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In part 1 John & Georgia were frantically sampling today’s mortgage landscape for one of those 30 year loans we all hear about that are now in the high 4’s & low 5% range.  As you remember, thay have a hybrid fixed to ARM loan that is about to convert to an adjustable and felt the only move that made sense was to get a new fixed rate.  See Do You Really Need to Refinance - part 1.

What was your conclusion?  Or better said what would have been the right thing for you to do if you had to choose? 

John & Georgia did not fully understand their current loan.  They mistakenly concluded that once the loan was an adjustable, their rate and payments would skyrocket, they would not be able to afford the new payments, loose control, and have to deal with yet higher future payments. 

We examined a 3 year chart of this index to see the unusually low and attractive rates this index is serving up.  They could see the most severe changes occurred from August of 07 through January of 09, and surmised that degree of activity is not likely to repeat itself as the economy recovers very slowly and index values rise.  This index being a 12 month running average, this could take some time.

So here are the facts they used to choose:

• New interest rate in August (index + margin) will be close to 3.25%
• New monthly payment for 1 year will be $1,018 per month saving them $744.67 each month for that year.
• Their current loan balance stays the same, a savings of $3,900 over refinancing
• The additional monthly cash savings could be saved to be applied to principal later if they need to or used for any other purpose like payment relief in case John does loose his job.

Taking the conservative approach, John and Georgia now look several years out to make some assessments about what might happen and the impact of that.  Below is a chart representing their calculations based on these assumptions:

• Their interest rate increases 1.25% each year
• They continue making interest only loan payments until the option discontinues
• They save the difference each month in and account that has a 3.25% rate of return
• If property value increases in 3-5 years they will sell and move to a larger home.

John & Georgia chose to stick with this index, the adjustable portion of the loan and direct what they save to either additional down payment in the future when they purchase again or, if they are fortunate with their finances and employment, to begin college savings accounts for their two children.

  Your Mortgage Loan is Going to Reset

Today consumers are concerned about their mortgages and what the future holds, more specifically, what to do with resetting rates and when.  Low interest rates in the mid 4’s to low 5’s, excellent rates by historical standards, have people scrambling to refinance loans with adjustable terms to fixed rate & term product.  Is that really necessary? 

John and Georgia owe $376,000 on their Bay Area home.  This loan, like many issued in the 2000 - 2004 mortgage and real estate boom period, was called a hybrid, containing both fixed rate and adjustable portions.  They have an interest only payment option lasting until 2013, and the monthly payment is $1,763.

Current Loan

The fixed rate portion is about to reset to a 1 year adjustable in August.  The terms of this change are index + margin is their new rate.  The index is the 1 year Treasury Security or CMT, the lifetime margin for the loan is 2.75%.

The clients, worried about John’s work situation are frantically looking for what to do next sampling the marketplace for appealing options.  The problem is everyone they speak to is on the sell for a solution in the form of a new mortgage that will be the:

• Lowest rate
• Lowest cost
• Best loan available
• Lowest monthly payment
• Perfect solution to solve their problems

Call any lender or mortgage broker and you’ll see, this list will go on and on with all the emotional appeal crafted to get you a better loan. 

Suppose John & Georgia settle on the new mortgage in the chart below.  They pay .25 points (1/4 of 1% of their new loan amount), include all costs and expenses totaling about $3,900. into their new loan so they don’t have to write a check at closing, and they get a new 30 year fixed rate loan.  Both the loan balance and monthly payment will be higher.

• They have increased their mortgage and reduced their home equity by $3,900.
• They have increased their monthly payments by $218.75.
• Was this the best option for them?

When I asked this question they said well, we’re not sure about John’s job and we feel better knowing our loan isn’t going to change to something we don’t understand, and besides things are still getting worse aren’t they?

In my next post on Monday I’ll show you the review we did and what their options were. 

Study the data on both the old and new loan and test your knowledge and conclusion.  Then on Monday find out if you would have made the right choice for yourself.

