The word timeshare is often associated with the same sneaky, slimy vibes that emanate from the backrooms of the car dealership during sales negotiations. They both are thought to involve high-pressure sales tactics, a big loss in value the second the purchase is made and rash decision-making you may regret later.
I don’t dispute those things are often quite true, but my timeshare purchase involved no salespeople, no pressure and (so far) no regrets.
And before you discount me as someone who has no clue what I’m talking about or that’s in denial, I travel on points and miles a lot of the time, am pretty adept at hunting travel deals and used math to decide that this purchase was a good one for us.
Here’s why buying a timeshare made sense for me, even though it absolutely won’t — and shouldn’t — make sense for everyone.
Related: 5 things to know about renting a timeshare
Buying a timeshare that doesn’t call itself a timeshare
We bought two contracts in the Disney Vacation Club, which is Mickey’s version of a timeshare … even though that nine-letter word isn’t one Disney uses on its public branding. But make no mistake, what we bought is indeed a timeshare — or two, to be more accurate.
With the Disney Vacation Club, you purchase a set number of points tied to a specific resort to use each year through the end of the contract. An agreement at a new property, such as the new villas at the Disneyland Hotel, is valid for 50 years, while getting a contract at existing properties usually means a shorter time frame, with some being as short as 19 years, ending in 2042.
The two smaller contracts we bought are for Disney’s Aulani resort in Hawaii (expiring in 2062) and the Polynesian Village Resort at Walt Disney World (expiring in 2066), for a total of 155 annual points in the Disney Vacation Club program. While you have priority booking 11 months from the date of travel at your home resort where you “own,” you can use the points within seven months of travel at any Disney Vacation Club resort with availability — with some caveats that we’ll mostly leave for this guide we have on how the Disney Vacation Club works.
Both of our contacts were purchased on the resale market, which means we are paying significantly less than what Disney would want for a direct DVC membership. A downside of buying resale is you can only pick through existing contracts instead of crafting exactly what you might want to design from scratch. You also don’t get some of the discounts and perks that come from owning at least 150 DVC points directly from Disney (such as access to the DVC lounges in the parks and being eligible for some less expensive annual pass types).
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I’ll get more into the numbers below, but we have a long track record of taking a variety of Disney vacations year after year, so I feel pretty confident that will continue for the foreseeable future. And I know what we often spend to stay at Disney resorts, which makes the math against the price to own easier. And there is a bustling market for renting DVC points that very much has my attention.
Related: How to rent Disney Vacation Club points to save money on Disney stays
Why now was the time to buy
While I’ve had a mild curiosity about becoming a Disney Vacation Club member for a few years — and have rented DVC points numerous times — there are a few reasons now was the time to purchase.
Disney has the first right of refusal to buy back all of its Disney Vacation Club contract resales. Once the buyer and the seller agree on a price, Disney then has 30 days to buy the contract back at that price itself, thus taking it away from its intended buyer. And historically, Disney really would exercise that right some of the time, especially on contracts where prices were low.
For example, according to the DVC Resale Market, a site that lists some DVC contracts for sale, by March 2022, Disney had already exercised its buy-back clause on 244 contracts that company had helped to sell by March that year. In contrast, by March this year, that buy-back number for the year was just four — and all of those were from January, with none shown since then.
With almost no Disney buybacks happening in the last few months, some contracts are selling at cheaper prices than historically was possible. With prices trending down, inventory trending up and Mickey not swooping in to buy back the best deals at a normal clip, now was the time for us to buy.
The math behind my timeshare purchase
Before I share our numbers, let me emphasize one more time that this isn’t for everyone — it’s not even right for most Disney aficionados. Smaller contracts also cost more per point than larger contracts, so you can get better deals on a per-point basis if you are willing to buy more points. We wanted to minimize risk by staying small, so we paid a bit more per point as a result. Here’s how it broke down for us.
For our Polynesian Village contract, we bought 55 points for $156 per point at a total cost (with dues, closing costs, etc.) of just over $9,300. For our Aulani contract, we bought 100 points for $108.50 per point for an all-in cost of just over $12,600. And yes, it is totally normal for some resorts to cost much more than others, as you see with our Aulani and Polynesian purchases. This is due to the cost of annual dues at each property, the desirability of booking further in advance at that property and the number of years left on the contract.
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Disney’s Polynesian Village Resort. SUMMER HULL/THE POINTS GUY
So for about $22,000, we now have 155 Disney Vacation Club points to use each year until the contracts expire. That cost may sound nuts by itself. But remember that at current rates, we also will owe $914 per year for dues on our Aulani points and $437.25 for our Polynesian points, and those numbers will likely only increase over time. So that means $1,351.25 per year just to own the points based on this year’s prices.
But here’s why it’s not as crazy as it likely initially sounds.
Right now, it is very realistic to rent your DVC points out for stays as an individual at $20 per point, with some getting higher or lower amounts. If we rented all 155 points out at that $20 rate in a year, that would mean getting $3,100, which way more than covers the dues. In fact, using current rates to rent out points and for dues (knowing both will likely increase as the years go by), we’d recoup the cost we spent to buy the contracts if we did that for 13 of the 39 years we will own both contracts — including covering the cost of the dues in the years we fully rent the points out.
Now, I’m not saying that’s my plan, but that’s the math. For those curious, per the terms, you can expressly rent out points, but not in a pattern that constitutes a commercial enterprise.
So now let’s talk about math when using the points, which we absolutely will do.
You can use the points to stay at Disney resorts starting at just 7 points per night at Deluxe resorts such as Disney’s Animal Kingdom Lodge. By owning 155 per year, we have the opportunity to cover numerous nights at Disney with the points we now own if we are strategic about how and when we cash them in. But for now, let’s be extra conservative and say our stays in studio villas will average 20 points a night. With that math, we get between seven and eight nights a year out of our points.
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Disney’s Animal Kingdom Lodge. SUMMER HULL/THE POINTS GUY
If, for the 39 years that we own both contracts, we used all the points ourselves and got an average of 7.75 nights at high-end Disney resorts from our points using a 20-point per-night average, that’s a total of 302 hotel nights (not even counting the additional four years of stays on our Polynesian points).
Not counting annual dues, that comes to a “cost” of $72.85 per resort night from the all-in original purchase price. Using today’s cost of dues, then counting annual dues, that cost jumps to paying $247.35 per night. This amount will go up, but likely so will the average cost of hotel stays booked directly, so using today’s dollars for both should give an apples-to-apples idea of the cost.
That’s not a cheap nightly rate for a hotel, but if you take a look at the going nightly rate for a night at Disney’s Polynesian Village Resort, Aulani Resort, Disney’s Grand Floridian Resort & Spa and other spots we like to stay, rates are often $500-$700. And compared to that, $247.35 per night starts to look more like a deal. And remember, this was using a conservative average nightly points rate compared to where nightly points rates start, so the more nights we redeem for lower points, the lower the average rate we are “paying” per night.
When you then factor in that there are other options for the points in the years that you may not want to go to Disney, such as gifting family and friends or even renting them out a stay, the math — for us — starts to look less and less outrageous.
Related: These are the best hotels at Disney World
What happens if we don’t want it anymore — or die?
If it turns out that eventually, we don’t want to own one or both of these Disney Vacation Club memberships anymore before the deeds expire, we can put them up for resale.
The good news is we bought at resale prices, so while no one knows what the future market is for these contracts, hopefully, we’d be able to get out of the memberships without getting too upside down since we didn’t pay retail. So far, someone has always been willing to buy a DVC membership as long as the price is right, so it’s not a question currently of if you could sell, but for how much.
But if no one bought them, we’d continue to be on the hook for the dues until we could offload them somehow. This is one reason we kept our purchase on the smaller side.
Since my husband and I are both on the deeds, if one of us dies while the deed is active, the other of us keeps on trucking with it. If we both die before the time is up on the deeds, then they become a piece of deeded real estate subjected to your will(s), those getting your inheritance, the probate process, etc.
Once our kids are adults, we could also add them to the deed(s) if it seems Disney is going to continue to be a part of their lives. Some people approach these purchases with a trust in mind as the owner. Naturally, there are implications to all of the proceeding options that would need to be worked out with lawyers and the like, so don’t take my word too seriously on any of that, but know that there are some implications of owning a deeded timeshare beyond just the cost to own.
Bottom line
Should any rational person spend $22,000 buying timeshares on the resale market — and still be on the hook for over $1,000 in annual dues for the next several decades for Disney resort stays? Maybe not. Probably not.
But on the other hand, after running the numbers many times and looking at our track record of vacations spanning more than the last decade, it started to feel absurd not to give this a try. And if it all goes south, then future me will hope that there’s someone out there like current me that thinks this is worth giving a try.
Non-QM lender First Guaranty Mortgage Corp. (FGMC) filed for Chapter 11 bankruptcy protection at the end of June — leaving four warehouse lenders on the hook for more than $415 million.
Sprout Mortgage imploded in early July, leaving its employees out in the cold. The lender so suddenly shuttered its doors it failed to file advanced notice of the layoffs, as required under federal law. It has since been sued by its former employees.
Just weeks later, a leaked text message from Flagstar Bank provided an inside look at how dire the current climate is for many non-QM lenders. The bank calls out 16 non-QM lenders in the text message, indicating it is ramping up scrutiny of its loan reviews, prior to advancing warehouse funding.
The examples, all within about a month, illustrate a non-QM lending world in disarray, turned upside down in recent months as originators battle an unassailable force over which they have no control: fast-rising interest rates. It’s an ongoing battle, which already has been lost by at least two lenders, FGMC and Sprout.
And others in the sector, warehouse lenders included, must now navigate the fallout, heed the warning signs and take action to avoid a similar fate. One executive said “it would be naïve” to think Sprout and FGMC will be the only casualties, given the current environment. In time, he said, they may well end up being “more of a trend than outliers.”
The Flagstar text message leaked to the media in mid-July confirmed, going forward, funding advances for non-QM mortgages will require advance approval by the lender’s warehouse lending arm. The bank also indicates it may adjust “haircuts” — the percentage of the loan the originator must fund itself to ensure it has skin in the game.
Thomas Yoon, president and CEO of Excelerate Capital, a full-service non-QM lender, said the move essentially means Flagstar now will “monitor every loan because they don’t want [to fund loans] that will be hard to sell in the open market, and then they’re stuck with that loan.”
“So, they are going to babysit now,” Yoon said, adding that from a business standpoint, it will slow down the loan originators’ processes. “Someone at Flagstar has to physically look at the deal and make sure it aligns with what they want before they’re able to fund, and that’s going to cause delays.”
Flagstar spokesperson Susan Cherry-Bergesen verified the authenticity of the text message when contacted by HousingWire and confirmed its content: The bank is adjusting its loan-review process. The leaked message included a list of 16 non-QM lenders that would be affected by the changes, according to published reports.
“We were at a meeting with one of our warehouse providers [recently] and … they asked a smart question: “Is Acra Lending on that list?” recalled Keith Lind, CEO of Acra Lending, a leading non-QM lender. “Of course we’re not.
“…If lenders didn’t take rates up fast enough, or they didn’t liquidate their positions fast enough, there’s going to be warehouse facilities where the loans [made to lenders] are worth less than the equity [skin in the game] that the originator posted. That’s probably a little more common than people think.”
