assets on your personal balance sheet. On the other side of the balance sheet are your liabilities. The primary liability for most families is their mortgage. Mortgages are critical to financial planning and long-term goals.
Consider acquisition. Most families cannot afford to purchase a home with all cash, therefore a mortgage is required. Using a 30-year fixed rate mortgage you benefit from a low monthly payment, relative to the amount you are borrowing, and the ability to budget what is likely your highest expense with a fixed amount well into the future.
Once you own a home you benefit from growth in equity as prices rise, either slowly or quickly, during you time of ownership.
As the equity grows you have the ability to access funds from your home by either increasing the amount of your mortgage through a refinance (a “cash-out” refinance), or obtaining a Home Equity Line of Credit (HELOC). Using a HELOC leaves your mortgage untouched, thereby keeping your interest rate and monthly payments the same.
Why would you want to access equity from your home?
There are circumstances when it makes sense to refinance your mortgage, pull cash out and use the funds to reduce other debt to improve your monthly cash-flow. For example, your home is valued at $700,000 and you undergo an extensive remodeling project.
When the dust is settled, and cleaned up, you have a HELOC with a large balance, as well you took advantage of “same as cash” financing items from furniture and appliance stores. The credit balances total $150,000. The monthly payments on these balances are about $1100 per month—and that is just the minimum payments which means the balances will not be paid off for years. Further, the HELOC balance is adjustable and rates will likely go up.
You owe $500,000 with a 3.5% mortgage and a payment of $2400 per month on your now remodeled home now worth $900,000. Your monthly payment for your mortgage and the remodeling expenses on credit total $3500 per month.
If a cash-out refinance for $650,000 ($500,000 pays off mortgage, $150,000 your remodeling costs) has a rate of 3.75% your monthly payment is $3010 per month, you save almost $500 per month.
A mortgage has enabled you to improve the value of your property, improve your cash-flow from the remodel by restructuring your debt.
Another way a mortgage is used as a financial tool is to settle a legal claim or complete a legal settlement.
The two most frequent mortgage transactions for these types of situations are divorces or partner separations, and inheritances. Here is an example of each.
Bill and Mary are separating after 10 years of marriage and two children. They own a home valued at $700,000 and have a mortgage with a $450,000 balance. They agree that Mary will remain in the home with their children to prevent further disruption in their lives. They must agree on how to divide their assets, bank accounts, retirement accounts, vehicles, and the equity in their home. For the settlement they agree that Mary will refinance the home to remove Bill from the mortgage and title. For this to happen they agree that Bill will receive $100,000.
Mary refinances the home for $550,000 with the net proceeds of $100,000 being paid directly to Bill from the escrow closing. Because Mary is not directly receiving any proceeds from the refinance, the transaction is considered a “limited cash-out” refinance, not a “cash-out” refinance, therefore the interest rate/costs are lower.
Example number 2: Jane, Sally and Brian’s mother has passed away in their family home. Their father passed away several years ago and the home, valued at $650,000 is part of Mom’s estate. Also in the estate are a retirement account valued at $210,000 and bank accounts valued at $30,000. The retirement accounts and cash in the bank are to be divided evenly between the three siblings.
Jane and her husband want to keep and move into Mom’s home. There is a reverse mortgage against the property that has a balance of $145,000. Sally and Brian agree to $160,000 each from the property, and Jane agrees to have her share of the cash in Mom’s bank account to go to her brother and sister.
To recap, Brian and Sally get $160,000 each for the property, $15,000 each from the cash in Mom’s bank account and $70,000 each from the retirement account. Provided Jane can get $320,000 for Brian and Sally, she will get the family home and $70,000 from the retirement account.
Jane and her husband fund an owner-occupied mortgage for $465,000 to payoff the reverse mortgage ($145,000) and pay out her siblings ($320,000). At closing the proceeds of $320,000 are paid directly to Brian and Sally, $160,000 each. Like the divorce scenario above, because Jane and her husband are not receiving any proceeds from the divorce the transaction is a limited cash-out refinance, therefore a lower rate/cost than a cash-out mortgage.
Many families are reluctant to utilize the equity in their home to consolidate debt, or leverage to obtain additional assets such as a vacation home or investment property. In many circumstances, the best option to achieve your financial objectives that results in a better overall financial position is using a long-term, low-cost financial tool, a mortgage.
These are just some of the scenarios where a mortgage is a beneficial financial tool for homeowners, call me with your financial objectives and we can discuss whether a mortgage is the right tool for you.
More pay, more costs, fewer workers is a take away from today’s jobs report from the Department of Labor. The economy netted only 194,000 new jobs in September, well below the forecasts of 500,000 new jobs. The unemployment rate drop to 4.8%, a pandemic low, however the labor force shrank by 183,000—meaning that many people dropped out of looking for work. Businesses are being squeezed due to lack of workers, higher costs for materials and rising wages to entice workers. The options are either to see a cut in profits or increase prices to consumers. With wages increasing 4.6% and inflation up 4.3% from last August, workers’ pay increase is being eroded by inflation. Estimates are that if there had been no pandemic the economy would see approximately 6 million more people in the workforce.
Bad news good news? The unsatisfactory jobs report portends slower economic growth than predicted. For those looking to borrow the bad news could be good news for rates not increasing as soon, or fast, as the Fed has announced its plan to taper its Quantitative Easing purchases of Treasury debt and mortgages is reliant on not only inflation and economic growth, but also the health of the labor markets. Today’s report does not represent a healthy labor market.
Rates for Friday October 8, 2021: Mortgage Backed Security prices dropped through the week as investors were concerned about the debt ceiling dance in Congress, the Fed’s pending tapering, and subsequent anticipation of higher rates. The result is that after nine weeks of rates being flat week-to-week, rates have increased for the second time in three weeks.
FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS FOR PURCHASE TRANSACTIONS:
30 year conforming 2.875% Up 0.125%
30 year high-balance conforming 3.125% Up 0.125%
Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.
In 1890 the Brooklyn Dodgers entered the National League, joining the New York Giants, who played in Manhattan. And the longest rivalry in baseball began. In 1958 both teams left their boroughs in New York City and re-settled in Los Angeles and San Francisco, becoming the only teams west of Kansas City. The rivalry moved with the teams, fueled by the NorCal-SoCal differences in lifestyle and cultures.
There have been many games and series through the decades (century plus) that have determined which of these historic teams make the playoffs. Thanks to a walk-off, pinch-hit home run on Wednesday night by Chris Taylor for the Dodgers, the two rivals will face each other in the playoffs for the first time.
All season long the Dodgers chased the Giants for the National League West title, coming up one game short. Adding some more fuel to the intra-state feud.
It should be a great series, more so if the Dodgers come out on top.
Have a great week,
Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog