Buy a house and save $100,000

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People would be better off driving smaller cars and living in bigger houses.Owning a home has been romanticized and called the "dream" of every American. Perhaps at one time in this country it was considered a dream to own a home. Now, it can be a reality for just about anyone, even on a modest income. As I write this, we are enjoying the lowest mortgage interest rates in a generation and home ownership is growing at a fast pace. This is good news because the right to own property is one of the principals our country was founded upon. I also believe it is very important for each family to own their home, because owning a home provides a great deal of foundation for the family. Families, in my opinion, need to have a sense of belonging, especially when children are involved.
A home of their own provides a special feeling that is missing when a family rents a place to live. A rented home or apartment never feels totally like home. You can get used to it after a while, but why settle for less when you can truly have a home of your own? Buying your own home is one of the purest ways to spend your way to wealth. However, there is a great deal of difference between being the legally recognized owner of a home and having a true, equitable position in a property.
There are so many special loan programs in existence that just about anyone can qualify for a mortgage to buy a house, on just about any income. But, if you pay too much for a house, or buy a home in a declining neighborhood, you may never enjoy the financial benefits you could have if you make smart decisions from the start. This article will help make you a smarter real estate investor. I’ll bet some of you never thought of it in that way. "A real estate investor? But, I’m a homeowner," you may be thinking. "Investors buy property as a business, don’t they?" If you own property, you are investing in real estate. Even if you own only your primary residence, you are a real-estate investor.
I find it very interesting how few people realize this concept. When we talk about investing in general and the question comes up, "How much of your investment portfolio includes real estate?" a common answer is, "Well, we don’t have any real estate investments." Then, I ask if the person owns her home and the lights start to go on. Your biggest investment is probably your home. The median price for a home in the United States as of this writing is about $155,000 and more than $300,000 in the state of California. To buy that property, you will need at least 5 percent and perhaps 10 to 20 percent of that amount in cash to invest into the deal. When you take into account the down payment, closing costs, and fix-up costs, you might have spent $20,000 to $45,000 in cash for your initial investment in your home. That is a great deal of money to have invested in real estate. Many do not have that much money saved in a 401k or other retirement fund, or any other investment, for that matter. And, with a home, you literally are investing more money into it every week just to maintain it. Even if you bought a home that was much less expensive than the median price level, you were still required to make quite an investment. Add up all the cash you have put into the purchase and compare that investment against other investments you may have. I think you will find that you have a substantial stake in real estate as part of your total investment portfolio. And, if you do not have any investment in real estate, you are missing an opportunity for incredible returns on investment. According to the National Association of Realtors, $20,000 invested in the S&P 500 in April 1992 would have been worth $52,694 in ten years while the same investment in a home would have yielded $75,133.

HOME EQUITY: THE BEST REASON TO OWN There are many reasons people give for not owning a home. They feel that they don’t have enough money for a down payment. Houses are too expensive or they don’t feel they have good enough credit. Buying and owning a home takes more work than renting. Fear of the legal aspect of negotiating and completing a real estate transaction is also a reason many prefer to rent. I’ve heard people tell me they were too young to own a home, while others felt that they were too old. The bottom line is, you can think of hundreds of reasons not to do something. But, if you have one compelling reason to do it, then you can motivate yourself through any obstacles. Here is the most compelling reason to own real estate: Owning a home can give you great financial power and leverage as your equity grows. Home equity loans and home equity lines of credit become available to people with equity in their homes. Equity is important. Equity is simply the difference between what the house can sell for and what you owe on the property. Home equity is a powerful financial tool that is instrumental in helping people to pay off their debt at lower interest rates, start businesses, pay for college education, retire comfortably, and much more. Many people will generate more future wealth through real estate than they will by saving money in a 401k retirement plan. Think about this for a moment. You can literally start the day off reading your newspaper’s classified ads and within a week or two end up with thousands of dollars in home equity at your disposal. It can happen with real estate. You can buy and sell a home and earn several thousand dollars in a very short time frame. In less than a month, you can turn home equity into cash. That is powerful. But, as with all spending and investing, you must do it correctly from the beginning.
Any real estate expert would tell you that you make money in real estate when you buy a piece of property and you realize the money when you sell the property. This is a key concept. You make money when you buy so you must do it correctly. The world is full of people who own property that is worth less now than when they bought it. You want to avoid this situation by being a smart realestate investor. We’ll do our best to get you started on the right foot. It is very important to buy a home with built-in equity right from the start. That is, it is worth more than what you are buying it for to begin with. It is very important to understand that it does not matter what you personally think the house is worth.
What matters most is what the market says the house is worth. If all of the homes that have sold in a neighborhood in the past twelve months have sold for $80,000, the market is setting a level for home prices in that neighborhood at around $80,000. If you buy a home for $90,000, you have overbought and chances are very good that you will not be able to get your money out of the home if you sell it any time in the near future because you would have to sell it for more than $90,000. Your goal would be to buy a home in this neighborhood for under $80,000. Equity is crucial to your decision on buying a property. Savvy real estate investors make it a rule never to buy property at the top price of any market or neighborhood and, certainly, never if the home is priced above the market level. It happens, though. People buy homes every day that are overpriced. There is always a better deal to be had if you don’t get emotionally involved in making such an important investment decision. The numbers must add up in your favor in a real estate transaction. If you buy a home that is in a declining neighborhood, too run down, and requiring costly repairs, or simply one that is overpriced compared to similar homes in the area, it will be nearly impossible for your investment to grow in value.