Lind said many lenders are now trying to digest a plethora of lower-rate loans, essentially “orphaned by the market.” During the height of the refi boom and earlier this year, scores of loans were originated at interest rates much lower than current market rates, which have risen dramatically in recent months.
As a result, there exists a mismatch between those legacy lower-rate mortgages and the new higher-rate loans. That’s the case even though the lower-rate loans are widely considered to be well-underwritten, quality loans. As of mid-July, according to Freddie Mac’s purchase mortgage-market survey, the 30-year fixed mortgage stood at 5.54%, compared with 3.22% as of the first week of January 2022 and 2.88% in July 2021.
The market’s interest rate woes contributed to non-QM lender FGMC’s downfall. FGMC and its affiliate, Maverick II Holdings LLC, filed for Chapter 11 bankruptcy protection June 30, leaving four of the country’s major warehouse lenders with claims totaling $418 million, according to court filings.
Those warehouse lenders are Customers Bank, Flagstar Bank, JVB Financial Group and Texas Capital Bank.
Another non-QM lender also was swept up in the “orphaned” loan market. Sprout Mortgage on July 6 closed its doors suddenly, leaving hundreds of employees without jobs and paychecks. Real estate agents and their clients also received no advance warning and multiple deals fell through as a result, sources told HousingWire. The lender also did not file a WARN Act notice — required of any employer of more than 100 that has a mass layoff at one location involving more than 50 employees.
“The New York State Department of Labor has not received a WARN notice from Sprout Mortgage,” states an email from the department sent in response to a HousingWire inquiry. “We do not comment (confirm nor deny) on potential or pending investigations.”
The failure to provide proper notice of the layoffs prompted a class-action lawsuit by former Sprout employees. The litigation — lodged in early July in U.S. District Court for the Eastern District of New York — seeks to recover wages due the workers.
The current interest-rate spread pressure-cooker tends to be even more acute in the non-QM sector, compared with the prime-mortgage market, according to John Toohig, managing director of whole loan trading at Raymond James in Memphis.
“[There’s] a lot of underwater coupons due to rapidly rising rates,” Toohig said. “The problem with non-QM is that most banks won’t be the liquidity source for those loans in whole-loan form [purchasing] vs. the aggregators putting them into RMBS [private label securitization deals] — which doesn’t work right now [either].
“So, I wouldn’t be surprised that there is some pain coming at the warehouse-line level [revolving lines of credit used to fund mortgage originations] as loans start to age. The good news for prime jumbo [is] banks want to own those loans and balance-sheet them. The same cannot necessarily be said for non-QM.”
Non-QM mortgages include loans that cannot command a government, or “agency,” stamp through Fannie Mae or Freddie Mac. The pool of non-QM borrowers includes real estate investors, property flippers, foreign nationals, business owners, gig workers and the self-employed, as well as a smaller group of homebuyers facing credit challenges, such as past bankruptcies.
Because non-QM, or non-prime, mortgages are deemed riskier than prime loans, in a normal market they generally command an interest rate about 150 basis points above conforming rates, according to Excelerate’s Yoon.
Excelerate and Acra each raised rates rapidly starting early in the first quarter of this year to stay ahead of the fast-rising interest rate curve, according to Yoon and Lind. The rapid surge in rates in the market is being fueled, in part, by the Federal Reserve’s ongoing benchmark rate bumps, intended to battle inflation. The consequence of failing to anticipate the velocity of rate increases could result in a lender getting stuck with millions of dollars in underwater loans — mortgages that are well-underwritten but valued under par, the lending executives said.
In other words, these lower-rate — now “scratch and dent” — loans are at a competitive disadvantage in terms of pricing in securitization and loan-trading liquidity channels because they are worth less than the newer crop of higher-rate mortgages. Lind put it this way: “These aren’t bad loans, just bad prices.”
“I don’t think [Sprout and FGMC] are the only two lenders that are in a bind,” Lind said. “I’m sure there’s other originators that are in difficult situations, given this movement in rates and probably their inability to get liquidity or to sell loans fast enough.”
Yoon said the Sprout and FGMC failures are likely going “to be more of a trend than outliers.”
“A lot of lenders took on, or funded, these really low-coupon loans,” Yoon continued. “And they probably had them sitting in their gestation pipelines thinking that the things will get better, and they could sell them off. That day never came.
“What I’ve been told through warehouse lenders and Wall Street aggregators is that there’s several billion dollars’ worth of these [low-coupon] loans out there, still sitting on balance sheets. At some point, they [lenders] will have to pay the piper, right? It’s naive to assume we’re not going to see more casualties.”
***
Q&A
HousingWire contacted half a dozen non-QM lenders seeking interviews for this story, including Angel Oak Cos., Deephaven Mortgage, CarVal Investors, Verus Mortgage Capital, Acra Lending and Excelerate Capital. All the lenders, as well as the now-failed Sprout Mortgage, participated in a prior story on the same subject — the state of the non-QM market, which was published in April.
This time around, only Acra and Excelerate agreed to participate. Representatives of the other lenders declined to comment or make executives available for an interview, with most saying the executives didn’t have time. The top executives at Acra and Excelerate, Lind and Yoon, respectively, each declined to comment on specific competitors in the non-QM market, but they did share their views on current market conditions and the challenges faced today by non-QM lenders in general.
Lind and Yoon stressed they are not predicting with certainty other non-QM lenders will fail, nor do they hope that will be the case. Both, however, predict due to the runup in rates, there will likely be painful losses incurred by some non-QM lenders, which will have to be dealt with somehow.
All non-QM lenders now face the same economic challenge — coping with the fallout from interest rates rising at a faster clip than the market has seen in decades. Following are comments from Acra’s Lind and Excelerate’s Yoon on a range of issues affecting the non-QM lending space.
Interest Rates
We saw the market [earlier in the year] and knew it would only get worse, at least in the short-run, and we put our rates above market at that time sharply. …We’re positioned really well to navigate the current market. That doesn’t mean it’ll be easy, but you know, we’re positioned better than most, so we feel fortunate about that. … When we raised our rates that significantly in the first quarter, it essentially blew up our pipeline in the short-run, but we felt like we needed to do that. …Going into October, November, December [of last year] and into January [2022], everyone was thinking, including us, that we’re going to have a banner 2022. Then the market changed on us overnight. There was only a handful of us that that made the move [to raise rates sharply], and they are positioned well going forward. — Thomas Yoon of Excelerate Capital
We’ve moved rates 18 times in 2022 [to date] — mostly up, with maybe one or two down. Listen, everyone’s got a different execution or [liquidity] outlet. I can just tell you that we’re breaking even or making a little bit of money in the first few quarters [of this year], and our rates are higher than others. I don’t know how some of these other people [lenders] have been able to do it. But if they have, then kudos to them. …You’ve probably heard this before: Don’t fight the Fed [the Federal Reserve]. The Fed is bigger than everyone. Well, guess what? So is the housing market, and you don’t fight the housing market. Everyone’s like, “Oh, I’m going to keep rates low because I need market share.” I think it’s always better to be prudent and pay attention to rates. It’s not a race [or sprint]. This is a marathon to be successful in this business. That’s the way we look at it. — Keith Lind of Acra Lending
Warehouse Lenders
The biggest problem in non-QM right now is the fear of liquidity, right? It’s whether they’re able to sell off their closed loans. If they don’t, then it becomes a burden and a debt. The biggest, I think, challenge that these non-QM platforms face — outside of what’s happening in the market — is will they maintain a stable relationship with their warehouse lines. …I expect lower limits in warehouse funding capabilities and more haircuts, so that they [warehouse lenders] feel that they’re protected. Oftentimes, warehouse divisions are a real profit-maker for banks, but we’re going through a cycle change, and originations have dropped 40-plus percent nationally. It means that everyone’s taken a hit. …Most warehouse lenders are banks and, of course, they’re feeling it too. —Yoon of Excelerate Capital
Regional banks [who are warehouse lenders] have a lot more exposure now and could be holding loans that are underwater. I’ve heard some of them are comfortable with the risk, and they’ll just wind down these positions over time. It’s still a good return for the bank. Others are looking for exit strategies. … Some of these regional warehouse lenders may ultimately do a full turbo feature where they collect all interest and principal, and the originator gets nothing. It’s going to be harder for the little guy [smaller originators] to come back because warehouse providers, as well as people that are lending money [generally], are going to demand more capital. — Lind of Acra Lending
Raising Capital
If you’re a [non-QM] executive and have a $300 million negative on the balance sheet [due to underwater loans], any company that’s going to provide capital is going to question whether [the leadership of the lender] knows how to run a mortgage-banking platform in this marketplace. …It’s not like they will be using that capital to build technology or to hire more great talent or [launch] a new system. To be clear, it’s to make themselves whole, right? That’s a tough, tough sell in today’s market. — Yoon of Excelerate Capital
You don’t throw good money after bad, right? — Lind of Acra Lending
Market Share
We took flack for raising our rates and recalibrating ourselves. A lot of our competition, for example, kept their rates really low and kept them low for all of the first quarter. They took on a massive risk, and their logic was that the market will turn for the better … and they’ll be able to sell these [loans] off at a profit, instead of just breakeven. They looked at it as an opportunity to gain market share. Everyone that did that, you know, they were wrong. — Yoon of Excelerate Capital
The originators that have made it through the first two quarters in [good] financial shape absolutely I would expect all of us to gain market share. There are going to be [originators] that go out of business, as we’ve seen, and they’re probably not the last, and then others are probably going to struggle. — Lind of Acra Lending
Survival Strategies
Our liquidity channels are still really viable. We have strong relationships with our aggregators and outlets. We’re very fortunate, but we also recognize how volatile [this market] is. We have to be nimble. So, we have a plan A, but we also have plan B and C ready, just in case. …The market is moving so quickly, so we’re shooting higher [on rates] than we normally would to make sure that the collateral bought is worth something when they securitize it — [a process that can take months]. The dramatic move [in rates] that we saw in the first quarter and second quarter, I don’t think it’s going to be that exaggerated [going forward], but we’re constantly chasing the bogey here, so to speak. — Yoon of Excelerate Capital
There are three aspects that we focus on. First of all, we focus on rates. And I told you, we’ve moved rates 18 times since January 3. We were at a 4.5% coupon, and now we’re low 8% [range] in terms of where our portfolio is. …Two is liquidity. If you don’t have strong liquidity, and you’re not getting off loan sales fast enough and at the [right] prices, that’s going to be difficult. So, rates, liquidity and then lastly operational expenses. Are you managing your expenses? We took our headcount from 450 down to 350. We did that two months ago. And we’re still looking at that, to make sure that that we are managing expenses and salaries. We’ve not only reduced headcount, but we’ve made adjustments to salaries. — Lind of Acra Lending
Downturn Duration
We’re going to go into a recession — if we’re not already in it right now. I hope that it’s a mild recession. We’re prepping as if this is going to be a 12- to 24-month downcycle for us as an industry. If it [ends] earlier, we look at that as very fortunate. But we anticipate that this year and the bulk of next year is going to be trying times for us. We’re taking a very conservative approach. — Yoon of Excelerate Capital
I’m going to take the view that until we have a better understanding of where we are with inflation and taming it, that this market is going to be choppy. And when the overall market has a more comfortable understanding of where inflation is, and that it’s under control, I would think that things will fall back into order. …There’s still a lot of tailwinds in the housing market, however. We’re short [some] 5 million homes [in the housing market], and I think from an investor perspective, depending on the price and the homes picked, there’s good cash flow every month. I think that’s why you’re seeing more and more people, as far as mom-and-pops [small landlords, who are non-QM borrowers] getting into the housing market as opposed to the equity market moving forward. I like the tailwinds in housing, for sure. — Lind of Acra Lending
My monthly Extraordinary Lives series has been a lot of fun, and I’m back with another inspiring interview. First up was JP Livingston, who retired with a net worth over $2,000,000 at the age of 28. Today’s interview is with Amanda, who is now living debt free after paying off $133,000 in three years and seven months.
