Are home equity loans a good idea in Texas? What would Dave Ramsey do (WWDRD) Investment loans?

June 13, 2008

Texas | Home Equity Loan Rates | Investment Home Equity Cash out Loans

Every mortgage or refinance needs a target; something larger we’re trying to accomplish beyond just buying/refinancing a home or investment property.

Most of my clients know I have a few “Jon Rules” that I think about when I’m doing any home loan or refinance.  

These rules are not strict–rather they are just like the sites on a rifle…they help everyone get a focus.

 Because a mortgage is just a tool, and should not be an end in and of itself, but a means to a bigger end.  

Top 3 Jon Rules…

#1) Eliminating Consumer Debt: (Non-tax deductible)

#2) Have a Savings Cushion:  Ideally 3-6 months in a liquid interest-bearing account.    

Texas Mortgage Refinance Application  | PHONE:  512-996-8194 |  We help people all over Texas

After you close on a home loan, you’ll need a savings cushion.   Some focus so much on the rate that they’ll empty all their savings to buy a home.  Tell me, does it matter if you get the lowest rates in Texas if you don’t have $500 left to your name after closing?    

This is one reason why I still offer 100% or 80/20 home loans.  Some people think 100% financing is for “sub-prime” or for people who have bad credit.  However, most of my 100% home loan clients are Ph.Ds, teachers, physicians, engineers, Aggies, Sooners, who could easily put 5-10% down.   In fact, I just closed a 100% home loan for a literal rocket scientist who works at a local Texas University. 

I believe his true title was “rocket propulsion specialist.”   If anyone knows of a brain surgeon who wants to buy a house with an 80/20 home loan, have them call me so I can call myself the Official lender to Rocket Scientist and Brain Surgeons.  Too bad I was only a  B- student in college.    But like the man who entered his mule in the Kentucky Derby, the exposure is doing me good.

Jon Rule #3) Pay home off before 30 years and save a ton in interest…..you shouldn’t pay for your house 3 times. 

My take is: Go with the loan that moves you forward financially.  Whatever that might be.  If this is a 15 year refinance–great.  But if you have debt and you’re paying lots of money out each month–your best bet is going with a home equity loan.   I would say if you pay more than 10-15% of your income in high-interest debt you should seriously look at a home equity loan vs. a “no cash” out loan.

The fewer bills you have the better.

But don’t home equity loans have higher rates than simple refinances?  Yes.  Mortgage rates go up and  go down…so chasing a magical rate is kinda stressful.  And waiting for the market to come your way takes you out of control of your finances.  I mean, if rates are 7% and you’re waiting on rates in the 4% range, you might be waiting a few years.    

My approach is different:   Have a strategy when going into the home loan or refinance– and “use” the mortgage to execute your game plan.   Mortgages are just tools.   And choosing the right tool is very important.  This is the true role of a qualified, licensed mortgage professional.   Our job is to show you options that you may not have thought about.  

When you’re getting any mortgage or refinance loan ask yourself:  “Is there a better way to approach amy home loan or refinance than just trying to get some “magical low rate.”  Naturally, rate is important, closing costs are too, but let’s try to blend two objectives; low rate and getting out of debt.

Sorta like looking down the barrel of a rifle…there are two points we must align before we can expect to hit something.   What are you aiming at? 

For most people, all they only aim on the rate.   So what do mortgage companies do…they give low rates to these people.   With PMI…

PMI:  Now tell me.  If your rate is 6.00% and the house payment is $1000.  But your PMI is $200 month do you still think your rate is 6% if you’re paying $1200/month?   Why don’t more people avoid PMI–it’s almost always a waste of money.  You guessed it.   Rates.  Home loans that are 80/20 or 80/10 or 80/15s have higher rates because these are riskier than single loans.   

And did you know mortgage people make more money on single loans vs. 80/20s or 80/15/5 loans?  Most bank loan people are trained to show you single loans with PMI.

