Renter’s Get Slaughtered Building Wealth Owning a Home

Renter’s Get Slaughtered Appropriate Times to Rent: College Moving to a new city Saving up for a down payment on a house

Renter’s Get Slaughtered Otherwise, your rent payments are simply like flushing money down the toilet every month.

George’s Story George was always complacent renting a house. He enjoyed not having to mow a lawn or fix anything that went wrong with the house. Over the course of 30 years, George has rented various houses, paying on average about $750 a month in rent to his landlords.

George’s Story At the end of the 30 years, George has nothing to show for his years of rent. George will continue to make rent payments until the day he dies. After thirty years of payments, George will have paid $270,000!!!!.....and have nothing to show for it.

Tom’s Story Tom graduated from college at the age of 22. His first major purchase was a modest 3 bedroom 2 bathroom home in Onalaska. The house cost $125,000, but Tom was a good saver.

Tom’s Story Tom saved $25,000 for a down payment on the house, and took out a $100,000 mortgage from the bank.

Tom’s Story After 30 years of making his mortgage payment of $750, Tom finally owns his home, which is now worth about $200,000. Tom does not need to make one mortgage payment ever again for the rest of his life.

George vs. Tom George Paid $270,000 over 30 years. Has nothing to show for his rent payments. Will continue to make rent payment for the rest of his life. Tom Paid $270,000 over the course of 30 years. Has a $200,000 house he now owns. Will never make another payment on this house to the bank.

Also…. Every year, George’s landlord has the right to raise his rent payments. Tom, who has a fixed interest rate, will never see his payments increase over the course of 30 years.

Renter’s Get Slaughtered The average homeowner is more than 34 TIMES RICHER than the average renter.

True Story John and Linda were 21 years old. Considered themselves “renters for life.” Linda convinced John to save up for a down payment on a house. First house cost $30,000 in Onalaska.

True Story John and Linda lived in that house for seven years. They made every effort to pay that house off as quickly as possible. Once that house was paid off, they decided to buy their “dream house” for $100,000. They decided not to sell their first house. Instead they collected rent payments of about $5,000 ever year.

True Story Lived in their “dream house” for 10 years. Made every effort to pay it off as quickly as possible. Sold that house for $250,000 and bought a “four-plex.” Collected $20,000 in rent from those apartments. Bought a mansion for $500,000. Still live there today.

True Story Bought first house in 1960 for $30,000. Bought second house for $100,000. Bought a mansion for $500,000 House is now worth $175,000 Collect rent payments of $12,000 every year Sold house for $250,000. Bought apartments and now collect $30,000 every year. Mansion is now worth $1.2 million.

True Story John and Linda have profited over $1 million from three transactions over the course of under 30 years. Now collect $42,000 every year in rent payments.

Something to think about… As long as you’re alive, you’re going to have to live somewhere! Someone has owned every single house and building you have ever stepped foot in. Why can’t that person be you?

Homeownership Fact 1 Owning is cheaper than renting. George and Tom initially paid $750. George’s rent payments went up by 3% every year because of inflation. After 25 years, George’s payments have gone up to $1,500. Tom’s payments will never increase from $750

Homeownership Fact 2 Homeowner’s get tax breaks that renters don’t. Interest paid on the home is tax deductible

Homeownership Fact 3 Homeowner’s are allowed to earn tax-free profits. When you buy Google at $400 and sell at $600, your profit is $200. You will owe roughly $30 in taxes, which means your real return is $170.

If you buy a house for $200,000 and sell it for $400,000, you don’t owe one penny in taxes.

Homeownership Fact 4 Homeownership creates savers. After 5 years of mortgage payments, Tom’s house is now worth $140,000. The value of his loan is at $90,000. Tom has $50,000 in “equity” saved up in a house.

Equity Value of Tom’s House $140,000 Value of Tom’s Mortgage -$90,000 If Tom sold his house today, he would receive a check for $50,000. This is called “Equity”

Homeownership Fact 5 When you own the property, you make the decisions. When renting, you are living by someone else’s rules.