I’ve been following Amanda – @debtfreeinsunnyca – on Instagram for quite some time, and I’m so happy that I was finally able to interview her!
In this interview, you’ll learn:
How Amanda got into debt.
Why she decided to get out of debt fast.
The expenses she cut so that she could pay off her debt quickly.
What she thinks about the cash envelope method.
The sacrifices she made to reach her goal.
What she did to stay motivated.
And more! This interview is packed full of valuable information!
I asked you, my readers, what questions I should ask her, so below are your questions (and some of mine) about Amanda’s story and how she has accomplished so much. Make sure you’re following me on Facebook so you have the opportunity to submit your own questions for the next interview.
Related content:
Tell me your story.
Hey Michelle! Thank you for the opportunity. Here is my story.
I was 22 years old and working as a massage therapist on a cruise ship when I was diagnosed with carpal tunnel and cubital (elbow) tunnel. The career that I had trained for was no longer an option. I had to start over and pick a new career. Tired of working commission jobs where your paycheck depends on how good of a salesperson you are, I sought out an in demand, well-paying career in cyber security.
Like any normal person would do, I took out student loans to cover my tuition. I didn’t pay any attention to how much I was borrowing or the interest rate. I figured I would be making the big bucks when I graduated and could afford the payments. To make that happen, I worked hard to get into my field and landed an internship during my first year in school. By the time I graduated, I had already been in the IT field for several years.
So, was I making the big bucks now? Nope, not even close. There was no big, fat pay raise when I graduated. Reality slapped me hard in the face when I realized I wasn’t going to be able to afford my student loan and car payments with my small salary in California.
I knew I had to do something to clean up my mess. Years before I had tried to get out of debt by following Dave Ramsey’s plan, but reverted to my old ways after going through some personal things. Wanting to give it another try, I enrolled in Financial Peace University. I also went back to school for my master’s degree. This allowed me to defer my loans while cleaning up my mess. The best part was the company I now worked for reimbursed tuition for degrees that are related to your field.
My debt was over $80,000 and consisted of student loans, a car, and a small credit card. Once I committed to doing a zero-based budget, I started to see some great progress. I was sharing all my progress with my then boyfriend, now husband. I tried to get him on board, but he wasn’t interested at the time. After a few months of hitting it hard, I started to get mad that my balance wasn’t going down as fast as I wanted it to. It was going to take me forever to get out of debt!
That’s when I had my second “I’ve had it” moment where I was now ready to take action. The Prius I was upside down on had to go. It was a drastic, but necessary move. I quickly saved up $5,000 for a used Honda Civic and sold my car. With one transaction I got rid of $17,000 worth of debt. It felt like I was getting somewhere now! Because of my past, dumb mistakes, I had to take out a $7,000 loan to cover the difference I was upside down on. Owing $7,000 is WAY better than owing $24,000. I consider this to be the best financial decision I’ve ever made. It catapulted my debt snowball and provided the motivation I needed to continue.
After seeing my progress and going through FPU, Josh got on board and started paying off his debt. He cash flowed my engagement ring and proposed several months later! We paused our debt free journey and cash flowed $14,000 in six months for our wedding and honeymoon.
With the wedding behind us, it was time to get to business. Together we had a total $133,763 in debt. Josh added a truck and multiple credit cards to the pile of debt. We combined our accounts, started doing a zero-based budget, and utilized cash envelopes to stay on track. We both worked to increase our income while keeping the same lifestyle. After three years and seven months of hard work, we became debt free on July 5th, 2018!
How much debt did you have and what was your debt from?
Our debt totaled $133,763 and consisted of 16 student loans, 8 credit cards, 2 vehicles, and 1 personal loan. Nearly half of our debt was my student loans from my associate’s and bachelor’s degrees.
Why did you want to get out of debt fast?
It’s an awful feeling not having enough money to pay your bills or having to tell your friends/family you can’t go out because you’re broke. I wanted to get out of debt fast so I could afford my bill and have money to do the things I enjoy.
My why evolved over time when Josh and I started talking about our future together. He almost bought a sailboat when he got out of the Army years ago. Josh ended up moving back to San Diego instead, and then we met. He shared his dream with me, and I was immediately on board. I had been obsessed with tiny house living, and having worked on cruise ships, I loved the water. Getting a sailboat and one day quitting our jobs to travel became our new why.
How long did it take you to pay off your debt and reach debt freedom?
We spent three years and seven months working on paying off all our debt. The first year I was on my own. We weren’t married yet, and it took some time to convince Josh to get on board. After getting engaged, we paused our debt payments for six months to cash flow our wedding. We finished up the remainder of our debt a year and a half after we were married.
How did you manage to get out of debt so fast?
Getting out of debt can be broken down into two areas: increasing your income and cutting your expenses. We did both during our journey.
Our income increased by $75,000 during our debt free journey. This was from raises, overtime, and on-call pay. How did we do this? I attribute a lot of my success to working while I was going to school. I landed a part-time internship when I was in my first year of school. It allowed me to work my way up the ladder faster and increase my income. While in my master’s program, I managed to get into the IT Security department at my company. It came with a significant pay increase and each yearly raise has been a generous amount.
Josh also works in IT. He doesn’t have a degree, but his eight years of experience in the Army and his drive more than make up for it. Josh manages critical applications and is one of the go-to people in the IT department. He’s on-call and often working overtime. His skills and work ethic have earned him well deserved pay increases over the years.
Cutting expenses also helped us reach debt freedom faster:
Housing
For most of our journey, we lived in a small 550 sq. ft house to keep rent low. This saved around $400 a month for the 2.5 years we lived there. That’s $12,000 saved!
Vacations
Other than a honeymoon, we didn’t go on a vacation during our whole debt free journey. We had a few small trips: graduation, a wedding, Christmas in Tennessee with my family, which my mom paid for because she wanted to see us while supporting our journey.
Instead of traveling, we found free things to do in San Diego. Going hiking with the dogs was one of our favorite things to do. We also hung out with friends at their house instead of going out. We would cook dinner and watch a movie or TV series.
Hobbies and fun
Josh has a lot of expensive hobbies that he put on hold during our debt free journey: spear fishing, fishing, tech stuff, etc. I didn’t have any hobbies since my life was consumed by work and school. We cut out restaurants, date nights, movies, and excessive clothing. If we wanted to go out to eat or buy booze, it would come out of our budgeted spending money. There were a lot of Netflix and chill nights! Our date nights consisted of grilling out in our yard and sitting by the fire pit. We did budget for date nights whenever we hit a big milestone.
Work perks
Josh and I work at the same company, which allowed us to carpool to save money. Additionally, our company has amazing benefits. Our health and dental insurance are extremely affordable, both of our cell phones are paid for because we’re on call, and we’re able to make up missed hours instead of taking PTO if we need to leave work for some reason.
Can you tell me about cash envelopes? How does it work and why do they help?
Cash envelopes are a budgeting method where you take out cash for specific categories instead of using your debit/credit card for purchases. Each payday we take out money for groceries, gas, spending money, and any sinking funds we’re saving for. For that two-week period, all groceries come out of the grocery envelope. Same with gas and spending money. Once it’s gone, it’s gone! There’s no money left in our accounts because it’s all been paid to debt, so you better spend the money wisely! We had our emergency fund in case anything happened, but spending too much on groceries is not an emergency.
This method really helps curb your spending because you feel it more when you use cash. It’s also easy to look in your wallet and see how much money you have for each category to stay on track. Josh is a spender and he’s had great success with cash envelopes. I had a wallet with several dividers made for him to make it easy.
A lot of people are scared to carry around cash. I think the benefits of using cash outweigh the risk of losing it or it being stolen. I suggest only carrying around the amount that you need and leaving the rest at home in a safe until you need it. If anything were to happen, you always have your emergency fund to fall back on.
What is your response to people that say, “You should invest that money instead of paying off the debt, you’ll earn more in the long run…” etc.?
Ahhh the age-old argument! My response is do what works best for YOU! Everyone’s situation and priorities are different.
When I started, I didn’t have a choice because I wasn’t going to be able to afford the minimum payments on my debt! As we got further into our journey, sure we could have invested, but paying off debt was more important to us. Becoming debt free is a sure thing and will force you to change your spending habits for the better. I never want to get in a bind and have to pull out investments early because of debt or bad spending habits.
What sacrifices did you have to make in order to become debt free?
The biggest sacrifice I made to become debt free was selling my beloved Prius for a 2005 Honda Civic. At first, I didn’t want to sell it. I was going to try and get out of debt while keeping the car. After eight months of paying down my car loan and not making a lot of progress, I realized I had to make some bigger sacrifices, otherwise I would fall back into my old spending habits and go further into debt. I still miss the ability to get into my car without taking the keys out of my purse and the convenience of Bluetooth! My used Honda is old and janky, but it’s paid off!
Often people paying off loads of debt feel they have to choose between “living life” and making payments. Were there any times during the journey that you chose to “splurge”?
There were a few times we splurged! We got sick and tired of living in a small house, so we moved into a bigger rental with office space and a yard for the dogs. Before moving we did a cost analysis on the expenses to determine if it was worth it to us to push back our debt free date by a few months or stick it out and continue living the same way.
Our new place was so empty when we moved in. Imagine going from 550 sq. ft to over 1,300! We didn’t even have a table. We spent a few weeks buying furniture and things that we needed for the house before getting back into the swing of things.
Another big splurge was a complete surprise to me! I had been eyeballing this nice Canon DSLR camera and planned on getting it as a debt free gift to myself. Right before I graduated with my master’s degree, my mom was in California on a travel nursing assignment. She knew we were on a strict budget and would say no to most things that cost money. My mom told me she won $150 gift card and wanted to use it to take us out to eat.
I agreed because who passes up free!? During dinner, I kept making comments about us going all out because we have to use up the gift card. Avocado eggrolls, pizza, and several beers later, Josh said he forgot his wallet out in the truck and went to grab it. He came in the door behind me and set a big present on my lap! I immediately knew it was the camera!
So, how did Josh get this big purchase by me? He’s a veteran and was in school at the time. Veterans get a housing allowance each month while in school per the Post-911 GI Bill. The money was deposited into his personal checking account, and then he moved it to our joint checking every month. He told me that the allowance was delayed that month because of paperwork! I completely bought it. Josh used the money to go in on my graduation gift with my mom.
And the gift card? There was no gift card! They knew the only way to get me to a restaurant during our debt free journey was to lie to me and say she had a gift card. The total with tip came out to just over $150.
What did you do to stay motivated?
It’s so important to find ways to stay motivated when you have years of work ahead of yourself. Because I had fallen off track once before, I knew I had to find better ways to stay motivated and focused.
