To pay or not to pay your mortgages

adminonFebruary 4, 2023February 19, 2023Leave a Comment

In Part I of this article, I mentioned that we were all taught by our parents, grandparents, and conventional wisdom that we should pay off our home mortgage to own our home free and clear so that the bank can never take our home from us. I explained why this way of thinking is outdated. In this article, I will present some ideas on using mortgages as a tool for wealth accumulation.

Let me say up front that I am not advising you to go out and do the things I am talking about without first educating yourself and getting advice from a trained and licensed professional. Although I firmly believe that what I'm about to tell you is a great strategy for wealth accumulation, there is also no one strategy that is right for everyone, as we all have different goals that require different action plans. Furthermore, for a dishonest or unskilled financial advisor (loan officer, accountant, financial planner, etc.), it would be.) very easy to take advantage of you or mistakenly put you into a product that will cost you time and money instead of helping you become financially independent.

Before we talk about releasing your equity and investing, make sure your finances are in order. There's no use taking equity out of your home to start investing if you're weighed down by a massive debt load and forced to use your credit cards every time an emergency arises. I recommend to my clients a three-step model that conservatively builds a solid financial foundation before using equity to increase net worth. This three-step model has the following parts, in order of priority: build cushion, get rid of "bad" debt, and create and maintain liquidity.

I think it is absolutely necessary for everyone to have a small cushion in a savings account to cover life's little emergencies and not automatically reach for a credit card or borrow money. We are not talking about a lot of money here – usually around half of a family's monthly income. When the total income of the family 8.000 US dollars per month should be 4.000 US dollars to cover it. If income is commission-based or somewhat irregular, it's a good idea to increase your cushion to one month's income.

Next, get rid of all "bad" debt – debt with no tax benefits, i.e. everything except mortgages and maybe student loans (car payments, credit card debt, etc.). These should be paid out before proceeding to the next step. If you invest in the market instead of paying a credit card that charges you 20% interest, you would need to make over 20% on your investment to come out ahead! You're much better off eliminating credit card debt first so you can invest your extra cash flow. This can be accomplished by using the equity in your home, but there are also several methods to pay it off month by month. My favorite is the snowball method of making minimum payments on all debt while paying as much as possible each month on the debt with the highest interest rate. Once that debt is paid off, pay the same amount each month, but pay the premium for the next higher interest rate. You will be free of "bad" debt before you know it, and you will have the small rewards of paying off debt along the way to stay motivated and focused on your ultimate goals.

The last step before starting to invest is to create and maintain liquidity. I advise you to have six months' salary in a safe, liquid place like a certificate of deposit, money market fund or other conservative liquid investments. This way you can be prepared and have cash available for things like business opportunities, helping friends in need, or taking time off for a vacation. It may be needed for extenuating circumstances such as job loss, health problems or major unexpected expenses. They have a significant safety net and sleep better at night!

After these three steps are completed, we can consider an investment. Depending on your financial goals and risk tolerance, my advice is to look at a mix of stocks, bonds and real estate. You should always take some time to educate yourself before jumping into any type of investment. There are many resources available to learn more about investing in stocks and bonds. I also recommend working closely with a financial planner to help you navigate the financial markets. At January Financial, we are very passionate about investing in real estate and are here to be a resource to you in this area.

In general, I believe people should be financially diversified, which means your assets should not be tied to one asset – especially your home! By freeing up your home's equity and investing in a variety of asset classes and areas, you reduce risk while increasing your potential returns. Investing in stocks allows you to participate in great companies and share in their success without having to spend time and energy actually working on the company. Investing in bonds provides steady income while lowering the overall risk of your portfolio. Finally, in my opinion, real estate offers the most accessible, least risky and most exciting way to get rich slowly.

With a turbulent housing market and volatile interest rate environment playing out over much of the past year, concerns about housing affordability have reached a boiling point. Recently, three housing policy experts joined HW Media COO Diego Sanchez to discuss potential changes to housing affordability in the next year.

The panel took place during HousingWire's Affordable Housing Mini-Con and featured Laurie Goodman of the Urban InstituteBelief Schwartz of Housing Finance Strategies and Jim Gray of the Lincoln Institute of Land Policy. When asked about "good news" regarding housing affordability, all three panelists described how encouraging the federal government's active work on affordability issues is.

"We have [seen] a major effort by the government, more than ever before, which makes this an absolute top priority for the administration, which is putting a lot of force and power into it HUD, Ginnie Mae, FHA, VAand the government to help the industry move forward," Schwartz said.

Goodman considered the trend in housing prices a generally positive sign and said that the "worst" of housing affordability is likely over due to moderate prices and the overall rising wage trend that seems to be outpacing the increase in housing prices.

"I expect wage growth to be well above HPA next year, which will bring affordability more in line," she said.

While interest rates are expected to continue to rise throughout the year, mortgage spreads are unusually high. Interest rates are tied to the 10-year Treasury rate plus mortgage spreads, which could lead to a more favorable interest rate environment, she explained.

"It's very possible that 10-year rates will actually rise a little bit and spread [contracting] to more normal levels and mortgage rates [could] actually fall in the course of next year," she said.

Gray agreed with Schwartz on the management of the housing system by Biden administration officials and highlighted efforts by FHA Commissioner Julia Gordon and Ginnie Mae President Alanna McCargo to increase affordability.