If you liked to learn more about avoid PMI with an 80/20 or 80/15 call me or email me.   512-996-8194

This is how the the typical refinance scenario goes

<Ring, Ring> 

Dude:  Hey I want to lower my mortgage rate and I have great credit…send me a GFE right now so I compare your GFE to 27 other people. 

And by the way, my brother’s cousin used to know a guy who worked at the golf shop of the friend of the CEO of Countrywide…so I’m in the know.   I got connections.   Your rate better be way low.

Typical Loan officer Mortgage Dudette:  That’s good, because I have really low rates.  Compared to the Carter administration, my rates are HOT!!!  :)

(But her low rates are available to every mortgage person so now the sales pitch begins).  I work with XYZ Mortgage and plus I’m really cute.   Check out my website, you’ll see!

Dude:   Okay, you’re right–you are cute.  You kinda look like my 3rd wife.  But I don’t want you to pull my credit.   I don’t want my scores to go down.  Can you send me the GFE without reviewing credit?

Typical Loan officer Mortgage Dudette:   Anything for you, Mr. High Credit Scores.   Here’s your Good faith estimate.  And don’t worry I didn’t verify anything about you like your job, income, assets so I’m not sure you even qualify for these rates but…did I mention I’m cute and have really low rates?  Want a calender with my picture? 

Then the next day rates go up by .25 making the cute loan officer’s GFE completely void….and this is a typical day in the mortgage world.  Cat and mouse.   And few people really are really serve.  

Certainly not the client who deserves someone to take the time to learn about their mid to long range goals.

My approach is different.  I want to gain clients who will refer me long term and the only way I can do this is if I bring more value to the table than the other cute loan officers.   So I approach mortgage lending from a “what loan will move this person forward” type of perspective.    

And I rarely have the lowest rates because most of the time my clients want to pay their own taxes and insurance–waiving escrows–instead of giving 2-3-4K to a bank to make interest on.   And to waive escrows as it’s called–one’s rate is generally higher by .25%.    My higher-end clients don’t mind the higher rate because they want to save on closing costs.   Plus they can take their tax money and put it into a money market account.  This way they are making the interest on their own money until their property taxes are due.  So there’s value to a higher rate.   

Or take 100% home loans…these rates are higher than 10% down.  But sometimes people want to keep their money vs putting it towards a home.   Maybe they are self-employed and can get a greater return on this money elsewhere or maybe they can take the 5% down and eliminate all their consumer debt.  Each person is different and has different goals and incomes.

So how do we actually blend these goals of low rates with financial planning?  What do the “Jon rules” look like in real life?

Let’s say someone calls me and says “I want to lower my rate.  I want to lower monthly bills.”   Okay, great.   That’s pretty general.    Sorta like most high school boys want a nice car and a pretty girlfriend.   Who doesn’t?

But what if we took at bigger approach to things and blended your goal #1–low rate–with #1 Jon Rule–eliminate consumer debt.  What loan would we choose if the objective was to reduce your family’s overall monthly expenses–not just the mortgage payment?

 Just focusing on the mortgage is fine–who doesn’t want a lower home payment?  But when we look at the mortgage in context of the overall family expenses what we are really doing is improving your overall financial plan.   This is what a financial planner truly needs to do.   And all financial planning begins on the mortgage level.   Because when you are out of debt you have more money to save, to invest, to build towards retirement.    

What’s your current refinance goal?  Maybe your situation might be “Hey Mr. Mortgage guy, what loan do you suggest that will help me retire at age 55.”  Whatever you goal–the mortgage person should start with it–and then customize the new mortgage (or refinance) around that specific goal.

Let’s talk about Home Equity Loans:  I recently helped a family get out of debt with a home equity loan.   They’ll save over $900/month.    That’s $10,800 a year they have in their checking accounts.    Not theoretical money.  Not the “What Would Dave Ramsey Do (WWDR)” approach of  ”cancel your cable and take the difference and put it into a municipal bond so you can make 1.3% over 10 years” But real money.  

And this is why I love what I do.  Financial planning truly begins on the mortgage level.