Visuals were by far my favorite way to stay motivated. I had multiple charts, spreadsheets, and countdowns going at home and work. Every time we made a payment towards debt, I would get to color in charts, change Excel spreadsheets, and update the whiteboard at work. Having reminders where you’ll see them every day is extremely motivating.
I also sought to find other people on the same journey. Back in 2014, there weren’t a lot of people on Instagram sharing their progress and journey. I found a small group of people from searching #debtfree and #daveramsey, and started following them. The hashtags started to get polluted by people selling those skinny teas and weight loss wraps. I put out a call to the small community, and we decided to vote on our own hashtag. That’s how the #debtfreecommunity was born!
It’s so motivating to talk to people who are going through the same thing. In real life, none of my friends or coworkers were trying to get out of debt. Their eyes would gloss over when talking about budgets or paying off a debt. Every time I opened Instagram, I would immediately be motivated by another person’s journey or the lovely comments left on my posts.
If you were starting back at ground zero, what would you do differently?
There are so many things I would do differently! First off, instead of getting a $12,000 car when I was 16, I would save up a few thousand and buy a used, reliable car. That one decision would set my life on a much better path! I’d be able to save up money and pay for school upfront, which is my next point. I would spend more time figuring out what I want to do in life and researching schools. I’d make sure to pick a career that is not commission based and makes a great salary. I would start investing early in life, even if it was only $100 a month. I would continue to pay cash for purchases, save money, and invest.
What is your very best tip (or two) that you have for someone who wants to reach the same success as you?
Hands down the best tip I can give is to create a zero-based budget and stick to it. A budget doesn’t sound sexy or fun, but it gives you freedom to spend money on the things that matter to you. Budgeting doesn’t mean you have to cut out all your fun! Put it in the budget. The point is to know where your money is going and to spend it intentionally. Don’t resist the budget!
The second tip I can give is to find your people! It’s hard to stay motivated to pay off debt or save when all your friends are spending money left and right. Having a supportive group of people that get you is priceless.
What’s your next financial goal?
Our next financial goal is to save $25,000 for our 6-month emergency fund. We want to be prepared for anything that comes at us!
We keep $2,000 in a local savings account and the rest will be in a high interest savings account. Transferring money from our large emergency fund to our checking account takes a few days, which is great because it helps prevent us from dipping into it for non-emergencies.
The emergency fund will cover all of our expenses for six months with minimal cuts to the budget. It’s going to be a huge relief to have money set aside just in case. No more money fights when something unexpected happens!
Where can my readers go to learn more about you?
You can learn more about us by following along on Instagram.
Do you have any other questions for Amanda? Are you trying to pay off debt?
The latest non-QM player to feel the pain of the interest rate volatility afflicting the nation’s housing market this year is a Pasadena, California-based real estate investment trust called Western Asset Mortgage Capital Corp.
The REIT, which is managed by investment advisor Western Asset Management Co. LLC, recently announced that it is exploring a potential company sale or merger in the wake of posting a $22.4 million net loss for the second quarter ended June 30, — on the heels of posting a $22.2 million loss in the first quarter. WMC, with some $2.8 billion in assets, has a diverse portfolio of residential and commercial real estate assets.
A closer look at WMC’s books, however, shows that as of June 30 its residential whole loan portfolio, nearly all of which is comprised of non-QM loans, was underwater by some $44 million. That’s based on a comparison of the principal balance of the loans on the books and their fair market value as reported by the REIT as of that date.
The principal balance of WMC’s residential whole loan portfolio at June 30 stood at $1.24 billion, representing nearly half of the company’s consolidated total assets, according to WMC’s balance sheet. The REIT lists the fair value of those loans, however, at about $1.19 billion — which means the portfolio is underwater to the tune of $44 million.
In addition, more than 60% of the 3,097 non-QM mortgages by count and volume in the REIT’s whole loan portfolio — totaling 3,102 loans — bear interest rates at 5% or less.
The dreaded discount
Because non-QM (or non-prime) mortgages are deemed riskier than prime loans, in a normal market they typically command an interest rate about 150 basis points above conforming rates, according to Thomas Yoon, president and CEO of non-QM lender Excelerate Capital. As of last week, according to Freddie Mac, the interest rate for a 30-year fixed conforming purchase mortgage stood at 4.99%, down from 5.3% a week earlier.
“The legacy non-QM coupons are like 4.5%, so we have 4.5% coupons floating around out there from earlier in the year that haven’t moved and are starting to age on warehouse lines,” said John Toohig, managing director of whole loan trading at Raymond James in Memphis. “And they have to sell them now [in the whole loan market or via securitization when we are seeing] 6%, 6.5% or 7% deals.
“It’ll be a very different buyer that comes to the rescue … and it will be at a pretty significant discount [in the whole-loan trading market]. I’m swagging it without being at my screen, but maybe in the 90s [100 is par], but certainly underwater.”
So far this year, WMC has undertaken two securitization deals through its Arroyo Mortgage Trust conduit (ARRW 2022-1 in February and ARRW 2022-2 in July). Both deals involved non-QM loans, according to bond-rating reports form S&P Global Ratings.
Why non-QM lending is not going away
Non-QM lenders have been going through a turbulent time in the past few months. HousingWire recently spoke with John Jeanmonod, Regional Vice President of Sales at Angel Oak, about non-QM lending and the outlook for the second half of 2022.
Presented by: Angel Oak
Combined, the closing loan-pool balance for the two securitization deals was $834.2 million, with the weighted average interest rate for the loan pools at 4.4% for the February offering and 5.5% for the most recent deal. Keith Lind, CEO of non-QM lender Acra Lending, said rates for non-QM loans through his company were “in the high 7% [range]” for July” up from 4.5% early in the year — with Acra moving rates 18 times, mostly up, over that period.
“There’s good liquidity at that [higher] rate,” Lind added. “I don’t think investors are jumping to buy bonds backed by coupons [rates on loans] that can’t even cover the coupon on the bonds … and securitization [costs].”
In other words, lower-rate loans are at a competitive disadvantage in terms of pricing in securitization and loan-trading liquidity channels because they are worth less than the newer crop of higher-rate mortgages. Lind put it this way: “These aren’t bad loans, just bad prices.”
Non-QM mortgages include loans that cannot command a government, or “agency,” stamp through FannieMae or Freddie Mac. The pool of non-QM borrowers includes real estate investors, property flippers, foreign nationals, business owners, gig workers and the self-employed, as well as a smaller group of homebuyers facing credit challenges, such as past bankruptcies.
It’s volatile out there
WMC’s struggles with the impact of red ink in recent quarters are forcing it to consider “strategic alternatives” going forward, including a possible “sale, merger or other transaction,” CEO Bonnie Wongtrakool said in the company’s Q2 earnings announcement.
Wongtrakool added that the REIT’s recent quarterly results are reflective of “the ongoing challenges of interest rate volatility and fluctuating asset values.” She noted that WMC has made “significant progress in the last two years toward strengthening our balance sheet and improving our liquidity and the earnings power of the portfolio.”
Still, that has not been enough for the market, and the company’s stock price. “We do not believe that these actions are being reflected in our stock price,” Wongtrakool said.
At press time, shares of WMC were trading at $15.50, compared to a 52-week high of $29.20 and a low of $11.00.The stock-value pressure is prompting the WMC to explore alternatives going forward, including a possible sale of the company.
“Today the company … announced that its board of directors has authorized a review of strategic alternatives for the company aimed at enhancing shareholder value, which may include a sale or merger of the company,” Wongtrakool said. “JMP Securities … has been retained as exclusive financial advisor to the company.
“No assurance can be given that the review being undertaken will result in a sale, merger, or other transaction involving the company, and the company has not set a timetable for completion of the review process.”
Coping with a liquidity squeeze
WMC isn’t alone in dealing with the pain sparked by volatile rates.
Non-QM lender First Guaranty Mortgage Corp. filed for Chapter 11 bankruptcy protection at the end of June — leaving four warehouse lenders on the hook for more than $415 million. Then, in early July, another non-QM lender, Sprout Mortgage, shuttered its doors suddenly, leaving employees out in the cold.
Just weeks later, a text message leaked to the media revealed that Flagstar Bank is ramping up scrutiny of non-QM lenders prior to advancing warehouse funding. Flagstar will now require advance approval for funding advances.
The bank also indicated it may adjust “haircuts” — the percentage of the loan the originator must fund itself to ensure it has skin in the game. The leaked message included a list of 16 non-QM lenders that would be affected by the changes.
Tom Piercy, managing director of Incenter Mortgage Advisors, points to yet another facet of the liquidity squeeze facing originators across the housing industry — in this case both prime and non-prime lenders. And that variable is the current compression of the yield curve as short-term interest rates rise faster than long-term rates — such as those for mortgages.
“Our short-term rates have increased substantially,” Piercy explained. “If you look at the mortgage industry right now, with this [short-term/long-term rate] inversion, it’s going to create even more heartburn because everyone’s going to be upside down on their warehouse lines [which, he said, are based on short-term rates].
“So, the cost of your warehouse facilities is increasing while the long side [mortgage rates] is staying low. If you originate mortgages at 5%, and you may have a cost at a warehouse line of 5.25% or 5.5%, then you’re losing money if you keep loans in the pipeline.
And, for some lenders, particularly non-QM loan originators, they also face the prospect of losing money when they seek to move loans out of their pipelines via whole-loan sales or securitizations because of the higher returns demanded by investors — who also want to stay ahead of interest-rate risks.
“It’s going to be interesting to see how this all plays out,” Piercy added.
Featured image credit: Howard Nourmand courtesy of Nourmand & Associates
A home is a symbol of status.
That sentence rings true whether you live in New York or Beijing, Vancouver or Madrid, Prague or Mumbai. But nowhere is the competition to stand out quite as fierce as Los Angeles, where million-dollar homes go to extreme lengths to appeal to potential buyers.
In what seems like an endless parade of upscale amenities, sprawling floorplans, and lavish interiors, the luxury segment of L.A.’s already competitive real estate market is constantly adapting to the changing needs (and growing expectations) of buyers in this price range.
But in a city that’s rife with new builds, there’s an undisputed appeal for homes with a bit of history — and a design that’s guaranteed to withstand the passage of time.
Paul Williams homes are hot commodities in L.A.
Out of the many architects that left their mark on the City of Angels, one name stands out: that of Paul Revere Williams, one of the most prolific and accomplished architects in recent history.
With his wide range of architectural styles — from traditional colonials to casual ranch-style to midcentury modern marvels — Williams left his mark on the city’s most glamorous and exclusive enclaves, including Beverly Hills, Brentwood, Bel Air and the Hollywood Hills.
He designed or revamped close to 3,000 buildings starting in the 1920s all the way through the 1970s, and rose to fame as the go-to architect of California celebs and business magnates alike.
Paul Williams counted Frank Sinatra, Lucille Ball and Desi Arnaz, William “Bojangles” Robinson and other entertainers among his high-powered clientele.
But beyond his flashy role as ‘The Architect of Hollywood”, Paul Williams built countless homes whose owners have not been immortalized on The Hollywood Walk of Fame. And these homes, with their timeless design and quality of build, continue to attract buyers in droves.
“Paul Williams’ homes are hot commodities in LA. His classic style and long-standing career designing for LA’s most storied legends make him one of city’s most celebrated architects. Owning a Williams home is owning a one-of-a-kind, classic home that has stood the test of time.”
