Tuesday, March 28, 2023

In terms of the economy and the increase in mortgage rates, I would say it is what it is. Do we predict the future? Do we hold off our game plans? Should we worry? Maybe all of the above? I just don’t think that procrastination helps in any capacity. Maybe, just maybe, we should look at planning based on what we want to accomplish right now in the present.

Of course, changes in the future are inevitable, but if we can make decisions now that are to our benefit, should we hold off, simply because inflation is high, rates are high and other costs are creeping up? As a matter of fact, I would say it is to the contrary. Given the above circumstances, we need to take some sort of action to try and reposition ourselves into a better financial situation. The answers can be right in front of you, but unintentionally neglected due to the busyness of life. I would suggest that you review the following.

PMI (private mortgage insurance): If you are paying mortgage insurance, monthly mortgage insurance can be terminated. It’s important to understand how it terminates so that you can make sure your payment drops and the monthly mortgage insurance is removed (even though it is supposed to be automatic at a certain point). Call your lender’s servicing department for direction and their process for PMI elimination. This may save you some cash without much expense.

Debt consolidation, cash flow help and equity acceleration options: Refinancing is not only a rate-based decision and there are many reasons to consider refinancing.

1. Damaged credit may have improved. Improved credit scores open the door to possibly refinancing at a rate better than an existing rate.

2. Credit card debt, as well as student debt, can be super expensive. Number crunch and see if a new loan can improve your cash flow (forget about the rate itself).

3. It may be that you have paid your 30-year fixed rate down enough to switch to a 15-year fixed rate, even at a higher rate, and knock off your existing loan in 15 years.

4. Pay off an existing mortgage with a reverse mortgage and free up cash (great product for the right people over 58).

ARM yourself! Fixed rates are up, but an alternative and great solution may be to explore adjustable-rate mortgage (ARM) products. Proper up-front analysis is the key. Today ARMs are only a small part of the market, but here’s the surprise: Most don’t adjust for five, seven, or 10 years and can make sense for homeowners with lots of equity if they plan to downsize or pay off the loan within that time frame.

Our feeling is that if you’re aiming to pay off your mortgage in a short period of time you may be able to save some cash. Real savings happens if you pay off the loan within the five to 10 years before the ARM adjusts—effectively turning it into a very short, very low-rate, fixed mortgage (which is great, if you plan to move in the next several years or if you want to pay off a big mortgage before you retire).

Reverse mortgages: The reverse mortgage can be used to pay off an existing “forward” mortgage to create additional cash flow and also strategically as a tax-free income source to defer taking Social Security, so you can get the maximum social security payment at 67. For those with stock portfolios that have appreciated with good returns, look at where the market is now (as of 11-08-2022). If you’re 60 or more and do not want to be forced to liquidate your portfolio, I would suggest looking at a reverse mortgage as a viable option and tool.

No longer a last-resort product, a reverse mortgage is a very sophisticated tool to support a sequence-of-return plan. The mechanics: A reverse mortgage acts as a credit-line bridge, and helps you avoid having to liquidate your portfolio when it’s down and pay taxes. A reverse mortgage gives you the ability to draw on a line of credit tax free and gives you the option of waiting for the market to rebound. In addition, the unused portion of that equity line has a growth factor.

For those that have a decent amount of equity in their properties, the question is how is that helping you? Is there a possibility that you can channel the equity in your home into a better growth vehicle such as a fixed annuity or life insurance? For those of you who are empty nesters transition may be the magic word. It might be a great time to downsize, cash out your home appreciation, lower your payments and redirect the cash to conservative, less risky, alternatives to balance out the investments that have moderate to high risk. Proper mortgage planning along with wise counsel may give you a whole new path to freedom and peace of mind.

The key takeaways are: 1. You can borrow on a reverse mortgage loan and make no monthly payments 2. Depending on the product, the loan has an increase factor whereby the actual cash availability and access can have line growth 3. You can design the payment structure, consolidate debt, age in place, take advantage of investment opportunities and the list goes on. Borrowers still own their home (if you heard anything else it’s not true). What do you trade for all the above advantages? The mortgage increases as time goes on, and so you owe more than you borrowed, but the tradeoff is no monthly payments.

Self Employed: Can’t show income? There are many programs that will allow a business owner to get a mortgage. Ideally, if you want to get the best rate, full income disclosure with enough income to qualify is necessary. In general, you can’t have your cake and eat it too. You want a low tax bill, keep in mind that write-offs assist with that, but they also help in having a hard time getting a good mortgage rate. When you’re self-employed, depending on your business structure, the usual set-up in terms of income distribution is to give yourself a salary, and distribute any extra profit (either as a partner or LLC or sub S). Then you have the discretionary “perks” such as health insurance, car leases, travel and entertainment, credit card payments and other personal/business items. You must have in mind that mortgage lenders look at consistency and typically two years is the standard, bar any program exceptions and special underwriting overlays. If buying a property is imminent, you want to structure a financial situation that maintains your self-employment history.

If you have paid yourself as a W-2 previously, you maintain that history, but if you become a consultant paid on a 1099, you have set your clock back two years because lenders want to see a two-year self-employment history.

If your income was low in the previous year, take fewer expenses for the upcoming tax year, if practically possible; beef up your income; pay the tax; and get the benefit of a better mortgage rate. Structure salary enough to qualify you for the mortgage financing you may be looking for down the line. Don’t change the business structure until you close on the loan!

Low credit scores cost big bucks! Work on increasing your scores.

Carl E. Guzman, CPA, is the president and founder of Greenback Capital Mortgage Corp, a mortgage broker/banker in New York, New Jersey and Florida celebrating over 32 years of assisting borrowers with their financing needs. He is the creator of www.mortgagegenius.com, a mortgage financial advisor, a CPA by training; and a licensed real estate broker in New York and New Jersey specializing in complex residential and commercial mortgage solutions.

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