And we did it with a home equity loan.   Which is kinda funny since we sorta got out of debt by gaining debt.   Kinda backwards, isn’t it?  Ever notice who people who lack energy and are feeling run-down are often told by their doctors to exercise?  It’s counter-intuitive.    But anyone who exercises knows that the expense of energy often gives energy…ask the people who run Town Lake in Austin.

It’s the same with money.    If we go into a home loan with a  game plan, we often gain dollars, not lose them.      Want to have money for retirement, consider buying and keeping real estate.  Let someone else pay your debt down for you while you gain tax benefits and equity.   Gain assets.   Start businesses.  It’s easier to start business when you don’t have debt by the way.  

I woudn’t be self employed had I not first bought an investment property.   And I used 100% financing.   My mom thought I was stupid but I read “Rich Dad Poor Dad” and this truly made a difference in my thinking. I bought my first home 6 months later–a duplex.   Then I sold it to start Mylendingplace.com.    I hated to sell an asset but I reasoned that my company would do more for me and my family than one property–I was right.   Notice the trend.

Assets (mortgage)–>Growth–>Business.   

My story:   I was raised in a “Poor Dad” home.   So I think this book is a must read.   If you don’t have the money, call me and I’ll buy it for you.    Better yet, buy Dave Ramsey’s book and Rich Dad. 

Then I went to college and major in biology and communications.  

After graduation, I was completely unqualified for anything.  Plus I had student loans.  Lots.  Eventually, I went to the college guidance counselor who said “You suck:  you need to sell something everybody wants.”

So now I sell money :)    Today, I help people all over Texas buy and refinance real estate.  Mylendingplace is a 3 year old company.  

Since I was raised in a “Poor Dad” family, I know first hand what it’s like to watch people in my family move from 40 to 50 to 60 years old without a single asset.    And I don’t think we are unique.

Why don’t more people buy real investment property? Too risk they say    But isn’t there a risk in retiring and not having money or assets?  Ever wonder why there are so many old people working at Wal Mart? 

 Do you think they want to be there?   Ask them them how many homes they owned and sold when they were young and what they think those homes would be worth now.   Wait, don’t ask them.  

Owning investment properties isn’t totally risk free, either.    I had to a costly eviction myself and I really wish I would have hired a management company…but I have to learn things the hard way.     What I’m suggesting isn’t pie-n-the-sky…I’m suggesting starting with with a financial game plan on each and every mortgage or refinance.   And ask yourself  ”does this loan help or hinder my long-range plans?”  If all you get is a mortgage rate on a Good Faith Estimate…keep looking ’cause you’re just getting debt.   

Back to the family I saved $900 using a home equity loan.   They were at their wits end.  The builder’s “in house mortgage” company “forgot” to include their true home’s taxes and they had a tax lien.    Family of 4 with a duel income, both of them working professionals, and a tax lien.   And lots of debt.    Medical bills, student loans, blah, blah….not extravagant living.   This is the typical American family of 4 today.

(TANGENT/ RANT/ $30,000 WORTH OF EXPERIANCE FOR FREE)

Do not EVER use a builder’s in-house mortgage company.  Ever. 

Regardless how much money they bribe you with…I mean, give you in “incentives.”   Run.   A builders “in-house” mortgage company is a like Vegas–the house always wins.   When you buy a builder home–that’s great.  Builders make some great homes.  But don’t use their lenders, appraisers, title, veterinarians, or dentists.    Because their lenders, title, etc all work for the builder.  And therefore on every level your home loan is designed to build profit for the builder. 

Don’t expect the “preferred mortgage company” guy to work for you–he’s working for company that writes his check.  Ditto for title.   This family I helped had a $7,000 tax lien because the builder’s in-house title “forgot” to go over “unimproved taxes vs. improved taxes.”  

 If you want to know more about mortgage taxes, etc…call me because long after you’re over the “free” incentives they gave you you’ll wish you would have known about unimproved property taxes.   

