Put a proven plan into action that will allow you to buy a home now – and:
1. Upgrade to a bigger home in record time while building a large investment account, or
2. Have the ability to pay your home off very quickly, without making extra payments.
The keys to this plan are simple. You just need to know how to manage your income, interest, and equity.
You also need to buy “less house” than you are qualified for the first time out.
During my many years of working in the real estate industry, I have observed that there are two kinds of home buyers. We’ll call them Type A and Type B.
Type A Home Buyers
Type A Home Buyers are conservative. They fight the urge to bite off more than they can chew. The first home that they buy costs less than they can afford.
They don’t rush out to buy new furniture on credit. They don’t buy new cars or insist on owning all of the latest high ticket items.
As a result, their budgets aren’t stretched, they have extra money to invest and save, and they are not forced to use high interest credit cards to pay for any emergencies that come up in their life.
For the most part, they live on a cash basis. If they don’t have the cash to spare; they don’t buy it.
This lifestyle may sound familiar to you. This is the way our parents, grandparents, and every generation before them lived. This is the way of life that built America.
Type B Home Buyers
Type B Home Buyers do things differently when buying their first home. They buy a home for the maximum amount that they are approved for and then they spend all of their extra cash on new furnishings.
They probably will take advantage of some of the “12 months same as cash” offers to buy even more new furnishings and they might decide that they need a new car to go in the garage.
At this point, the budget is stretched to the limit. Every paycheck goes to pay bills. There is no extra money to invest and save.
It gets worse. The refrigerator conks out and they are forced to buy a new one on a high interest credit card. The “12 months same as cash” has expired and more payments hit the already over taxed budget.
Then, one of our Type B Home Buyers gets laid off. There are no reserves to fall back on. You can imagine what happens next.
o Late Bills
o Late Mortgage Payments
o Sometimes, even bankruptcy
It didn’t have to be that way………
If you haven’t already figured it out, Type A is the Smart Home Buyer.
You can be too!
Follow these simple principals and you will;
o Live with less stress
o Have reserves to fall back on
o Build wealth faster
o Make interest work for you
You will also have the option of buying or building the home of your dreams – without stretching your budget – sooner than you think!
The plan that makes up The Smart Home Buyer Report is pretty simple. It is based on 4 easy-to-follow parts.
1. Buy less than you are approved for
2. Keep your principal
3. Invest the difference
4. Invest windfalls
Buy Less Than You Are Approved For
When you visit a loan officer to find out how much you can get approved for, you will probably be offered the maximum. Many of the programs that will be offered to you will allow you to spend up to 55% of your gross income on mortgage and debt payments.
(Gross income is before taxes)
If 15% of your total paycheck goes to income taxes and you buy the maximum that you are approved for, you would actually be spending 70% of your income!
Gross Income 100% $5,000
Taxes -15% -750
Payments -55% -2,750
Money Left Over 30% $1,500
Suppose that you have 5% deducted from your pay each month for a 401K plan. Now you only have 25% of your income for living expenses.
What do you spend monthly on the following items?
o Gasoline and auto maintenance
o Health insurance and medical related expenses
o Tithing and charitable donations
Are you putting 10% of your income into savings each month?
You can easily see that spending the maximum that you are approved for doesn’t leave much to work with. If you are in a higher tax bracket, it gets much worse!
In my opinion, you are just asking for trouble if you go this route!
Reduce Your Stress
Why not buy a home that is less than you are approved for?
Let’s say………….35% of your gross income.
Instead of trying to pay living expenses, save, and invest on only 30% or less of your income, you now have 50% to work with!
o Which plan of action would result in less stress?
o Which plan would allow you to plan more effectively for the future?
Keep Your Principal
Once you have made the decision to buy less than you are approved for, you may want to do what many of my clients have done. They purchased their home with an interest only 30 year fixed mortgage, and invested the difference.
In other words, they have invested the portion that would have gone to pay principal. Most mortgage loans include principal (the money that you have borrowed) and interest in your monthly payment.
I know what you are thinking: “Did he say interest only? I’ll never pay my house off on an interest only mortgage. I heard that those are bad”
If you are using an interest only mortgage to buy a bigger house than you can afford or to get lower payments without any other plan of action, they are bad!
Let me tell you a little bit about “the proper use of interest only loans.”
Banks borrow money at a discount, on an interest only basis, then they loan it to you at a premium. They make their interest payments and invest the rest.
Traditional mortgage companies make a big profit on the interest you pay for the use of their money. Additionally, they make a huge profit investing the principal dollars you are paying each month.
When you take out a mortgage, the mortgage company doesn’t lend its own money to you. They use “Other People’s Money” (OPM). Using OPM is one of the secrets of wealth.
Large and small businesses borrow money (OPM) on an interest only basis in order to keep more of their income. Why? If they keep more of their income, they can use it to make more money!