STOP SUBSIDIZING YOUR LANDLADY I am not going to spend an excessive amount of time in this chapter discussing the various nuts and bolts of real estate transactions and mortgage negotiations. There are many good books on those subjects from noted experts like Robert Allen, Russ Witney, Robert Kiyosaki, and Carleton Sheets. I do want to spend time alerting you to what I believe are the key factors in properly buying a home, negotiating for the best possible mortgage, and using the home’s equity to your financial advantage. The bottom line is if you do not own the place you are living in, it is costing you a lot of money now, and will continue to do so in the future. This article is important if you want to increase your financial power and at the same time put thousands of dollars into your bank account.
Let’s talk about the basic decision of renting versus owning. This is a simple concept and really not a decision at all. You are buying a home whether you rent or buy. If you are renting, you are just not buying the home for the benefit of you or your family. You are buying the home for the landlady and her family. You are helping the landlady build her equity so that she may use that equity to her financial advantage. You get no advantage when you rent, other than a roof over your head. In most cases, you are not only paying off the landlady’s mortgage, you are actually overpaying by a certain percentage, which is mostly profit for the landlady. Renting property is a business with expenses, so you’ve got to have some profit in the deal if you rent properties and hope to continue to do so. The renters must pay more than is required to simply cover the mortgage, in order to cover expenses and provide a profit to the landlady. In apartment buildings, the profit margin is huge. Just imagine the profit on a single apartment in a big apartment complex that cost maybe $5,000 to $10,000 to build and is then rented for the next twenty to fifty years or more! There are apartment buildings across the country that are hundreds of years old. The mortgages on those properties have long since been satisfied and now the rents are generating pure profit for the owner.
Just think of the incredible wealth creation going on with year after year of rental payments coming in, with profit built in, plus the equity growth of the property as the mortgage is paid down by the renters. The margins aren’t so big on single-family homes, but they can also be very profitable as rentals. And don’t forget, the landlady also gets tax deductions, which can be taken on the estimated depreciation of the rental property.
More financial advantage for her, less for you. Certainly, there are times when renting may be appropriate for a short period of time. Perhaps you have just moved to a new city and want to take some time to decide where to invest in a home. Or you need to sell your home quickly for some reason and need to move out before you can make a good decision on buying a new home. These are legitimate short-term uses of rental property. I am merely saying that you shouldn’t get used to it. There are many more reasons to buy your own home than to rent a place. If you have to do it for a legitimate reason, just don’t get used to it and do it for too long. Building future wealth through increasing equity is one of the biggest reasons to own your own home, as we have discussed. But let’s not forget about the opportunities to keep more money in your pocket right now through home ownership. Reducing your tax burden through home ownership gives you an opportunity to increase your take-home pay right away. When you create allowable tax deductions, reducing the amount of income tax you will owe, you can adjust your W-4 form at work, which will reduce the amount of money taken out of your paycheck each week to pay income taxes.