Michael Nourmand – President, Nourmand & Associates
SEE ALSO: The Chemosphere House and 6 other striking John Lautner-designed homes
And he should know. Michael’s company, Nourmand & Associates, a leading real estate brokerage in the Los Angeles area, sold three Paul Williams-designed homes in 2021 alone — one more charming than the other.
“It’s an honor for myself and Nourmand agents to have represented both buyer and seller in the most recent Paul Williams listings.”
Most recently, Nourmand & Associates closed on the $11.5 million sale of Villa Andalusia (pictured above), a 1931-built Italianate Pallazo that’s touted as one of the finest properties in Los Feliz. Konstantine Valissarakos represented the buyer in the transaction.
The sale followed two other noteworthy transactions closed by Michael Nourmand himself; the first, a picture-perfect family home that traded for $8.75 million, and the other an exceptionally well-crafted Beverly Hills home that commanded a $5.198 million sale price. For the latter, Michael Nourmand held the listing alongside Adam Sires, with another Nourmand & Associates agent, Jill Epstein, representing the buyer.
And these million-dollar sales are by no means outliers.
In early 2021, a Brentwood manor Paul Williams built back in the 1930s for opera singer-actress Grace Moore and her husband, Spanish actor Valentín Parera (later occupied by legendary actor Tyrone Power) sold for $10.1 million to veteran CAA agent Josh Lieberman.
Prolific celebrity house flippers Ellen DeGeneres and Portia de Rossi have also just closed on a Paul Williams-designed home in Beverly Hills Post Office. According to the Los Angeles Times, the couple paid $8.5 million for the pristine mid-century home that’s tucked in the gated enclave of Hidden Valley Estates.
But beyond the visual and structural appeal of the homes the lauded architect left behind, there’s a much more complex legacy.
The legacy of Paul R. Williams
While he’s widely remembered as “the architect of Hollywood” and a top choice among the stars of his time, Williams’ repertoire is vast in both style and quantity, creating some 3,000 buildings before his death in 1980.
A 2012 NPR profile chronicling his work crowned him as “the trailblazing architect that helped shape L.A.” Beyond the residential projects he worked on, Williams didn’t shy away from tackling ambitious public and commercial buildings.
He helped design iconic structures like the Los Angeles County Courthouse, the historic Spanish-colonial style YMCA building in downtown LA, and even parts of Los Angeles International Airport.
He was part of the LAX planning and design team, working on some of the most well-known commercial and municipal projects, including the Golden State Mutual Life Insurance Building, Hillside Memorial Park, Westwood Medical Center, and the First AME Church.
Because of his varied portfolio, you might even recognize his handwriting: it’s prominently plastered on the façade of the Beverly Hills Hotel (which he didn’t build, but expanded and renovated throughout the years).
But Paul Williams’ legacy extends beyond the structures he helped build.
He was the first African American architect to become a member of the American Institute of Architects in 1923, and later, in 1957, he was inducted as the AIA’s first black fellow.
Despite the deep prejudice and racism he faced, Williams masterfully navigated the business and social circles of the day.
The LA Conservancy reports that he even learned to draw upside down in order to sketch for clients from across the table — for the benefit of any white clients who might have been uneasy sitting next to an African American.
Williams famously remarked upon the bitter irony of the fact that most of the homes he designed, and whose construction he oversaw, were on parcels whose deeds included segregation covenants barring Black people from purchasing them.
Later in his career, Williams chose to devote more of his time to projects aimed at providing affordable housing; he co-designed the first federally funded public housing projects of the post-war period (Langston Terrace in Washington, D.C.) and later the Pueblo del Rio project in southeast Los Angeles.
It wasn’t until 2017, 37 years after his death, that the American Institute of Architects awarded him his gold medal for the outstanding contributions he made in the world of architecture.
“Our profession desperately needs more architects like Paul Williams. His pioneering career has encouraged others to cross a chasm of historic biases. I can’t think of another architect whose work embodies the spirit of the Gold Medal better. His recognition demonstrates a significant shift in the equity for the profession and the institute.”
William J. Bates, FAIA, in his support of William’s nomination for the AIA Gold Medal, Architectural Digest via Wikipedia
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FIRST ON FOX – State treasurers and other top finance officials from 27 states on Monday urged President Biden to end what they said was his “unconscionable” policy of forcing people with good credit scores to subsidize mortgage loans of higher-risk borrowers, and warned Biden’s plan would be a “disaster.”
Biden’s plan was outlined just a few weeks ago by the Federal Housing Agency (FHFA) and is set to take effect today. The plan is aimed at helping lower-income borrowers afford their monthly mortgage payments – it would do so by forcing people with good credit scores to pay more each month for their mortgages, extra payments that would be credited to the loans of higher-risk borrowers.
The controversial policy has been attacked by both Republicans and Democrats, including President Obama’s former Federal Housing Administrator. On Monday, financial officers from 27 states weighed in and said it was clear the policy was a mistake even before it takes effect.
SENATE GOP SLAMS ‘PERVERSE’ BIDEN RULE FORCING PEOPLE WITH GOOD CREDIT TO SUBSIDIZE HIGH-RISK MORTGAGES
US President Joe Biden speaks about the economy and the final rule implementing the American Rescue Plans Special Financial Assistance program, protecting multiemployer pension plans, at Max S. Hayes High School in Cleveland, Ohio, July 6, 2022. (Pho ((Photo by SAUL LOEB/AFP via Getty Images) / Getty Images)
“It is already clear that this new policy will be a disaster,” they wrote in a letter led by Pennsylvania Treasurer Stacy Garrity that was sent to Biden and FHFA Director Sandra Thompson. “It amounts to a middle-class tax hike that will unfairly cost American families millions upon millions of dollars. And – at a time when the real estate market has already slowed considerably due to high interest rates – it will further depress home sales.”
“We urge you to take immediate action to end this unconscionable policy,” they wrote.
The state finance officers blasted the plan for turning the normal system of home buying incentives “upside down” by hurting people who make sound financial decisions.
BIDEN RULE WILL REDISTRIBUTE HIGH-RISK LOAN COSTS TO HOMEOWNERS WITH GOOD CREDIT
The policy was proposed by Federal Housing Finance Agency Director Sandra L. Thompson, and it is set to take effect May 1, 2023. (Photo By Tom Williams/CQ-Roll Call, Inc via Getty Images) (Getty Images)
“[T]the policy will take money away from the people who played by the rules and did things right – including millions of hardworking, middle-class Americans who built a good credit score and saved enough to make a strong down payment,” they wrote. “Incredibly, those who make down payments of 20 percent or more on their homes will pay the highest fees – one of the most backward incentives imaginable.”
It noted that the forced extra payments will be used to hand out “better mortgage rates to people with lower credit ratings. Others have said the plan would make it easier for people with shaky credit histories to afford more expensive mortgages, a move that could put more people at financial risk.
The state officials said that while expanding homeownership is a worthy goal, the forced subsidization of risky loans isn’t the way to do it.
BIDEN RULE WILL REDISTRIBUTE HIGH-RISK LOAN COSTS TO HOMEOWNERS WITH GOOD CREDIT
Biden has promoted a series of ‘equity’ initiatives during his two years in office. ((Photo by Anna Moneymaker/Getty Images) / Getty Images)
“[T]he right way to solve that problem is not to use the power of the federal government to penalize hardworking, middle-class American families by confiscating their money and using it as a handout,” they wrote. “The right way is to implement policies which will reduce inflation, cut energy costs and bring lower interest rates.”
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The letter was signed by treasurers, auditors, commissioners of revenue and other top officials from Alabama, Alaska, Arizona, Arkansas, Florida, Idaho, Indiana, Iowa, Kansas, Kentucky, Louisiana, Mississippi, Missouri, Nebraska, Nevada, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, South Carolina, South Dakota, Texas, Utah, West Virginia, Wisconsin and Wyoming.
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Frugal green living is important for everyone because environmental issues affect all of us, not just the people who can afford to be eco-conscious.
Plus the concept of frugal green means you are saving money! And that is always helpful.
This is why I created this blog, to help people save money, find financial freedom, and have choices in life.
Reducing your carbon footprint is one of the greatest gifts you can give to yourself and the planet.
But how do you save money while also making a difference? It’s possible!
This is why choosing to be frugal green is so important!
These are all frugal ways that I have personally done or heard of other people doing as well. They are tried-and-true methods of living a more frugal life, and I hope that you will find them helpful. Plus help the environment at the same time.
This is a win-win situation.
Have you ever wondered how to be environmentally friendly?
Do you want to save money and the environment at the same time?
This article has 91+ frugal green living tips that will help! Let me know which ones are your favorites!
How to save money and be frugal green?
There are many ways to be frugal green and save money while helping the environment.
Plus in the long run living green costs less.
We will cover ideas for your kitchen, car, shopping and so much more. There are many other ways to be frugal green, so find what works best for you and make a difference!
These are ways to live more sustainably while saving money.
Importance of Sustainability and the Environment
You can save money and help the environment without making any major changes to your lifestyle.
Some easy ways to do this include, but are not limited to, changing your habits at home, buying used instead of new, and being more conscious about how you use energy.
Every day you can make the decision to choose to be a thrifty person.
Top 10 Best Frugal Green Living Tips
In order to save money and be more environmentally friendly, try some of these tips:
1. Reduce your use of plastics. This means bringing your own bags to the grocery store, refusing straws when you order drinks, and not using disposable utensils or plates.
2. Make Recycling a Priority. Recycling is important, and everyone should do their part to make it a part of their everyday routine. It’s not just for plastics and paper- there are many different things that can be recycled. By taking small steps like bringing a reusable coffee mug, we can all make a big difference in the long run.
3. Ride a bike or walk instead of driving. Not only is this better for the environment, but it’s also a great way to get some exercise.
4. Do the “green thing” and buy things secondhand! When you’re considering your lifestyle choices, buying things secondhand is a great way to do the “green thing.” You can save money and help reduce the amount of waste that goes into landfills.
5. Only buy what you need. Many times we buy things out of convenience or wants. Truly evaluate whether the purchase is necessary or if you can save money by buying used.
6. Compost as much as possible. Not only does this help reduce waste, but it also helps create nutrient-rich soil for plants.
7. Consider your carbon footprint. Americans use a tremendous amount of resources and impact the planet in many ways. We consume a lot of energy, materials, and water. Our lifestyles have a big environmental impact. There are many ways to be frugal and environmentally conscious, including recycling and reducing food waste.
8. Cut Out Paper and Plastic Waste. One way to be more frugal and green is to reduce the amount of paper and plastic waste you produce. Technology has greatly improved in many ways to cut down on plastic and paper consumption, so take advantage.
9. Think Before You Throw Away and Buy New. We are way too quick to toss things and replace them without even thinking. Next time before you throw it into the landfill, think about how you can reuse, repurpose, or give away the item.
10. Upcycle. The concept of upcycling has gained popularity in the past years. It is a simple way of taking something ugly and worn down, putting some TLC into it, and making it into something beautiful.
Related Reading: Top 10 Influential Frugal Living Tips with a Big Impact
Being frugal and being environmentally conscious may not always go hand in hand.
In some cases, you may have to make a choice between buying an eco-friendly item that is more expensive or sticking with a cheaper, non-sustainable option.