We will also have a special offer lasting 48 hours where you could win a free tri-merge credit report complete with a complimentary consultation and analysis.

See you at Do You Really Need to Refinance - Part 2

If you are alive today, you know about planning, goals, urgency, and inspiration.  You may not be as good at practicing what you know as you are at knowing it, but you do know their value in getting what you want.

If you are an investor, a stay-at-home-dad or mom, a student, an employee, if you’re out of work, we are all confronted with the same dilemma in getting the results we want in any project and across all platforms.  That dilema is the triad

Yesterday - Today - Tomorrow!

1. How much do you rely on lessons learned from yesterday to plan today or even tomorrow?
2. What amount of focus should be placed on living for the moment?
3. Why is the notion of tomorrow such a compelling vision for each of us, we have never been there & neve will?

Here’s something that will surely offer some direction and perspective:

Today

Yesterday is a history book of lessons

An archive of memories and lore

Yesterday is a faded fogged dimension

Behind a glass labeled nevermore

Yesterday is a wise experienced teacher

Who teaches what the lived and wise men say

Yesterday instructs and warns and tutors

So I can learn and live a great day

Tomorrow is an out of focus future

Where nothing is real and distant from today

Tomorrow is a wish but not a promise

A reachless place that’s just too far away

Tomorrow is a hopeful fiction story

But has not guarantee and no say

Tomorrow can be only slightly molded

But planning, working, loving here today

Today is all I have that I can work with

From where I rise to where I lay my head

My yesterdays are used and lie behind me

Tomorrow lies beyond my covered bed

Today I can show loyalty to someone

Today I can dispense forgiving grace

It’s now I can use yesterday’s wise lessons

To make this world a safe and better place

Today I dream about a great tomorrow

And work and vote and supplicate and play

Today I make a masterpiece of living

For all I have to work in is today

Swen Nader

The unemployment rate is now over 8% nationally, 10% in California, and growing. 

A primary fear of Americans today is losing their job through no fault of their own which is the source of income and support for themselves and their family.

Historically, we are a nation that spends what it earns plus some and we may be experiencing the turning point for that sad but prevalent perspective.

For this final piece in the series I suggest we all need to look seriously at how much we rely on our employers and careers as the sole source of income we need to live the life we’ve both chosen and built.  Is that really a safe bet?  But what choice do we have you might say, and with good reason, after all, you can’t simply start doing something else, and even if you could, how would that be any different?

Many years ago I recall reading an article from some magazine, whose name escapes me, titled “Obsolete at 40″.  It was an article that actually shocked me.  The case was very well built for how older more educated and tenured employees were actually being replaced by their early 30’s something counterparts who would do better work, had endless energy to work more than 40 hours a week and accepted less pay happily.

I couldn’t imagine that happening, it was foreign to my way of thinking.  Didn’t big companies value those long term loyal employees who had done so much for their employers over the years?  Weren’t they entitled to some sort of special treatment for all they had done?  This article was partnered with a then obscure perspective that major employers preferred temporary contract employees to long term hires and that this would become a trend in the coming years simply to avoid paying retirement benefits and better quality work they speculated would be done by somebody with specific skills for a particular result in time.

In today’s world we now know that was indeed a trend.  Had we paid attention to that trend we could have changed our behavior as many have so as not to be impacted by the loss of a job.  In fact, as some report, to loose their job would be a blessing, here’s why:

I am encountering many who now want to build something for themselves that they control.  Start a small part time business, work in the evenings to supplement income, maybe even buy rental real estate in Silicon Valley at these low prices with positive cash flow which will grow rapidly during the upcoming economic recovery.  Let’s go out on the weekends and get some of the stuff people sell at endless garage and yard sales then sell it on E-bay some say.  There are many more examples of this kind of ambitious thinking and it is growing at a feverish pace!

Bottom line - Let’s create additional sources of passive income so we don’t have to rely 100% on an ever evolving career or job that may not turn out to be as secure as we imagined when we graduated from high school or college.

What do you think?