"I think people are starting to realize that really a lot more can be done if you can just make minimal changes to the credit box Fannie Mae And Freddy Mac have so much power over, " he said.

There is still room for more government action, Schwartz said, particularly because of its influence on housing policy. But adding more private dollars to the mix may also help improve the affordability situation for many Americans who feel shut out of the homebuying process.

"Private capital should be brought in at reasonable rates of return with guardrails to protect the consumer and help us implement some innovative programs," she said. "Underwriting, Trend-to-Data, Utilities [and more]. While we scratch the surface, it doesn't materially change things. But all these small additions can really make a significant difference for People of Color who don't have home ownership."

Goodman agreed, saying that expanding the loan box and keeping the default probability constant could be beneficial to improve affordability, while acknowledging that the loss mitigation options available to borrowers have grown significantly over the past two years.

She added that it could be beneficial for seniors who want to age in their own homes if Medicare were able to fund home modifications to better accommodate the naturally declining mobility that occurs as we age.

"Accidents are a big problem," she says. Few seniors have their homes fit for this stage of life. I actually think it could be […] It's very cost-effective for Medicare to pay for grab bars in particular so you don't trip over the shower and/or toilet seat extensions. There are certain things you can do very cheaply and easily, assuming people want to age in place."

Accessory dwelling units (ADUs) are also a potential solution to older housing issues, she said. Gray added that manufactured homes could, by and large, become a more prominent solution to impact housing affordability in the U.S. as long as four key issues are addressed: Financing, land issues, exclusion zones, and energy efficiency.

In the long term, the energy crisis is accelerating the path to net zero emissions. (Image: Shutterstock.com/bilanol)

Russia's invasion of Ukraine has triggered an energy crisis. But that shouldn't stop countries from implementing their net-zero targets, say experts at Schroders.

More e-cars were bought in the UK in March 2022 than in all of 2019. This is despite the downturn in the small vehicle market and supply chain issues that currently make it difficult to purchase an e-vehicle. Even before the recent rise in energy prices, the switch to electric cars was in full swing. But the price increase due to high oil prices makes conventional combustion engines unattractive for consumers.

"Prices for gas and coal are now four times higher than a year ago. As a result, the economics of renewable energy sources have improved significantly in comparison", Felix Odey, Portfolio Manager of the Schroders Global Energy Transition Team, explains.

Russia's invasion of Ukraine had exacerbated oil and gas price increases at a time when energy costs were already rising. The lack of investment in recent years has led to a shortage of newly developed reserves in the oil and gas markets. One thing is certain: energy companies were reluctant to extend support. "The international focus on reaching net zero means that management teams have had to turn away from oil production without knowing what demand there will be for their end products in ten years' time", Odey explains.

Fewer and fewer investors are also willing to finance the development of new fossil fuels, he said. This mixed situation caused tight supply in the market, price increases and strong returns in the conventional energy markets.

Covering with renewable energy

The net-zero challenges facing countries were known even before the war of aggression on Ukraine: How to make economies independent of fossil fuels while ensuring energy security? What has changed, he said, is that these factual issues are now front and center. The current energy crisis is likely to change the path taken towards net zero. Some countries could bring forward CO2 emissions as they ramp up power generation to avert the cost pressures of rising electricity and gas prices from consumers.

"Something positive, especially in Europe, is that policymakers have responded to the energy security crisis these days with plans for greater use of renewable energy", says Alex Monk, portfolio manager of the Schroders Global Energy Transition Team. Although more fossil fuels would be used in the short term, renewables dominate the energy mix in the medium- to long-term strategy.

On the part of policymakers, this is a first, Alex Monk points out: "If the energy crisis had happened earlier, I don't think that would have been the standard response. A political turn has taken place." The conclusion: countries whose CO2 emissions will increase in the coming years would have to increase the pace of decarbonization. In other words, a significant expansion of renewable energies is needed. This is the only way to achieve the net-zero targets.

Ukraine war accelerates energy transition in the longer term

The Federal Republic of Germany is considered as a good example. The government passed a far-reaching reform to triple renewable energy sources by 2030. This is to ensure energy security in the wake of Russia's invasion of Ukraine. Some European and U.S. politicians also suggested more employees should work from home offices. This would reduce the amount of fuel needed for transportation.

Despite these measures, Europe is consuming more coal and gas. That means countries must meet their emissions targets faster than planned. Some British politicians would have been in favor of more incentives to install solar panels on roofs, as well as cutting red tape with regard to renewable energy sources. But so far, only small actionable steps have been taken in this area.

Alex Monk further argues that much more can be done. Consumers could reduce their electricity bills by further incentivizing solar installations. This would additionally help the country meet its emissions targets. "In the long term, the Ukraine crisis is a support for the energy transition. The short-term slowdown on the part of policymakers does not matter", he adds.

However, such programs tend to benefit the middle class rather than those who need it most. It is impossible for the poorest in society to pay for solar panels, even with reduced prices. The cost-of-living crisis has plunged millions into poverty: many have to consider whether to heat or eat. "Governments are faced with serious factual issues. To what extent can they reduce energy costs without widening the gap between rich and poor?? A short-term solution could be increased use of coal and gas", says Alex Monk.

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