How Much Home Can You Afford? Rule of Thumbs 29% of Income 41% of Income If you have no debt

If you Make… $35,000 a year 29% - $725/month 41%- $1,195/month No Debt

If you make… $60,000 29% $1,450 41% $2,050 No Debt

If you Make… $100,000 29% $2,415 41% $3,415 No Debt

How Much Home Can You Afford? If you make $35,000 you can afford a house worth $125,000

How Much Home Can You Afford? If you make $60,000, you can afford a house worth $228,000

How Much Home Can You Afford? If you make $100,000 a year, you can afford a house worth $367,000.

Important Note Before you shop for a home, you need to shop for a mortgage.

Getting Pre-Approved Before you begin your house search, you must go to the bank and try to get pre-approved. The bank will look at your income and your expenses, and they will tell you exactly how much they are willing to lend you.

Mortgage Advisors Direct Lender- Work at a bank or lending institution. Give the funds directly to the customer. Mortgage Broker- Don’t actually lend money themselves. Instead, they work with various banks to get your loan approved. Find someone you can trust!

Three Parts of a Mortgage Size of the Mortgage How much you are borrowing… The Terms of the Mortgage How long you are borrowing… Cost of the Mortgage How much they are charging…

Term of the Mortgage Two most common are 15 and 30 year mortgages. Thirty Years is most popular!

Terms of the Mortgage You buy a home for $200,000. The interest rate is 6% (common). After 15 years, how much interest would you pay? (Payment is $2,034) $104,000 After 30 years, how much interest would you pay? (Payment is $1,545) $230,000

Terms of the Mortgage If you buy a $500,000 house, how much would you pay in interest on a… (7% Interest) 15 year Mortgage 30 year Mortgage 40 year Mortgage $309,000 $697,000 $991,000

Terms of the Mortgage The payments are higher, but if you can afford a 15 year mortgage, it will save you a bunch of money!

Fixed Rate or ARM Fixed Rate means the interest they charge you will never go up or down. Adjustable Rate Mortgage (ARM) Typically 30 year Mortgages Rate is fixed for the first 5 years After that it “adjusts”….could go up or down!

Rates Right Now 30 Year Fixed- 5% 15 Year Fixed- 4.9% ARM- 4.5% After the first five years, the rate on the arm could go up or down!!! Extremely Risky!!!

30 Year Fixed Rate Pro: Lock in your interest rate Payments will never go up or down! Con: You are locked in for 30 years…if interest rates drop, you will miss out of savings Bottom Line: Great if you value peace of mind Plan to be in your home at least 7-10 years

15 Year Fixed Rate Pro: Lock in your interest rate Lower interest rate than 30 year Pay off your home sooner Con: Higher Monthly Payment Bottom Line: Great if you are a committed saver! Be debt-free in 15 years!

ARM Pro: Low initial interest rate for five years Benefit if rates go down Con: Extremely risky if rates rise Bottom Line Okay if you don’t plan on being in the house long NOT A GOOD LONG-TERM OPTION! TOO RISKY

Terms Conclusion Stick with a 15 year fixed mortgage if you can afford it. If you can’t, your next best bet is a 30 year fixed mortgage. Stay away from ARM’s

The Importance of Credit Score Interest Rate Monthly Payment 760-850 5.48% $850 700-759 5.7% $871 680-699 5.88% $887 660-679 6.09% $908 640-459 6.52% $950 620-639 7.07% $1,005

The Importance of Good Credit The difference between a good loan and a bad loan over the course of 30 years…. $55,800

Note What the bank is willing to lend you vs. what you can afford to borrow are two different things. Be sure NOT to overextend yourself. Do not buy a home you cannot afford.

Total Payment Principal $425 Interest $220 Property Taxes $200 Insurance $100 PMI $50 Total $995

Interest First, Principle Later The first five years of your mortgage you pay off mostly interest. At the end of the mortgage, almost all of your payments go to principal….very little to interest.