BUYING FSBOS Let’s discuss some winning home buying strategies that will help you from the beginning to buy property properly to maximize your wealth-building potential. To save yourself 3 to 7 percent right off of the top of the selling price of a home, buy properties that are for sale by owner. These are known as FSBOs in the industry. People who choose to sell their homes themselves are actively attempting to save money by not using a realestate listing agent who charges a commission. There are several reasons to explain why they may be doing this. They could be very astute followers of my radio show and realize how smart it is to avoid paying those thousands of dollars in real-estate agent commissions. More often than not, though, these FSBO sellers are doing it themselves because they can’t afford to use an agent. You see, if a seller uses a real-estate listing agent, the seller automatically has to add the sales commission to the selling price of the home because the commission comes from the proceeds of the sale. When someone uses a listing agent, the mortgage payoff balance has to be at least 10 percent under the selling price just to break even. Otherwise, the seller will have to start digging into his own pockets to cover the costs for selling the house because a listing agent will get up to 7 percent of the selling price right off of the top. Then, the portion of the seller’s closing costs are usually in the range of 3 to 5 percent of the home’s selling price. If a seller needs most of the selling price proceeds for his own purposes, such as to pay off the current mortgage, debts, or other expense, it will be difficult for him to pay a sales commission out of the sales price. When a seller puts the home up for sale by himself, there is often more flexibility in the selling price, and you always save the commissions. Even though the seller technically pays the commission out of the sales proceeds, you, the buyer, are really paying the bill since you are buying the home.

QUESTIONS TO ASK A SELLER Here are some key questions to ask a seller that will give you an advantage when deciding how much to offer for a home. You need to find out how much the seller needs from the sale of the home, why he needs the money, and what his mortgage payoff balance is currently. You can find out some of this information by searching your county tax records either online or where they keep the physical tax and real-estate ownership records in your city or county. In the tax records you can also research the selling prices of similar homes in the neighborhood, as well as how much the seller originally paid for a property. This is very valuable information that you must have in order to be a smart real estate investor. You should also check out any other houses for sale in the neighborhood that are using listing agents. They will provide you with lots of valuable information about the area in which you will be interested in living.

ADVANTAGES OF PRE-APPROVAL While you are searching for a home, it is a good idea to start shopping for a good mortgage offer and get pre-qualified and approved for a mortgage so you can act quickly once you find a property you are interested in buying. Being pre-approved for a mortgage is much stronger than being pre-qualified. Anyone can pre-qualify you by looking at a couple of key pieces of financial information such as your credit score, your monthly gross income, and unsecured debt balances and expenses. You can easily pre-qualify yourself. All pre-qualification means is that you have met some preliminary qualifying parameters. Being pre-approved means the lender has gone more deeply into your qualifications and has provided assurance to you that you may have a loan at a specific interest rate when you are ready to make a purchase.
Buy a House and Save $100,000 It is prudent to shop several banks, starting with the one with which you have your checking account. Also, interview several mortgage brokers, looking for one with which you feel comfortable working. While banks can provide you with a mortgage loan, they will be more limited in the number and types of loan programs they have to offer. A good mortgage broker, on the other hand, will have thousands of programs from which to choose. Mortgage brokers are very competitive and need to hustle for business, while local banks are less aggressive. If you are like me, you will want someone who is going to work hard for you and treat you like you are their only customer. I demand this type of treatment and let them know right from the start what I expect. A real estate transaction has too big of a financial impact on my family to fool around with inexperienced or uninterested people. They work for me while the transaction is being completed, so I expect a focused and serious effort on my behalf. Mortgage lenders and brokers perform a very needed service, and good ones can put together loans that can be very good for your finances. But, in the end, they are commissioned salespeople, so review any recommendations carefully to make sure the person getting the best deal in the deal is you. Check all proposed fees and costs very carefully.
Virtually every cost included in a mortgage good-faith estimate, which is a preliminary estimate of all of the costs you will pay for the mortgage closing, including the interest rate, are negotiable. Be prepared to wince at each cost on the estimate and don’t be afraid to ask if the broker or lender can do better. Watch out for double charges on such things as application fees and administrative fees. Ask what each cost will cover and why it is needed. By the way, the higher your credit score, the more power you will have to negotiate with mortgage lenders and brokers. I suggest you don’t wait to apply for your mortgage to take a look at your credit report and credit score. The time to do something about a less-than-perfect credit history is before you apply for loans. Once you initiate the process, it is impossible to make any improvements in your credit score quickly enough to affect the outcome on the current loan.