However, many of the aims of frugal families link to eco-friendly living.
Below are simple sustainable products to consider buying instead of their wasteful counterpart.
Reusable food bags are a great way to reduce your environmental impact while also saving money.
There are a variety of different types of food grade eco-friendly bags on the market today. They are made of safe, eco-friendly materials that will not harm the environment and they are lead-free, chloride-free, and BPA free.
Bamboo straws are a great eco-friendly alternative to plastic straws.
They are compostable, meaning they will never pollute the environment or harm animals. Bamboo straws are odorless and tasteless, so you can use them with any drink. Reusable bamboo straws make a great addition to your everyday kitchen supplies.
These dish cloths are also super absorbent and work better than microfiber cloths and paper towels for cleaning.
They are made from cellulose, which is a soft material that is gentle on your hands. They can be used for a variety of tasks, such as dishwashing, wiping down counters, and polishing furniture. And they are durable enough to be reused multiple times.
A reusable K-cup is a great way to reduce your environmental impact while enjoying your favorite cup of joe.
Works perfectly in our house! Not only do they help you save money in the long run, but they also allow you to customize your coffee experience like never before. Plus, using a reusable k-cup is an easy way to reduce waste and help preserve our planet.
Frugal Green in the Kitchen & Table
There are a number of ways to save money and be frugal green in your kitchen.
Use a Reusable Coffee Mug. So simple and easy to do. Pick your favorite up here.
Skip plastic straws. This is a simple thing to do for the environment. Buy reusable straws. And don’t forget the cleaning brush (hint… the cleaning brush will save you from throwing away your reusable straws.)
Skip the Paper Plates and Plastic Utensils. You will be shocked to see the waste this creates. Invest in quality dishes you like and don’t be afraid to wash them up.
Invest in a Water Filter. If you’re looking for ways to improve your diet and save money, consider investing in a water filter. We upgraded to an under-the-sink mount water filter and it was the BEST choice ever! This is the exact one we bought.
Cook at Home. Making your own meals can save you a lot of money in the long run. You’ll be surprised at how much money you can save by cooking simple meals yourself.
Grow a Kitchen Garden. One way to reduce your food costs is to grow some of your own fruits and vegetables. You can start with a kitchen garden, which is a small plot of land near your house where you can plant fruits, vegetables, and herbs. if you don’t have space, check out these Aerogardens.
Stop Using Plastic Wrap. To reduce your reliance on plastic wrap is to invest in some beeswax food wraps. These work just as well as plastic wrap, but because they’re made of natural materials, you can reuse them over and over again!
Air dry dishes. This is because air-drying dishes use less energy than running a dishwasher and takes up less time.
Stick With Instant Pot. When you’re cooking, try to use a microwave or pressure cooker instead of your oven. Ovens produce a lot of heat and use up a lot of energy, so using these other appliances will help conserve resources. This is the Instant Pot/Air Fryer Combo I love (and use ALL.THE.TIME)!
Frugal Green Cooking & Menu Plan
This may not seem as environmentally conscious as other areas, however, it will help your wallet more.
Buy produce at the local market. Fruits and vegetables tend to be cheaper at the market than they are at the grocery store, so this is a great way to save some cash while also doing your part for the environment. Plus you save on the costs of trucking in the produce and support local.
Join a CSA. These community-supported agricultures have become popular ways for consumers to buy local and seasonal food directly from the farm. You normally have a dollar amount buy-in or a certain number of hours worked for food.
Enjoy Organic Foods. Organic foods may be worth the extra cost – organic food has a higher nutritional value than conventional food, plus it’s better for the environment because it doesn’t require pesticides or chemical fertilizers.
Go Meatless. Americans, on average, eat twice the recommended amount of meat. Meat production is one of the leading causes of greenhouse gas emissions and climate change. Consider your carbon footprint when making dietary decisions.
Shop Grocery Weekly Ads. Start by looking out for food sales at the grocery store. This can help you save money while also being more mindful of the environmental impact your food choices have.
Meal Plan. One great way to save money on groceries is to plan your meals ahead of time. This allows you to be more strategic in your shopping and can help you avoid buying items that you don’t need.
Use Leftovers. When you’re cooking a meal, always cook a little more than you need. This way, you’ll have leftovers that can be used to make another meal or stored in a glass jar for later use.
Pantry Challenge Time! One way to save money on your groceries is to consider doing a pantry cleanse. This means eating all the foods in your pantry that are sitting there. Then, only buy groceries that you know you’ll use. This can help you avoid overspending and wasting food.
Skip Pre-Made or Boxed Mixes. Making your own is a more affordable option, as pre-made or boxed mixes can be expensive. There are many recipes online that are healthy and affordable, and by planning ahead you can save time and money.
Shop the Perimeter of the Grocery Store. A lot of people want to save money and be more environmentally friendly, but don’t know where to start. One way to do both is to try to stick to the perimeter of the grocery store. This means avoiding the center aisles, where most processed foods and extra packaging are found.
Buy Generic Brands. Generic brands are less expensive than their name-brand counterparts. This is because generic brands do not have the same marketing and advertising costs as name-brand products. Many times the quality is the same or better!
Key Frugal Green Ideas While Shopping
These are environmentally friendly ways to improve your shopping habits. Many people may call this frugal minimalism.
Donate First. It’s easy to just dispose of something when it’s no longer needed, but sometimes that thing could be reused or recycled. For example, if you have an old TV that isn’t being used, try selling it or donating it before throwing it away. There are a lot of people who might need your old TV, and you can get some money for it if you sell it.
Buy Refurbished. On the other hand, if you’re in the market for a new TV, think about buying one that is refurbished instead of buying a brand-new one. Refurbished electronics often come with the same warranty as new ones and cost way less than buying a brand-new model.
Try Fixing First. Just because something is broken doesn’t mean you have to throw it away! Many times, things can be fixed very easily and cheaply. If your electronic device is leaking toxic chemicals, however, you should definitely not try to fix it yourself–take it to a professional recycler instead.
Reuse your own grocery bags. This will save both money and the environment, as disposable grocery bags often end up in landfills. Also, many stores are now charging for grocery bags, so save a few bucks at the store.
Do not buy new books. You can borrow books from the library or from friends, or you can buy them used. Buying new books wastes resources, and it’s often cheaper to buy them used.
Use the Library. The library has a wealth of books, movies, and music that you can borrow for free. Plus you can find access to tons of digital resources as well.
Shop Second-Hand Stores for your needs. These are great places to find clothes, furniture, and other household items at a fraction of the price.
Stop buying the paper version of the newspaper. Instead, get the daily news online for free. Not only will you save a few bucks each month, but you’ll also help reduce deforestation.
Shop at Sustainable Businesses. Thankfully, many companies focus on being sustainable businesses by making changes from production, to packing to shipping. As a whole, the industry could do better to create less waste. One sustainable company is the Everyone Store.
Think Twice on Gifts. Really consider what someone would want for a gift. Too many times we opt for quick and cheap gifts that are materialistic in nature and never be used. So, consider some of these money gift ideas instead.
Frugal Green Cleaning Products that Are Eco Friendly
You may not be environmentally aware of the hazards of using most cleaning products. In fact, you should check your normal cleaning products with EWG’s database and their standards.
DIY Baking Soda & Vinegar. Using green cleaning products is usually more expensive than traditional ones. Baking soda and vinegar are easy-to-find, cost-effective alternatives to environmentally unfriendly cleaners.
Use Microfiber Cloths. Personally, this is my favorite way to cut the expansive (and not-good-for-you) cleaning products. These microfiber cloths are just as effective at cleaning and will save you money in the long run.
Skip the Disposable Rags. Use up-cycled rags from old clothes to pick up spills.
Stop Using Air Fresheners. Reduce or eliminate the use of air fresheners, which release harmful chemicals into the air. Plus they are super costly!
Frugal Green & Energy Use in the Laundry Room
Use Detergent Powder. Washing your clothes in a washing powder uses less water than liquid tabs, which come in more plastic packaging. Also, the powder is a much better environmental solution and better for your body. This is the detergent powder we use and love (and those I recommended it to love it as well)!
Sniff Test. Implement the sniff test and only wash clothes when they fail the sniff test. Beware of this recommendation with teenagers!
Line Dry Clothes. Additionally, line drying clothes throughout the year can save a ton on your energy bill! Plus your clothes do not wear as quickly.
Watch Your Hot, Wash in Cold. One easy way to save money on your household bills is to reduce the amount of hot water you use. Heating water takes up a large percentage of the energy used in households, so by washing your clothes in cold water, you can cut down on your energy usage significantly.
Frugal Green in the Bathroom & Morning Routine
Use Less Shampoo or Soap. In order to save money on your grocery bill, you can use less shampoo than is recommended. If everyone did this, it would result in significant monetary and plastic savings.
Turn the water off while brushing your teeth. It is important to turn the tap off while brushing teeth in order to conserve water. Many people forget to do this, and as a result, millions of gallons of water are wasted every year.
If it’s yellow, let it mellow. If the toilet water is yellow, it’s ok to let it mellow. You don’t have to flush to turn it off every time. Thanks to auto-flush toilets in most places this is very common for people to forget to flush at home.
Take Cooler Showers. This may not be everyone’s favorite. But take a cool shower rather than a piping hot shower. Most of the energy used is the hot water heater warming up the water.
Use Every Last Drop! There are a few ways to get the most out of your products and conserve them- one way is to leave bottles upside down for a couple of hours after you’ve used them so that you can get the last bit of product out. You can also roll up toothpaste tubes to get the remaining paste out. Here is a great product to help you squeeze every expensive ounce out.
Related Reading: Billionaire Morning Routine: How To Achieve Success In Life
Green Lot with Frugal Green Landscaping
Xeroscape Your Lawn. Lawns are often seen as a status symbol, but they’re actually quite expensive and environmentally damaging. They require large amounts of water, fertilizer, and pesticides to maintain, which can leach into the groundwater and pollute the environment.
Change Mowing Schedule. Additionally, lawn mowing emits greenhouse gases that contribute to climate change.
Water Less Often. While this sounds great in theory, you may not be able to fully switch to xeriscaping your yard. If you can’t switch, then check out this Rachio to lessen your dependence on water.
Frugal Green Home Ownership
There are many ways to save money and be more environmentally conscious at the same time when owning a home.
Your home is probably one of your biggest expenses, so it’s important to take measures to conserve energy and save money. Plus there are many ways to reduce the amount of energy your home consumes!
Home Improvement Math. When considering whether or not to make an improvement to your home in order to reduce your carbon footprint, always do the math to see if the improvement will actually pay for itself. Sometimes it will and sometimes it won’t so be sure to weigh all of the options before making a decision.
Downsize Your Home. If you live in a large house, consider moving into a smaller one. This will help you save on your energy bill and make your home more efficient.
Install low-flow fixtures. One way is to install low-flow fixtures, such as showerheads and faucets. This will reduce your energy use and, in turn, your monthly bills. You can also save water by taking shorter showers.
Hang UV Blocking Curtains. By stopping the sun from heating up your house with curtains during the day, you can save on cooling costs in the summer. Using UV blocking curtains is something we did and notice a significant difference in the summer and winter.
