Slicing Through Money's Mysteries
FICO gave a small peek behind the curtain at how their scoring model works and showed just how much mortgage delinquencies affect your credit score. The example they gave drew attention to three different FICO scores on the higher end of the spectrum (680, 720, and 780) and how one late payment of 30 days affected each score.
According to FICO, the impact of a 30-day late payment on a consumer s mortgage varies greatly depending on how high the consumer’s credit score already was.
If you haven’t noticed, we live in a consumerism society where we are bombarded by advertisements that compel us to spend on things we don’t need. Some things are definitely worth spending up on. But for everything else, save your money.
Like many people, I have debt. Although my debt is tied to property, which tends to appreciate over time, it’s still debt that I plan on getting rid of by 2027. I don’t have any revolving credit card debt because their interest rates are absurdly high.
Earlier this year, I got rid of $815,000 of debt by selling a rental house for roughly 30X annual gross rent. I don’t miss the rental income because I don’t miss the $3,400 monthly mortgage, the $23,000 in annual property tax, the $3,000 in annual maintenance, the $2,000 in annual insurance, and pain in the ass tenants.
Despite the large pay down, I still have about $1,000,000 in debt spread between my primary residence and my vacation rental in Lake Tahoe. Simple math states that if I can pay down $100,000 a year, I will be debt free in 10 years. Here’s an easy strategy for how I plan to get there relatively painlessly that I recommend you follow as well.
One of the reasons why I want to rebuild my cash reserves back over $100,000 is because of financial risk. With two rental mortgages to pay and no steady job, having less than $100,000 feels irresponsible. Theoretically, I could lose all my tenants and therefore have to shoulder both mortgage payments on my own. In such a scenario, because of property taxes, an HOA fee, maintenance, and mortgage payments, $100,000 would be exhausted in 12 months.
Going off a gut feeling to determine how much cash to have is OK. But it would be nice to formalize a debt-to-cash scale to see at what level debt is too much. Because of excessive debt, way too many people got their heads blown off during the last financial crisis. Today, we once again see plenty of people borrowing from their home equity to buy things they don’t need. It’s so funny how quickly we forget about the risk of having too much debt!
Patch Homes has rebranded to Noah in 2020 and has raised more funding.
I’ve got around $1,800,000 in home equity locked up in one property. The property was originally purchased for $1,520,000 at the end of 2004 with $305,000 down and a $1,217,000 mortgage. The property is now worth an estimated $2,600,000 with a remaining $800,000 mortgage at 2.375%.
Although it’s nice to have $1,800,000 of home equity (31% LTV), it’s essentially “dead money” that’s doing little to improve my net worth or lifestyle. I controlled this property when my equity was only $305,000 after the initial downpayment, so the leverage power is no longer as strong.
Because roughly 67% of the average homeowner’s wealth is trapped in home equity, being “house rich, cash poor” is a common situation. As a result, homeowners have traditionally turned to home equity lines of credit (HELOC) to extract equity to pay for life’s many expenses.
One look online and you’ll find that HELOC rates are generally 1% – 2% higher than your current mortgage rate e.g. 3.75% for a 30-year-fixed vs. 5% for a HELOC. In addition to higher interest rates, using a home like an ATM machine may get homeowners who lack discipline in trouble down the road.
If only there was a better way to extra home equity at a lower cost. Enter Patch Homes.
The percentage of homeowners with over $100,000 in home equity in various cities
SoFi started in 2011 and is a lending company that recently surpassed $15B in funded loans as of 2017. They have 225,000+ customers, 240 employees and have raised $1.9 B in equity funding after raising $500M led by Silver Lake in February 2017.
The company was founded by Mike Cagney, Dan Macklin, James Finnigan and Ian Brady, four students who met at the Stanford Graduate School of Business. They got together because they wanted to make lending and refinancing easier for borrowers using social lending.
The gist of their business is that lenders are willing to lend at a lower rate to people similar to themselves versus complete strangers. In other words, alumni should be more willing to lend to students and fellow grads of their alma matter because they share the same educational qualifications and should have a strong likelihood of repaying their loans.
SoFi is considered the largest and most successful fintech lender today. They are based right here in San Francisco, and I’ve met many of their employees. It’s worth checking to see if you can get a lower student loan rate with SoFi. The cost is free.
Not a big deal
The Federal Open Market Committee unanimously voted to raise the range of the federal funds rate by 0.25% to 0.50% – 0.75% (from 0.25% – 0.5%) on 12/14/2016, citing progress in economic activity and labor market growth. This rate hike marks the first for 2016 compared to expectations for two-to-four rate hikes this year back in 2015.