AVOIDING PMI A good mortgage professional will also understand how to help you structure your loan to eliminate the need for private mortgage insurance (PMI). Avoiding the requirement to pay for PMI is very important. Private mortgage insurance is one of the hidden costs of a mortgage loan. It costs you money that would be better spent on extra principle payments, paying off credit card debt, saving, or just about any other positive use you can think of. This insurance policy is required by most lenders if you make a down payment of less than 20 percent or if your loan balance on the home you already own is less than 20 percent of the home’s market value. It provides protection only for the lender in case of a default on the mortgage loan and does not help the homeowner at all. Still, the homeowner is required to pay the premium year after year. That money is simply gone. It is an expense that can reduce your disposable income by several hundred to several thousand dollars a year and give you nothing in return. In my opinion, it punishes good people more than it penalizes the people who default on their mortgages and create the need for this insurance in the first place. In fact, the more responsible you are in making your mortgage payments, the more of a rip-off this insurance is. You may have owned a home for thirty years and never missed a payment, but, if you buy a new home and put less than 20 percent down, you will be required to have private mortgage insurance. If your mortgage is FHA- or VA-guaranteed, you are also required to pay a mortgage insurance premium (MIP). To add insult to injury, mortgage insurance is not deductible from your taxes like mortgage interest is. While this insurance has been credited for making it possible for many more people to own homes because it reduces the lender’s risk, it comes at a high price for homeowners. First, there is an up-front premium required of 1.5 percent of the purchase price for FHA-, VA-, and FmHA-backed mortgage loans. That equals $1,500 on a $100,000 home. The lender will be happy to wrap that amount into the thirty-year mortgage so you will be paying interest on top of the premium amount. The initial premium for a conventional loan is usually around half of a percent of the total sales price. Then, the renewal cost of the policy each year ranges from one third of a percent to one half of a percent of the loan balance. That is an extra $300 to $500 a year on a $100,000 balance. By the way, you do not get to shop for the best premium; the lender will choose the insurer. And, you can’t even see the policy because it is not your policy. You just pay the bill. Even when a homeowner does reach 20 percent equity, the lender does not automatically cancel the PMI. The homeowner must request that the policy be canceled.
According to congressional testimony, overpayment of PMI is potentially costing hundreds of thousands of homeowners millions of dollars per year. I am happy to report that there are ways to eliminate the requirement for PMI. The easiest way to avoid the requirement is to put a 20 percent down payment on your home loan. Most people, however, cannot afford that much of a down payment and the lenders know it.
According to Freddie Mac, the average down payment by first-time homebuyers is just 10 percent. One great way to avoid the PMI requirement involves getting a first mortgage for 80 percent of your loan, with a 10 percent down payment, and a second mortgage to cover the other 10 percent of the down payment, giving you a total down payment of 20 percent. This is sometimes called a "piggy-back" mortgage. Since your first mortgage is at 80 percent loan-tovalue, the requirement for mortgage insurance is eliminated. A good mortgage broker, who is up on the latest programs and strategies, can help you accomplish this. Some lenders offer a loan that actually builds the PMI into the interest rate. You would have to agree to pay a higher interest rate but the interest cost is tax deductible. Without the PMI requirement, you can save thousands of dollars in interest because you can put the money you would be paying toward insurance for the lender right into the principle of your loan. Or, you could spend money on presents for your children. Anything is better than having to pay a monthly fee to insure your lender. Thanks to the Homeowners’ Protection Act of 1998, PMI on all mortgages issued after July 1999 automatically cancels when you reach 22 percent equity in your home.
Don’t wait for the extra 2 percent growth in your equity, though. Waiting could end up costing you hundreds or thousands of dollars in additional insurance payments. The Homeowners’ Protection Act requires lenders to notify you when your home equity reaches 20 percent. The minute you get the notification request the cancellation of the PMI. If your mortgage was issued prior to 1999, it is your responsibility to keep track of when your equity reaches 20 percent in order to take action to have the PMI requirement cancelled. By the way, if you have ever had a HUD/FHA-insured mortgage, you may be eligible for a refund on part of your insurance premium payments or a share of the earnings of the mutual mortgage insurance fund in which your payments were invested. To find out if the government owes you some money, just call the U.S. Department of Housing and Urban Development at (800) 697–6967, or visit online http://www.hud.gov/.