Some feel this type of lending  was the epicenter of the sub-prime meltown.    Builders who went beyond the scope of building and offered lending/appraisal and title services.   But don’t take my word for it.  Business week magazine wrote a great article about it.

 http://www.businessweek.com/magazine/content/07_33/b4046601.htm?chan=search

I personally lost 30K (that’s $30,000–more than my college education!!!) because I used a builder’s appraiser.     If you are thinking of buying a brand new home–call me or some other independent mortgage company.   

How do you know you’re working with a truly independent mortgage company?  If the builder takes away your “incentives” because you want to use a independent third-party you’re working with the right person.  END OF TANGENT:)

Home Equity Loans:   If you are going to refinance, at least look at something larger than the mortgage rate.  For example, let’s say you’re current mortgage is 7% and rates are at 5.75%.   You’d really like to refinance and lower your bills.    Let’s say you’d save around $100 if youtook advantage of the 5.75%.

But what if you took some equity out of your home and paid most/all of your non-tax deductible debt off in the process?  This probably would save you $500-$700 month.  Then you could take some of the savings and apply it to your principal and pay a 30 year mortgage off in 15-20 years.   That is a very important step–and here is where I agree with Dave Ramsey–you must have a budget because without this you’ll get back into debt. 

Refinancing to get a low rate is  good.  But the second play, using Jon Rule #1 and #2 moves you to an entirely different financial situation.

I mean, you’re going to have closing costs anyway.  Why not go with a home loan that will move you forward financially vs. one that will just save you $100.

Some people think home equity loans are not good.   Gurus like Dave Ramsey don’t encourage them at all.   But if the numbers make sense–who’s to argue?  Is Dave Ramsey going to pay your bills for you?

Dave has some great fundamental principlals.  Most of which I agree with.     Budgeting, saving, low debt…but the more I listen to his show the more I see his main goal for his followers is this:  ” Get to zero.”

“Don’t owe anyone anything”…which is good.   He even throws some Bible verses around.    Who could disagree with a simplistic message of getting to zero?

Well me, for one. :)

I don’t think you win the financial game by getting to zero.  I believe you get there when you have money.  People win the game when they have assets.  Assets give you options.    Few things in life are 100%–and money is no different.  

What if you called Dave’s show and said “Hey I make good money but I my retirement is iffy at best.   I only have 30K in retirment and I’m 50 years old.”  He’s likely to suggest you need to budget more, maybe cut out some vacations and buy another book of his.

If you called me, however,  and you’d didn’t have any goals of your own–I’d probably suggest the things that Dave suggest– but I’d encourage you to buy investment properties or some other growth vehicle.  If your IRA was growing at 1-2% and we find some properties that are growing at 3-5-7% I’d might even encourage you to put more of your savings towards a higher yield vehicle like established real estate.  No specs stuff.   Then, with the right planning and discipline,  you could retire with several properties that have equity. 

Just keeping one property in your 20s or 30s would make your retirement a completely different experience.

Then, when it’s time to retire, these assets could be sold or you could keep them and enjoy passive income during your retirement years.  Whichever approach you take–you’ll need to get some points on the board because “getting to zero” is not a long term game plan.   So think of me as Dave Ramsey Plus.   Take the budgeting, savings, getting out of debt–he talks about PLUS add buying and keeping assets and starting businesses, even if you have to incur debt.

If you’re considering refinancing your home or investment property just call our office or visit our website:  http://www.mylendingplace.com

Please complete the free, no-obligation Texas Mortgage Refinance Application 

 Investment Home Equity Cash out loans: We also offer home equity loans on investment property.   This means you can refinance a Texas investment property and pull equity out of it.   Use the equity to buy more rental property, make improvements, pay debt off, or whatever.  

Please call me at 512-996-8194 if you have any questions about home equity loans or 100% (80/20) mortgage financing. Or about Invesment home loan refinance or cash out investment loans.

If you have a Texas Zip Code we can help you buy or refinance your mortgage and investment mortgage.

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