Interest First, Principle Later On a $100,000 mortgage….. In your first year of payments $6,900 in Interest $1,000 in Principle In your last year of payments $295 in Interest $7,690 in Principle

Interest First, Principle Later After five years of payments on a $100,000 house, You will have made $39,900 in payments Your mortgage balance will be $94,000 Of the $39,900 in payments, only $6,000 went to pay off the principle.

Interest First, Principle Later Typically it takes 5 years to make money off a house. If you move houses every two/three years, you won’t be paying off any of the mortgage, YOU WILL BE PAYING ALL INTEREST. Stay put for at least 5 to 10 years and pay off the loan!

Renter’s Get Slaughtered Building Wealth Owning a Home

Going Shopping You’ve checked your credit. You’ve talked to the bank and gotten pre-approved. You know exactly how much you’re able to spend… Now it’s time to go shopping!

Step One Meet with a real estate agent. Talk with friends/family to get referrals. See if your bank can refer someone.

Step Two Figure out what your needs/wants are. Things to think about… Detached House, Townhouse, Condo? Home improvements? Bedrooms? Bathrooms? Garage? Yard? Pool? School System? Commute?

Step 3 Decide where you want to be and start looking there. Open Houses Drive-Through Town Newspaper Internet Realtor.com

Advantages of Buying New New has what the market demands Everything works Generally where people are moving to this area. Easier to sell Easier to rent

Step 4 Look at what “comparables” are selling for. Houses of similar size in similar neighborhoods Bedrooms/Bathrooms Helps you understand what the value of the home you’re interested might be.

Step 5 Make an Offer An “Offer” is a legal document that states that you will buy a house at a specific price. Also includes any stipulations you might have You must put a fence in the backyard before we buy. You must fix the broken garage door. We must sell our house first.

Writing an Offer When the seller receives the offer, they have three choices: 1. Accept the Offer-making it a legal contract. 2. Reject the Offer 3. Counter-Offer

The Offer A home is selling for $200,000. A family decides to make an offer of $180,000. The home seller can: Accept the offer of $180,000 Reject the offer Counter-Offer

The Counter Offer The home seller decides not to accept the offer of $180,000 for the house listed at $200,000. Instead, they decide to counter-offer at $195,000.

Counter-Offer The family that made the original offer of $180,000 now has three options: 1. Accept the Offer of $195,000 2. Reject the Offer 3. Make a Counter-Offer…. Might come back at $185,000

Counter-Offer A house is listed at $200,000. The seller has just received an offer of $180,000. The seller has decided to counter-offer at $195,000. The original offer is now void!!!

Making an Offer This process continues until: 1. A deal is reached 2. A deal falls through Sometimes there are 12 offers/counter-offers before a deal is reached.

After you buy a home… Don’t forget… Homeowners Insurance $30-$200 Property Taxes $1,500-$3,000 Depending on the Value of Your Home Maintenance/Upkeep Lawn Mower Snow Shovels Repairs

The Secret to Mortgages You have a $100,000 30 year, fixed rate loan of 7%. Your monthly payment is $800. You are paid every other Friday, 26 times a year. If you are paid on the 1st and the 15th you are paid 24 times a year.

The Secret to Mortgages Cut your mortgage in half……$400 Make $400 payments every two weeks. Over one year, you will make 26 half payments…. Or….13 full payments!!! One extra mortgage payment a year!

The Secret to Mortgages Full payment $800 x 12 = $9,600 Half payments $400 x 26 = $10,400 Difference is $800……One extra payment!!!

The Secret to Mortgages On a 30 year mortgage…..this could save you 7 years!!! On a 15 year mortgage, this could save you 3 years!!!

This could save you tens of thousands of dollars in interest payments!!! Takes 10 minutes to set it up at your bank. But wait…

If you added 10% to your bi-weekly payments, You would now pay $400 +$40 = $440 every two weeks. You would pay off your home 12 years sooner on a 30 year mortgage! You would pay off your home 6 years sooner on a 15 year mortgage!

You could own your home in 18 years for a 30 year mortgage If you bought when you were 21, you could have a house paid for by the time you were 30!!!

What would you do with an extra $1,000 every month????