The reality is the market already jacked up rates for all consumers by a more aggressive 0.5% – 0.75% this year as Treasury bonds sold off post Trump’s victory. The 10-year Treasury bond yield is now hovering around 2.5%, the entry point I’ve been looking for to build a municipal bond portfolio.
With unemployment below 5% for the past year, a level that many economists consider to be full employment, it seems like an inevitability there will be inflationary pressure due to higher wages, higher demand, and higher prices.
Everybody needs to borrow money some time. Peer-to-peer lending is a good alternative if you don’t want to pay usurious rates from loan sharks, if you’ve been denied a loan by your local bank or credit union, or if you are just too embarrassed to ask someone you know for help. From $1,000 for an emergency medical bill to $15,000 to pay for an engagement ring, some reasons are more legit than others!
As an investor in P2P lending with LendingClub, it’s always a good idea to set parameters on what type of person you plan to lend to. As P2P lending is primarily going to replace my low risk CD income that’s coming due, I intend to focus on low risk borrowers with high ratings between C to AA. They’ll probably pay rates of 6.59% to 15% so I can make a 4-10% return. An important part of understanding a borrower’s risk profile is to therefore understand what they plan to borrow money for!
I highlight all the main reasons why people borrow money through peer-to-peer lending. These are actually selections for borrowers to choose from on Prosper.com. I bucket the reasons into four categories (Great, Good, Borderline, Suspect) and analyze each reason from a borrower’s point of view. As a potential borrower in P2P lending, you can then decide whether you want to go forward with borrowing based on my rationale. The same goes for lenders when selecting loans to fund.
During my New York trip, I stopped by Princeton, New Jersey to attend a college friend’s wedding. We were Spanish House housemates who used to flip on CNBC before class and dream of one day making it on Wall Street. This was back in 1998 when working in finance was all the rage.
Although he never made it into finance, he did something better. He became a cardiologist and married an opthalmologist. In terms of finances, their household is set for life. After all those years of training, I wouldn’t expect anything less.
According to the Association of American Medical Colleges, 84% of all 2014 medical students graduate with debt, and the median debt level is $180,000. That is a ton of money to be paying back. Or is it? Let’s look at why the “student loan crisis” the media harps on and on about is overblown.
After publishing my post on actions to take in a rising LIBOR environment, it dawned on me that besides refinancing your adjustable rate mortgage, you should also consider refinancing your student loans as well, if you have any. It feels like a lifetime ago, but I used to have ~$40,000 in business school loans that were paid off in 2008.
During my time, there was no such thing as student loan forgiveness. Come hell or high water, you had to pay back what you owed with interest. You also couldn’t go straight to the corner office without paying your dues either. As our country has grown wealthier, softer, and more focused on instant gratification, student loan borrowers have pressured the government into giving them more options and it’s worked!
Here’s a sponsored post from Student Loan Hero about the various options borrowers have to repay their loans and how student loan forgiveness can actually end up costing a borrower more. I had no idea there were this many choices. I’m hoping by the time my kids go to college in 20 years, tuition will be free or highly subsidized, just like it is in Europe, Asia, Canada, and the rest of the world. It’s fun to have someone else pay!
My biggest weakness is being unable to generate enough organic motivation to keep on hustling. I used to get up by 5am every weekday to work for 2-3 hours before work. Then I’d get home by 8pm and work another 1-2 hours on my side hustles. There was this massive internal drive to go all out to one day break free.
Now that I don’t have a day job, I get up around 6am and then zone out on my phone for 30 minutes before checking the refrigerator several times to see if there’s anything good to eat!
No wonder why my weight continues to creep higher. I’m just not trying hard enough. I admit it. Reaching financial independence has made me less productive by at least two hours a day. What a shame to no longer reach maximum potential.
Then one day I realized I had been sitting on two, $2,100 rent checks from my Pacific Heights tenants for one week. They’ve been great so far in terms of paying promptly. The only reason why I remembered carrying these checks is because I told my tenants to just take the cost of fixing the leaky kitchen faucet off their rent.
They reminded me they had already sent their rent checks, and given rent wouldn’t be due for another 3.5 weeks, they’d rather just get reimbursed directly. Oh yeah, that’s right.
The main reason why I forgot to deposit the $4,200 for a week is because I paid off the mortgage in 2015. After 13 years, the bank is no longer helping me stay financially disciplined.