CUT THE COST OF HOMEOWNER’S INSURANCE One other area where you can save substantially is also insurance related. You will be required by your lender to also carry Homeowner’s Insurance to protect your home from catastrophic loss or damage. This insurance also protects you if someone should be injured on your property. As with any insurance policy, it pays to shop around for coverage to get the lowest rates. You are dealing with salespeople again, so double-check everything. This is another big expense that the percentages show will rarely be utilized. You have to have this protection so get the best quality for the lowest price. Going with the first name in the yellow pages or the referral from the real estate agent is not the best strategy. Be sure you deal with a highly rated and well-respected company that has few complaints from homeowners. You can check with your state’s insurance commissioner’s office for information on good companies for all of your insurance needs. When it comes to insurance, the higher your deductible is set, the lower your premium will be. But many are afraid to set the deductible too high for fear that they won’t have the money to cover the deductible should they ever need it. Here is a strategy to help you feel more comfortable choosing a higher deductible, saving you money on your insurance premiums, while allowing you to have the money to cover the deductible in an emergency. Open a credit card account for the amount of your deductible.
Suppose your deductible is $1,000. This special credit card should have a $1,000 credit limit. Choose a card with no annual fee so it costs you nothing to carry the account. A low interest rate is also preferable. You are not going to be using this card except in an emergency, so the interest really is not that big of a concern, but, you always want to have the lowest interest rates possible. Keep this credit card locked away in a safe in your home, or in some other secure place. If you ever, unfortunately, endure a situation where your home is damaged or lost, you will always have that credit card account available to help you cover the deductible for your homeowner’s insurance if you needed to use it. Then, you won’t have to worry about having the cash available for the deductible in an emergency.