Run Appliances with Full Loads Only. Wait until you have a full load of dishes or laundry before running the dishwasher or washing machine. You would be surprised at the amount of energy and water it takes to run those appliances.
Be Reasonable with Air Conditioning Temperature. In the summer, don’t crank up the air conditioning to save on your energy bill. You can also set your thermostat a couple of degrees higher in the summer to save money. Also, you may want to start cooling your house earlier in the day to prevent your AC unit from working overtime and consuming more energy.
Program Your Winter Heating Temperature. In the UK, A/C is not as common as it is in other countries. Central heating is used more often and is set to a lower room temperature for the summer and a higher room temperature for the winter. This is because people want to save on their energy bills.
Open Windows to Cool House. When the weather is nice, open your windows to allow for natural cooling. This is a simple and cheap way to cool your house. Especially after a nice cool thunderstorm.
Buy Energy Efficient Appliances. Energy-efficient models might be more expensive in the short term, but they will save you money in the long run and help reduce your environmental impact. However, these products should only be bought when the older model is worn out–don’t replace something just because it’s energy-efficient!
Replace Windows. On the one hand, it’s a great idea to replace your windows with more energy-efficient models if you’re staying in your home for many years. However, if you plan on moving within a few years, it might not be worth the investment. You’ll need to weigh the cost of the windows against how much money you’ll save on your monthly energy bill.
Get a programmable thermostat. Programmable thermostats are a great way to save money on your energy bill. You can set them to turn off or down when you’re not at home, or during times of the day when you don’t need as much heating or cooling.
Look for Energy Leakage. The typical older home has enough energy leakage that it’s the equivalent of leaving your front door open all year long. You can combat this by installing weather stripping and caulking around doors and windows and adding insulation to your attic. Most utility companies offer an energy audit.
Weatherize your Home. Weatherizing your home is a great way to improve energy efficiency and save money on your energy bills. There are many things you can do this and varies on the area of the world you live in.
Sustainable Frugal Green Transportation
Ditch the Car Completely. One of the biggest expenses for many people is their car. Whether you’re paying for car payments, insurance, gas, or maintenance, it can be a lot of money. You can eliminate this expense by ditching the keys and taking public transportation. Not only will you save money on your monthly expenses, but you’ll also help the environment!
Buy Hybrid Cars. Hybrids cars are expensive but they could help you save money on fuel in the long run – hybrids tend to have lower emissions than conventional cars. So, it might be time to say bye to that beater car.
Drive Less and Play Your Route. Driving less is the biggest way to reduce fuel-guzzling trips. Take it a step further with UPS research on their strategic delivery methods and focus on making only right-hand turns.
Carpool Whenever Possible. carpooling is a much more green choice than driving alone.
Look Into Car Sharing. When you only need a car occasionally, or for short trips, it might be more convenient and affordable to use a car-sharing service. Car-sharing services offer the opportunity to have access to wheels when you need them, and they’re flexible and convenient for short trips.
Invest in Electric Scooter. This mode of transportation is the uber-popular. You don’t need cash for gas, money for registration fees, and completely reliable to get around quickly. Check out the best electric scooters on the market.
Ride a Bike. A commuter bike is much cheaper than a car. Plus you get the added benefits of exercise and no carbon waste. Or upgrade to an E-bike.
Telecommute. If you can do your work remotely, then telecommute more often than not. This will save on transportation costs as well as pollution.
Walk More Often. Plan your day around being able to walk places that take under 30 minutes to get there. Then, it is better to walk than drive. Plus you can hit your 10000 steps quicker. It is a triple for the win – health benefits, free exercise, and fresh air!
Don’t Run Your Engine Unnecessarily. Leaving your engine running unnecessarily while stationary can waste fuel and cause environmental damage. Make sure to turn your engine off when you’re not moving to save money and help the planet!
Drive More Efficient. When it comes to saving fuel, one of the best ways is to drive more slowly and efficiently. This will help you save petrol or diesel and reduce your carbon footprint. For example, slowly put your foot on the accelerate to maintain a speed.
Frugal Green Budgeting Per Month
Choose To Save Rather Than Spend. Every tie you actively choose to save your money rather than spend it. You help the environmental impact. We have plenty of popular money saving challenges to help you save more money today.
Pay Bills Online. When you pay bills online, you can save a lot of time, space, and money. You can also save paper by paying your bills online–instead of receiving paper statements in the mail, you can access them online.
Find Free Things to Do. This one is a win-win for frugality environmentalism. Focus on finding activities from this list of things to do with no money. Many of them are already frugal green wins.
Opt for Paperless. And finally, if you pay your bills online, you may automatically receive discounts on some of your monthly bills! Many companies now charge a $2-5 paper statement to be mailed.
Focus on Financial Independence. This may seem like a crazy idea, but it is true. The more you save, the faster you reach financial independence. In fact, this is with the Frugalwoods decided to be frugal in the first place.
Follow Simple Frugal Living Green Ideas – Way to Go Green
Reduce, reuse, recycle. This old mantra is more important than ever in today’s world. By recycling everything you can, you can help conserve resources and keep waste out of landfills.
Your Mindset is Everything. Just like with anything, if you decide to commit yourselves to become environmentally aware, then you are likely to succeed. You don’t have to become extremely frugal overnight. You just have to remember that mindset is everything in this process.
Turn off electronics when not in use. This includes televisions, computers, and other appliances. By turning them off, you’re conserving energy (and saving money). Plus some older appliances might be fire hazards if left plugged in.
Stop Junk Mail. One way to reduce the amount of junk mail you receive is to go through your postal mail and ask to be removed from lists you’re not interested in. This can be done by contacting the Direct Marketing Association (DMA) or specific companies that send you unsolicited mail.
Grab a Sweatershirt or Blanket when Cold. Instead of automatically adjusting the programmable thermostat higher, you can also save by wearing a sweater or using a blanket. Maybe turn on the fireplace before putting the heating on.
Invest in Renewable Energy. In today’s world, it is more important than ever to invest in renewable energy. There are many reasons for this:
First and foremost, using renewable energy helps to reduce our dependence on fossil fuels, which are finite and contribute to climate change.
Renewable energy also creates jobs and supports local businesses.
And finally, investing in renewables reduces our greenhouse gas emissions, helping to fight climate change.
In the long run, renewable energy can save you money and reduce emissions by providing power more reliably, often more cheaply than a traditional power source.
Are You Ready Live Life Frugal Green?
Living a more frugal lifestyle is good for the environment because it costs less.
It doesn’t take much to make small changes in your life that will have a big impact on the planet. For example, consume less and you’ll be doing the most earth-friendly thing you can do.
There are dozens of ways to save money and be more environmentally conscious which we covered in this post.
Being frugal and being green often go hand in hand.
However, most people lose steam after just a couple of weeks. So, do not attempt to do each frugal green living habit.
Pick your top 3 with the biggest impact.
Add one another 1-3 frugal living tips every month or so.
Over time, you will be surprised to see how easy it is to live frugal green, while also helping you to save money while also protecting the environment.
You can be the frugal green girl or gal with a few of these simple habits. Or choose to follow a frugal blog or frugal forum.
Know someone else that needs this, too? Then, please share!!
Have you ever thought about doing a cash-out refinance on your home for investment?
A lot of people have.
I received exactly this question from a reader.
Reader Question
Hi Jeff,
Thanks for your videos and educational websites!
I know you are very busy and this may a simple answer so thank you if can take the time to answer!
Would you ever consider approving someone to taking a cash-out refi on the equity in their house to invest?
I have been approved for a VA 100% LTV cash-out refi at 4% and would give me 100k to play with.
With average ROI on peer to peer, Betterment, Fundrise, and S&P 500 index funds being 6-8%, it seems like this type of leveraging would work. However, this is my primary residence and there is an obvious risk. I could also use the 100k to help buy another property here in Las Vegas, using some of the 100k for a down and rent out the property.
BTW, I would be debt free other than the mortgage, have 50k available from a 401k loan if needed for an emergency, but with no savings. I have been told this is crazy, but some articles on leveraging seem otherwise as mortgages at low rates are good at fighting inflation, so I guess I am not sure how crazy this really is.
I would greatly appreciate a response and maybe an article or video covering this topic as I am sure there are others out there who may have the same questions.
My Thoughts
But rather than answering the question directly, I’m going to present the pros and cons of the strategy.
At the end, I’ll give my opinion.
The Pros of a Cash-Out Refinance on Your Home For Investment Purposes
The reader reports he’s been told the idea is crazy.
But it’s not without a few definite advantages.
Locking in a Very Low-Interest Rate
The 4% interest rate is certainly attractive.
It will be very difficult for the reader to borrow money at such a low rate from virtually any other source. And with rate inching up, he may be locking into the best rates for a very long time.
Even better, a home mortgage is very stable debt. He can lock in both the rate and the monthly payment for the length of the loan – presumably 30 years. A $100,000 loan at 4% would produce a payment of just $477 per month. That’s little more than a car payment. And it would give him access to $100,000 investment capital.
As long as he has both the income and job stability needed to carry the payment, the loan itself will be fairly low risk.
So far, so good!
The Leverage Factor
Let’s use an S&P 500 index fund as an example here.
The average annual rate of return on the index has been right around 10%.
Now that’s not the return year in, year out. But it is the average based on nearly 100 years.
If the reader can borrow $100,000 at 4%, and invest it and an average rate of return of 10%, he’ll have a net annual return of 6%.
(Actually, the spread is better than that, because as the loan amortizes, the interest being paid on it disappears.)
If the reader invests $100,000 in an S&P 500 index fund averaging 10% per year for the next 30 years, he’ll have $1,744,937.That gives the reader a better than 17 to 1 return on his borrowed investment.
If everything goes as planned, he’ll be a millionaire using the cash-out equity strategy.
That’s hard to argue against.
Rising Investment, Declining Debt
This adds an entire dimension to the strategy. Not only can the reader invest his way into millionaire status by doing a cash-out refinance for investment purposes, but at the end of 30 years, his mortgage is paid in full, and he’s once again in a debt-free home.
Not only does his investment grow to over $1 million, but over the 30 year term of the mortgage, the loan self-amortizes down to zero.
What could possibly go wrong?
That’s what we’re going to talk about next.
The Cons of a Cash-out Refinance on Your Home
This is where the prospect of doing a cash-out refinance on your home for investment purposes gets interesting.
Or more to the point, where it gets downright risky.
There are several risk factors the strategy creates.
Closing Costs and the VA Funding Fee
One of the major disadvantages with taking a new first mortgage are the closing costs involved.
Whenever you do a refinance, you’ll typically pay anywhere from 2% to 4% of the loan amount in closing costs.
This will include:
origination fees
application fee
attorney fee
appraisal
title search
title insurance
mortgage taxes
and about a dozen other expenses.
If the reader were to do a refinance for $100,000, he would only receive between $96,000 and $98,000 in cash.
Then there’s the VA Funding Fee.
This is a mortgage insurance premium charged on most VA loans at the time of closing. It’s usually added on top of the new loan amount.
The VA funding fee is between 2.15% to 3.30% of the new mortgage amount.
Were the reader to take a $100,000 mortgage, and the VA funding fee set at 2.5%, he’d owe $102,500.
Now… let’s combine the effects of both the closing costs in the VA funding fee. Let’s assume the closing costs are 3%.
