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Generally speaking, you should have a cushion of three to six months of
living expenses in an emergency fund. The rule of thumb is three months for
two working adults without children and six months for one working adult
With mortgage rates still near historic lows and home prices appreciating quickly, it might make sense to diversify investments and keep more
liquidity instead of putting extra money into paying off what is essentially a
low-interest loan. It depends on how you feel about risk and investing your
money in the market.
If it keeps you up at night, and you feel better putting more money toward
your mortgage, that might be a better route for you. Just remember that
when you prepay a mortgage loan, you’re not going to get that money back
until you actually sell your home.
Q: Should I take out a second mortgage or a jumbo loan for
an expensive home?
A: It all depends on how large of a loan you need. Sometimes it
makes sense to buy a home with a conforming loan at the maximum amount allowable for your county and obtain a second mortgage
or home equity loan or line of credit to close the gap between your
downpayment and the total amount of financing you need.
If you want a 30-year fixed-rate loan, the interest rate on a conforming loan
is likely to be lower than on a jumbo loan. The interest rate will be higher on
the second mortgage, however, but the total monthly payment is likely to be
lower, which could make sense for you depending on your situation.
One disadvantage of taking a second mortgage is that not all lenders provide this type of financing and sometimes you will need loans from two different lenders, which can complicate the closing process. Also, if you are looking for an adjustable-rate mortgage (ARM) for financing, a jumbo ARM often
has comparable loan rates and so the interest rate advantage disappears.
Q: How do I know which loan is best for my present
situation and future goals?
A: Here’s the most important question you need to answer: How long
do you plan to stay in this home? If you plan to stay in your home for
the long term — more than 10 years — then a low, fixed-rate mortgage
is probably your best bet.
If this is a starter home, however, and you think you will move again in five to
seven years, you may want to consider an adjustable-rate mortgage. You’ll
likely get a lower interest rate for the short term than in the long term and
benefit from lower monthly payments.
What many people don’t understand is that the initial low interest rates
on 5/1 and 7/1 adjustable-rate mortgages, or ARMs, are fixed for the first five
or seven years. If you sell that house or refinance that loan before the rate
adjusts, you essentially had a lower fixed rate for the short life of the loan.
The gamble is that rates may rise or the market may fall by the time you are
ready to sell or refinance.
Q: Should I consider including home equity in my long-
term retirement plans?
A: It is becoming more and more of a reality that people need to consider all of their assets — including their home, which is often their
largest asset — when planning for long-term retirement needs. The
key is to start planning early and have a strategy for how to tap into
the equity in your home before you need it. It can take a while to get a
solid plan in place, so you don’t want to wait until you are out of cash
to try to tap into the equity in your home.
This is where a financial adviser or planner can be a real asset. I am not a
financial planner, but I would be happy to suggest some professionals who
n n n
What all of these questions tell us is that we must raise the bar. Mortgage
professionals can guide borrowers through loan products and services that
pertain to their mortgages — and perhaps answer certain questions about
the impact of those products on financial health — but trained financial
planners are needed to provide services such as investment management.
Together, these professionals can help borrowers obtain a complete financial picture. There’s an incredible opportunity in the mortgage industry to
help borrowers get in front of the challenges that longevity produces by
helping homebuyers see the long-term impact of their real estate decisions.
It helps them be better prepared for all times in life, and allows them to move
forward confidently. n
Scott Chase is regional director for Opes Advisors, a division of Flagstar Bank.
With more than 15 years in the financial services industry, Chase is responsible
for the acquisition, retention and expansion of sales for the Bay Area, Central Valley and Southern
California. Additionally, he leads, coaches and supports sales activities to promote sales. Reach
Chase at (650) 543-8008 or firstname.lastname@example.org.
“People need to consider all of their
assets — including
their home — when
planning for long-term retirement