Setting Yourself up for Financial Success - Written by Nate Monson
Setting Yourself up for Financial Success
If you’re buying a first time home buyer in 2022 you’re probably going to be looking at getting a mortgage...unless you’ve got a pile of cash under your bed (I know I don’t!). For new buyers this can be super scary to go take out so much debt, but we do it because we know it’s better to own a home than rent an apartment and take control of our own equity. The normal 30 year mortgage is what’s been the standard product since its inception in 1971. But the real question is how do we truly turn our homes into financial assets? What are some ways we can keep more money in our pocket? And how can we take advantage of the systems and products that are out there? In today’s world there are several ways you can set yourself up for financial success!
What’s another option other than a 30 Year Mortgage?
30 Year mortgages exist for a reason. It’s a great product for the working class individual to achieve the dream of buying and owning their own home. But you don’t have to be a millionaire to take advantage of some of the mortgage options out there. Especially for first time home buyers, at the top of the list is an adjustable rate mortgage (ARM). Wait Nate...Adjustable rate? That sounds really unpredictable. It’s always difficult when I introduce this product to people because of how it sounds. Here’s how it works.
Many banks have products out there that they call ARM loans. These loans are fixed for the first 5, 7, or 10 years and then adjustable after that. This can be super advantageous for first time home buyers who only plan to live in this home for 10 years or less. The trade off for doing this is getting a lower interest rate. I’ve seen differences as large as a point and a half!
Here’s an example, John and Jane Doe are buying their first house. Their plan is to be there for 5-7 years and then upgrade their home after that time. Current mortgage rates are 6% and they are looking to buy a home in the price range of $250,000-$300,000. They are looking to put 10% down. They found a lovely home priced at $275,000, right in their range and now they are approaching the bank for their mortgage. With an average taxes, insurance etc. for this type of property John and Jane would be looking at a payment of approximately $2,042. If John and Jane were to use a 10/1 ARM product and secured a 4.5% interest rate their payment would go down to $1,812!! $230 less! That amounts to a savings of $2760 per year and $13,800 over 5 years!
Now I’m sitting on a money printing gold mine here. If that was the case everyone would be doing it. There is some level of risk here. If John and Jane were to stay in the house longer than their initial time frame they would likely want to refinance into a new fixed mortgage at that point. So for people who are completely risk averse this may not be for them. But if you’re able to take on a small amount of risk there is a huge up side by using a product like this!
What else is out there that can allow me to drive financial success?
There are several other ways you can drive financial success. I am going to talk about two, Home Equity Lines of Credit (HELOC) and House Hacking.
A HELOC loan is a line of credit that is based on how much equity you have in your home. So if your home is worth $250,000 and you have $150,000 left on your loan balance, you have $100,000 in equity. Many banks will allow you to take a loan based on that equity. In the same scenario, if you were to take an 80% loan to value (LTV) HELOC on this amount you would be able to take a loan of $80,000 ($100,000 x 80% = $80,000). Many people will secure a HELOC loan without even touching it, and keep it there for potential improvements to their house, emergencies, etc.
There are plenty of other resources out there to cover a wide array of investment strategies. So instead of talking about them all I’d like to talk about one specific strategy that can really propel your financial success. The term is called “House Hacking.” House Hacking is when you buy a multifamily property, between 2-4 units, and live in one unit and rent out the rest. This is an extremely powerful investment strategy for a couple of reasons. First, by living in a 2, 3, or 4 unit property you can cut your living expense down by at least, 50% more likely it will be closer to 75%. And many people who live in 3 or 4 unit properties can have their rents cover their entire mortgage (it’s still possible in a 2 unit property, it’s just harder). Imagine the extra money you’d be able to save if you could completely cut out your rent payment or mortgage. 2nd, if you are interested in investing in real estate, this is a way to acquire a property with significantly less funds. A normal 2nd home/commercial loan will generally require at least 20% down. But if you plan to occupy the property you open yourself up to loans at 5% or potentially even lower. If you’re trying to go the most optimal route by using this strategy you could do this multiple times, keeping the properties that you had previously lived in. And by the time you’re ready to move into a single family home you will have amassed a small portfolio of rental properties for a secondary income. Being a landlord isn’t for everyone, but it can absolutely change your life to have a few thousand dollars of extra money coming in every month.
-Nate