BUILDING REAL WEALTH! Once you close the mortgage and become a homeowner, you are in position to begin to save thousands of dollars every year both in mortgage interest that I will show you how to eliminate, and on income taxes you will reduce due to allowable tax deductions for homeowners. Over time, by working to grow your equity in the home, you will build a valuable estate. This is how real wealth is created. Hopefully, you have made a smart purchase by doing some homework, questioning costs, fees, and other expenses, and are already sitting on a healthy amount of equity. You have worked with a good mortgage professional and have found a loan program at the lowest-possible interest rate that is structured to eliminate the need to pay for private mortgage insurance, saving you hundreds or thousands of dollars each year. And, you have minimized your homeowner’s insurance costs. This is money in your pocket that you can use to create a richer lifestyle.
Wealthy people use these techniques to build fortunes. Granted, it takes extra work on your part to get the best possible price for a home and a good mortgage. You can take the easy way out, of course. I, personally, have always felt that the toll on the easy road is much too expensive. Now, let’s talk about the really big money that you can spend without regard, or keep where it really belongs: in your account. The cost of a home, when you calculate interest, is stunning. Many people don’t realize the real, total cost of a home over the long run thanks to interest.
The same happens with an automobile purchase, or any expensive purchase where interest is involved. We get so fixated on the monthly payment and being sure we can afford it, that we don’t realize how much things really cost over time, including interest. Since a home is, most likely, your biggest expense ever, the cost of interest on top of the principle is always a big number. But don’t despair—by using some simple techniques, it is possible to save thousands of dollars in interest while you also build up equity in your home more quickly. When you close on your loan, ask the mortgage company for what is called an amortization schedule. This is a breakdown of your payments during the life of the loan. They may charge you a small fee for this service but it is well worth it. You could also buy software to create your own or visit any number of financial Web sites that give you the ability to produce this document by entering into a worksheet information such as your loan balance, interest rate, and term of your loan. The amortization schedule will show you all three hundred and sixty payments for a thirty-year loan. Each month’s principle amount and interest amount will be broken out separately. When you add the two together, you get your monthly principle and interest payment. It is fascinating just to see what you will still owe on your home, say, ten or fifteen years from now, if you just make your regular monthly payments. You will notice that, for a long time, the interest portion of the payment is very large in comparison to a very small principle amount. As you make each payment, the next month’s interest amount is a little bit smaller and the principle amount gets a little bit bigger. Eventually, the two amounts are nearly equal, then the principle becomes a bigger portion of your monthly payment while the interest portion keeps getting smaller. The real power in this document is in realizing that by prepaying a principal amount, you eliminate the interest charge on that amount. For example, let’s say your amortization schedule shows next month’s principle amount at $60 and the interest amount at $700. When you make this month’s regular payment, all you have to do is add next month’s principle amount of $60 to your payment, and you will have effectively eliminated next month’s $700 interest cost because you aren’t borrowing the $60. Go to next month’s payment and cross it off. You just saved yourself and your family $700. How long does it take to write out a check to your mortgage company? Seconds, right? In a matter of seconds, with a few strokes of a pen each month, you can earn hundreds of dollars in savings. The pen really is mightier than the sword! Do this each month and you will eliminate years from your mortgage and thousands of dollars in interest payments.
Here are some other ways to prepay principle, eliminate mortgage interest to save thousands and thousands of dollars, and build your home equity faster, even if you don’t use an amortization schedule. Make one extra mortgage payment each year or just add some extra amount to each month’s payment, which you put toward the principle. The faster you pay down the principle amount, the less you will end up paying in interest. Still not convinced that this is the right thing to do? Look at these actual numbers. I just ran these numbers in an online loan calculator while broadcasting my radio show. A $100,000 mortgage balance is calculated at 6.3 percent interest, today’s average mortgage interest rate for thirty-year fixed rate loan. The monthly principal and interest payment calculates at $680.97. The total interest paid over the life of the loan, thirty years, will be $123,000. By adding just $100 more to each monthly payment, the monthly principal and interest payment would increase to $780.97, but the thirtyyear loan is reduced to twenty years and eleven months. The total interest paid is reduced by more than $42,000. That is $42,000 in the homeowner’s pocket or, $1,400 a year. Would an extra $100 or so a month in your account be of any use to you? You could easily pay the extra $42,000 to the mortgage company or it can stay where it belongs—in your family. This knowledge gives you great financial power. Hopefully it gets you very excited to start implementing this strategy.

FEES THAT FEED ON YOUR FORTUNE I personally dislike any fees or extra costs that hurt my ability to build equity in my home. Condo association and homeowner’s association and maintenance fees eat into your ability to build equity in your home. Any amount of money you must pay that is not directed at the mortgage principal and interest is money that is gone forever, so the key is to minimize all of those extra costs. This is very important. Think of this: If you can afford to pay $65,000 for a condominium that has a $150 per month maintenance fee, you can also afford an $80,000 house.
Many people settle for the cheaper home thinking they can’t afford the more expensive home. They discount the fact that they are going to pay $150 extra each month for some basic services for the entire community, like cutting the grass and maintaining the community swimming pool if there is one. You could really be living in a bigger home if you wanted and still make money. Look at these numbers: Take the $80,000 mortgage at the same interest rate, 6.3 percent. Your 146 Buy a House and Save $100,000 monthly payment for principle and interest would go up from $402 (for a $65,000 loan) to $495. This leaves you with an extra $57 a month and a house worth at least $80,000. Put the $57 into a savings account every month at just 1.5 percent interest and you can look forward to having nearly $23,000 in the bank at the end of thirty years. Or, you could pay the extra $57 a month toward the principle on your home mortgage loan and save over $18,000 in interest while you pay the home off in just over twenty three years. There could be many variations on the example given above. It is meant to give you some idea of the incredible wealth-building power of owning your own home. For most people, real estate offers the greatest opportunity to build a richer lifestyle now and a more comfortable financial future. You will live somewhere for the rest of your life so smart real estate investing is a strategy that will serve you for a long time. In fact, real property is one of the best ways to pass wealth on to your family. Smart ownership of real estate can give you major financial leverage. It can legitimately make anyone a millionaire in a relatively short period of time. It all starts with doing the right

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