The borrower will receive a net of $97,000 in cash. But he will owe $102,500. That is, he will pay $102,500 for the privilege of borrowing $97,000. That’s $5,500, which is nearly 5.7% of the cash proceeds!
Even if the reader gets a very low-interest rate on the new mortgage, he’s still paid a steep price for the loan.
From an investment standpoint, he’s starting out with a nearly 6% loss on his money!
I can’t recommend taking a guaranteed loss – upfront – for the purpose of pursuing uncertain returns.
It means you’re in a losing position from the very beginning.
The Interest on the Mortgage May No Longer be Tax Deductible
The Tax Cuts and Jobs Act was passed in December 2017, and applies to all activity from January 1, 2018, forward.
There are some changes in the tax law which were not favorable to real estate lending.
Under the previous tax law, a homeowner could deduct the interest paid on a mortgage of up to $1 million, if that money was used to build, acquire or renovate the home. They can also deduct interest on up to $100,000 of cash-out proceeds used for purposes unrelated to the home.
That could include paying off high interest credit card debts, paying for a child’s college education, investing, or even buying a new car.
But it looks like that’s changed under the new tax law.
Borrowing up $100,000 for purposes unrelated to your home, and deducting the interest looks to have been specifically eliminated by the new law.
It’s now widely assumed that cash-out equity on a new first mortgage is also no longer deductible.
Now the law is still brand-new and subject to both interpretation and even revision. But that’s where it stands right now.
There may be an even bigger obstacle that makes the cash-out interest deduction meaningless, anyway.
Under the new tax law, the standard deduction increases to $12,000 (from $6,350 under the previous law) for single taxpayers, and to $24,000 (up from $12,700 under the previous law) for married couples filing jointly. (Don’t get too excited – personal exemptions are eliminated, and combined with the standard deduction to create a higher limit.)
The long and short of it is with the higher standard deduction levels, it’s much less likely mortgage interest will be deductible anyway. Especially on the loan amount as low as $100,000, and no more than $4,000 in interest paid.
Using the Funds to Invest in Robo-advisors, the S&P 500 or Peer-to-Peer Investments (P2P)
The reader is correct that these investments have been providing steady returns, well in excess of the 4% he’ll be paying on a cash-out refinance.
In theory at least, if he can borrow at 4%, and invest at say, 10%, it’s a no-brainer. He’ll be getting a 6% annual return for doing virtually nothing. It sounds absolutely perfect.
But as the saying goes, if it looks too good to be true, it probably is.
I often recommend all of these investments, but not when debt is used to acquire them.
That changes the whole game.
Whenever you’re thinking about investing, you always must consider the risks involved.
The last nine years have somewhat distorted the traditional view of risk.
For example, the stock market has been up nine years in a row, without so much as a correction of greater than 10%. It’s easy to see why people might think the returns are automatic.
But they’re not.
Yes, it may have been, for the past nine years. But if you look back further, that certainly hasn’t been the case.
The market has gone up and down, and while it’s true that you come out ahead as long as you hold out for the long term, the debt situation changes the picture.
Matching a Certain Liability with Uncertain Investment Returns
Since he’ll be investing in the market with 100% borrowed funds, any losses will be magnified.
Something on the order of a 50% crash in stock prices, like what happened during the Dot.com Bust and the Financial Meltdown, could see the reader lose $50,000 in a similar crash.
But he’ll still owe $100,000 on his home.
This is where human emotion comes into the picture. Since he’s playing with borrowed money, there’s a good chance he’ll panic-sell his investments after taking that kind of loss.
If he does, his loss becomes permanent – and so does his debt.
The same will be true if he invests with a robo-advisor, or in P2P loans.
Robo-advisor returns are every bit as tied to the stock market as an S&P 500 index fund is. And P2P loan investments are not risk-free.
In fact, since most P2P investing and lending has taken place only since the Financial Meltdown, it’s not certain how they’ll perform should a similar crisis take place.
None of this is nearly as much a problem with straight-up investing based on saved capital.
But if your investment capital is coming from debt – especially 100% – it can’t be ignored.
It doesn’t make sense to match a certain liability with uncertain investment gains.
Using the Funds to Buy Investment Property in Las Vegas
In a lot of ways, this looks like the most risky investment play offered by the reader.
On the surface, it sounds almost logical – the reader will be borrowing against real estate, to buy more real estate. That seems to make a lot of sense.
But if we dig a little deeper, the Las Vegas market in particular was one of the worst hit in the last recession.
Peak-to-trough, property values fell on the order of 50%, between 2008 in 2012. Las Vegas was often referred to as the “foreclosure capital of America”.
I’m not implying the Las Vegas market is doomed to see this outcome again.
But the chart below from Zillow.com shows a potentially scary development:
The upside down U formation of the chart shows that current property values have once again reached peak levels.
That brings the question – which we cannot answer – what’s different this time? If prices collapsed after the last peak, there’s no guarantee it can’t happen again.
Once again, I’m not predicting that outcome.
But if you’re planning to invest in the Las Vegas market with 100% debt, it can’t be ignored either. In the last market crash, property values didn’t just decline – a lot of properties became downright unsalable at any price.
The nightmare scenario here would be a repeat of the 2009-2012 downturn, with the reader losing 100% of his investment. At the same time, he’ll still have the 100% loan on his home. Which at that point, might be more than the house is worth, creating a double jeopardy trap.
Once again, the idea sounds good in theory, and certainly makes sense against the recent run-up in prices.
But the “doomsday scenario” has to be considered, especially when you’re investing with that much leverage.
Putting Your Home at Risk
While I generally recommend against using debt for investment purposes, I have an even bigger problem when the source of the debt is the family homestead.
Borrowing money for investment purposes is always risky.
But when your home is the collateral for the loan, the risk is double. You not only have the risk that the investments you’re making may go sour, but also that you’ll put your home at risk in a losing venture.
Let’s say he invests the full $100,000. But due to leverage, the net value of that investment has declined to $25,000 in five years. That’s bad enough. But he’ll still owe $100,000 on his home.
And since it’s a 100% loan, his home is 100% at risk. The investment strategy didn’t pan out, but he’s still stuck with the liability.
It’ll be a double whammy if the money is used for the purchase of an investment property in your home market.
For example, should the Las Vegas market take a hit similar to what it did during the Financial Meltdown, he’ll not only lose equity in the investment property, but also in his home.
He could end up in a situation where he has negative equity in both the investment property and his home. That’s not just a bad investment – that’s a certified nightmare!
It could even lead him into bankruptcy court, or foreclosures on two properties – the primary residence and the investment property. The reader’s credit would pretty much be toast for the next 10 years.
Right now, he has zero risk on his home.
But if he does the 100% cash out, he’ll convert that zero risk to 100% risk. Given that the house is needed as a place to live, this is not a risk worth taking.
Final Thoughs
Can you tell that I don’t have a warm, fuzzy feeling about the strategy? I think you figure it out by the greater emphasis on Cons than on Pros where I come down on this question.
I think it’s an excellent idea in theory, but there’s just too much that can go wrong with it.
There are three other factors that lead me to believe this is probably not a good idea:
1. The Lack of Other Savings
The reader reports that he has “…50k available from a 401k loan if needed for emergency, but with no savings.”For me, that’s an instant red flag. Kudos to him for having no other debt, but the absence of savings – other than what he can borrow against his 401(k) plan – is setting off alarm bells.
To take on this kind of high risk investment scheme without a source of ready cash, exaggerates all of the risks.
Sure, he may be able to take a loan against his 401(k), but that creates yet another liability.
That that will need to be repaid, and it will become a lien against his only remaining unencumbered asset (the 401k).
If he has to borrow money to stay liquid during a crisis, it’s just a question of time before the strategy collapses.
2. The Reader’s Risk Tolerance
We have no idea what the reader’s risk tolerance is.
That’s important, especially when you’re constructing a complex investment strategy.
While it might seem the very fact he’s contemplating this is an indication he has a high risk tolerance, we can’t be certain. He’s basing his projections on optimistic outcomes – that the investments he makes with the borrowed money will produce positive returns.
What we don’t know, and what I ask the reader to consider, is how he would handle a big reversal.
For example, if he goes ahead with the loan, invests the money, and finds himself down 20% or 30% within the first couple of years, will he be able to sleep at night? Or will he instead contemplate an early exit strategy, that will leave him in a permanent weakened financial state?
These are real risks that investors face in the real world. At times, you will lose money. And how you react to that outcome can determine the success or failure of the strategy.
This is definitely a high risk/high reward plan. Unless he has the risk tolerance to handle it, it’s best not to even start.
On the flip side, just because you have the risk tolerance, doesn’t guarantee success.
3. Buying at a Market Peak
I don’t know who said it, but when asked where the market would go, his response was “The market will go up. And the market will go down”.
That’s a fact, and one that every investor has to accept.
This isn’t about market timing strategies, but about recognizing reality.
Here’s the problem: both the financial markets and real estate have been moving up steadily for the past nine years (but maybe a little bit less for real estate).
Sooner or later, all markets reverse. These markets will too.
I’m worried that the reader might be borrowing money to leverage investing at what could turn out to be the absolute worst time.
Ironically, a borrow-to-invest strategy is a lot less risky after market crashes.
But at that point, everyone’s too scared, and no one wants to do it. It’s only at market peaks, when people believe there’s no risk in the investment markets, that they think seriously about things like 100% home loans for investments.
In the end, the reader’s strategy could be a very good idea, but with very bad timing.
Worst Case Scenario: The Reader Loses His Home in Foreclosure
This is the one that seals the deal against for me. Doing a cash out refinance on your home for investment is definitely a high-risk strategy.
Heads you’re a millionaire, tails you’re homeless.
That’s not just risk, it’s serious risk. We don’t know if the reader also has a family.
I couldn’t recommend anyone with a family putting themselves in that position, even if the payoff were that high.
Based on the facts supplied by the reader, we’re looking at 100+% leverage – the 100% loan on his house, then additional (401k) debt if he runs into cash flow problems. That’s the kind of debt that will either make you rich, or lead you to the poor house.
Given that the reader has a debt-free home, no non-housing debt, and we can guess at least $100,000 in his 401(k), he’s in a pretty solid situation right now. Taking a 100% loan against his house, and relying on a 401(k) loan for emergencies, could change that situation in no more than a year or two.
A while ago, my wife and I did what we do from time to time — ask if there’s another cost-saving opportunity we’ve overlooked. I don’t know about you, but the quest for fiscal prudence is generally at its highest in our household after some indulgent purchase. “Hey, look! We can compensate for this luxo-foobie by slashing costs here!” (Are we the only people who do this?)
The indulgence in question was an iPhone. My trooper wife had been braving modern civilization with a dumb phone. (Someone from the ’80s would have called a slim, foldable phone which sends text messages anything but dumb, but that’s a different subject.) It worked fine and was cheap, but, well, even it began to show signs of age. Cell phones not being fine wine, I decided to surprise her with an iPhone, to heck with the cost. She did not resist.
Soon, however, guilt replaced the excitement, prompting the aforementioned introspection.
CBS’s long-running show, Two and a Half Men, brought us 12 seasons of laughs at the expense of its fairly unique characters — jingle writer Charlie Harper who leads a hedonistic, carefree life, his ‘good-for-nothing’ brother, Alan, and quirky nephew Jake — who all lived together in Charlie’s Malibu mansion. Season 9 brought about a […]
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