This is how the wealthy people become wealthy!
Borrow at the lowest payment; invest the difference. Invest more of your income.
o For the first several years, the majority of your payment goes to interest anyway.
On a traditional 30 year mortgage, you don’t start making a significant dent on the principal until you have been paying for over 15 years!
Why not keep your principal and make it work for you instead?
Important note: I am NOT a proponent of many interest only, adjustable rate mortgages. For the purposes of The Smart Home Buyer Report, a 30 year fixed mortgage, with a 10 or 15 year interest only period, is the most conservative and effective way to go.
Invest the Difference
You must be disciplined to this. Treat your investment payment just like any other bill. It MUST be paid!
o If you save $300 per month by paying interest only (I/O) on a $200,000 mortgage, you would invest that $300 every month.
o By averaging a 10% annual return, (I’m doing it; you can too) your investment account would be worth $62,778 at the end of ten years!
o During this same period of time, you would have paid only $30,449 in principal, on a traditional 30 year mortgage!
The following chart shows:
The principal paid on a traditional 30 year mortgage
The value of your investment account, funded by your monthly interest only savings
These numbers are based on:
$200,000, 30 year fixed mortgage with a note rate of 6.5%.
Interest only saves you $300 per month.
You invest that $300 per month into an account that pays 10% annual interest.
Years Principal Paid Investment Value
5 $12,778.00 $23,918.00
10 $30,449.00 $62,778.00
15 $54,285.00 $126,713.00
20 $88,671.00 $231,907.00
Rather astounding, isn’t it?
You have amassed this fortune while making the exact same payment that you would have on a “traditional” 30 year mortgage!
o By the end of 5 years, you have only paid $12,778 in principal on a traditional mortgage.
o If you are on an I/O mortgage and you invested the $300 monthly savings, you would have $23,918. That is almost double the amount of principal that would have been paid!
o Notice that 20 years into the traditional loan, you have not even paid half of the principal back on a traditional loan, but on the I/O, you could pay off your home and still have cash left over!
Lots of Options
At the end of the first ten year period you could pay $30,449 to principal, be in the same position that you would have been on the traditional loan and walk away with more than $32,000 of your investment money.
You can sell your home; roll the equity over into a larger or smaller home, depending on your needs and/or desires, without increasing your monthly payment. If you decided on this option, you would use an I/O mortgage for your new home and continue to grow your investment account.
You could refinance into a new mortgage that gives you another 10 years of I/O. Lets imagine that the refinance costs $5000 to accomplish. You now owe $205,000 on your home. Look at the magic of the second 10 year investment period.
Continuing to invest just $300 per month @ 10% annually, you will have $231,907 at the end of this 10 year period! Subtract the $5000 that it cost to refinance and you net out at $226,907.
The average tax payer receives a $3000 refund each year. What happens if you invest this amount as well as your monthly payment?
You would have $425,164 at the end of 10 years! WOW!
Imagine how much you can amass by adding a little more here and there!
Some of my clients really get into this and they squirrel away every extra dollar that they can. They don’t run out to buy the latest, greatest, newest, gadgets when they hit the market. They aren’t caught up in “keeping up with the Jones.”
They have a vision of a future that includes many options. It really boils down to how bad you want it!
It doesn’t end there either! During this time, your home has been appreciating. Let’s assume an ultra-conservative rate of only 3%. (The national average is 6%)
At only 3%, your home is now worth $361,000.
Let’s recap. Twenty years have gone by:
Home Value $361,222
Net Worth $581,386
Here are some other benefits to think about:
1. During the period that you are following this plan, you are very liquid. If you have an emergency or are unable to work for a span of time, you have the cash reserves to fall back on.
2. Paying extra to your mortgage instead of investing will increase equity, but if you are not qualified to borrow against this equity during a time of emergency, (Credit issues, no income, etc) the equity is worthless unless you sell your home.
3. There is nothing to stop you from paying extra to principal. However, after looking at these numbers, I don’t know why you would want to do that!
You should ALWAYS consult with a local licensed financial adviser before investing.
The examples are not intended to represent any actual investment or savings vehicle. The availability of an account meeting the criteria is theoretical. Such an account would be necessary to make the process function as described.
A good growth account is one that will maximize your money’s growth and security. Even more important than the “rate of return,” the use of tax and accounting rules can increase the security and wealth potential of your growth account.
Where you put your interest savings and some of your principal payments, so that they can grow, is crucial to the success of your plan.
Not all growth accounts are the same. Ideally, a growth account should provide four essential characteristics in order to make the most of your wealth potential and security.
Your growth account should provide:
o Tax deferred growth of the money placed into it
o Some minimum guarantee of interest or return on the money
o No cost access to the money
o Tax free access to the money and growth on the money
All of these characteristics can make a huge difference in the potential of your growth account. You can use whatever you choose for a growth account. For most growth account options, you will use your local professional.