Mutual Fund Or A Bank For Your Money Market?

What's up everyone!  So I was asked over email, "What is the difference between a money market fund and a money market account?"  The person who emailed me wants to do better than keeping his money in a traditional savings account without too much risk.  Okay, so to answer this question I'll start by saying that both of these financial instruments (let's call them) are fairly safe places to put your money, but other than their names both starting with "money market," they're not at all alike.

Money Market Fund

A MMF is actually part of the mutual fund family.  It's one of the safest types of mutual funds.  Like all mutual funds, you can buy shares, pooling your money with other investors and benefiting from a performance upside in proportion to the number of shares of the fund you own.  With the stock market getting ready to pull back...some say a major correction will happen within the next two years, this is a good time to be placing some of your market profits in safe yield like MM mutual funds.  Depending on the goal of the fund, MMF managers will buy and sell assets like,

1.  Agency Securities issued by government agencies or by government-sponsored organizations.
2.  Bankers' Acceptances.  These are commercial notes guaranteed by a bank.
3.  Certificates of Deposits.  These are usually large-denomination and negotiable CDs sold by both U.S. and foreign commercial banks.
4.  Treasury Bills and Notes i.e. Government debt.
5.  Repurchase Agreements.  These are your basic buy-sell deals where the mutual fund buys securities with an agreement that the seller will buy them back in a quick turn-around fashion (within a week) at a price that includes interest.
6.  Corporate debt with short maturities.

As you can see, these are basically all "money market" securities with minimal credit risk (default is rare).  MM mutual funds don't buy stocks!  They're also NOT FDIC-Insured, but this is really a non-issue because of how relatively safe these investments are.


What Type of Investor Should Own A MM mutual fund?

1. Beginning investors who want to test the waters before diving into bond or stock mutual funds.
2.  Investors that switch investments as interest rates rise and equities become overvalued.
3.  Investors with an investment goal with a short time horizon that would rather not be stuck selling their investment at a loss when they need the money.  
4.  Investors who need their money to be liquid and still make some money from interest payments.  For example, your emergency fund can be held in a MM mutual fund.
5.  Investors who plan on writing checks against their account.  A MM fund will allow you to write as many checks as you like, with $150 to $500 being the minimums per check quite often.

Here's the catch.  MM mutual funds have fees and sometimes even a sales load that could offset any money you earn.  Plus you may have to make a minimum investment at first.  You need to read the prospectus of any MM mutual fund you are interested in.  To offset fees, some investors buy shares of Tax-Exempt MM funds.  Depending on the fund, you can be making money (from dividends paid to you) that is exempt of your state's income taxes or federal income taxes.  Heck...sometimes exempt from both!  Shop around.  People in states with high income tax rates (California, New York, e.g.) are better off investing in tax-exempt MM funds.  For reference, here is a list of taxed and tax-exempt MM mutual funds offered by Vanguard.  Notice their expense ratios and yields.


Money Market Accounts

Okay, so MM accounts are basically glorified savings accounts.  You can go online or to your bank and get a money market account set up in less than an hour.  These are bank accounts that offer higher interest rates than a regular savings account.  Banks are essentially doing what MM mutual fund managers are doing, investing in low-risk, high credit, short-term "money market" securities.  

Your deposits are FDIC-insured so they are the least riskiest of all investments.  The interest rate or Annual Percentage Yield (includes compounding interest) will depend on whatever the bank wants to offer.

Some MM accounts have monthly minimum balances.  The best ones don't.  Also, the best MM accounts will allow you to write more than three checks per month to third parties.  Right now, a total of six transactions is the limit and law for all MM accounts.  MM accounts come with a debit card, and you can easily transfer money between this account and your other accounts, like checking.

MM accounts are great for people that,

1.  Want a place to park their kid's tuition money temporarily until the next quarter or semester.
2.  Need a place to keep their money for future tax payments (like your property taxes or other business taxes you know you'll need to pay).
3.  Need to build an emergency fund.

I've taken the liberty of finding you an article where you can have at your disposal the best MM accounts for 2017.  Here it is.

Well, that's all I got for today folks.  I hope you've learned the difference between MM funds and accounts and have a better grasp of which one is more suitable for your financial goals.  Thanks for reading!

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Being In Love With Grades Can Lead To A Bad Financial Decision, College

Let me ask you something: Are high schools in the U.S. college preparation environments?  Yes?  What if I told you that they're in fact NOT where teens go to become prepared to succeed in college?  High schools in America are where teens go to get "accepted" into college.  Big difference.  You see, according to the National Assessment of Educational Progress, also known as the "Nation's Report Card," only about one-third of high school seniors were prepared for college-level coursework in math and reading in 2015.  What this means is that 66% of high school seniors have done everything according to plan, keeping great attendance, behavior, and most importantly, grades, but still aren't college ready!

That's a lot of unprepared kids, isn't it?  So one of the biggest lies in all of schooling also happens to be the biggest selling point of all high schools: "We offer a wide selection of college prep courses."  Unfortunately, high schools give teens a false sense of superiority or of being "special" when in fact most seniors who get accepted into a university are quite average.

Here's more perspective.  According to a USAToday report, nearly half of graduating seniors from the class of 2016 were "A" students, yet SAT scores are on a downward creep.  What's going on?  There is obviously a huge deviation between grading and what the Scholastic Aptitude Test assesses.  You already know grades are subjective measures of performance at best.  Unfortunately, teenagers fall in love with them.  Many teens live to get A's and are crushed when they get an A-.  Some have parents who'll go all the way to the school board to have their teen's A- be changed to an A to ensure Johnny gets into Stanford.

Ready for some more disappointment?  Many students attribute high marks to intelligence.  Over the course of my career as a teacher, I've heard many teens say out-loud, "I got an A in...I'm so smart!"  Yet, we know intelligence and grades have practically zero correlation.  Having what would be considered stellar grades (3.8 g.p.a and above) makes a teen at most a stellar "student."  The worst part of it is that many teens become complacent, doing the bare minimum to earn their high g.p.a.  I have to burst their bubbles.  When they say out-loud, "I love my grades," I reply, "You mean, you love the grades you're getting at this school."  I then explain to them that there are over 21,000 public and over 10,000 private, high schools in America and each one of them will have a Valedictorian.

     

The best schools are the ones that offer the most Advanced Placement (A.P.) courses.  There are two benefits of taking Advanced Placement courses.  One, your teen student gets to see what they are truly made of.  If they pass the class with a B or better, and pass the A.P. subject test at the end of the year, they are probably ready for college.  Two, students who take their respective A.P. test and pass will have earned college credit on the cheap.  Just think, if your teen takes an A.P. Calculus AB test and passes, they don't have to take a quarter of calculus in college! Savings galore.

Enrolling at a 4-year college may not be the best option for certain teens and their families.  The telltale signs of a student who may be best suited for a two-year college after high school are:

1.  Great grades, but poor SAT scores

2.  Few if any A.P. courses taken

3.  Poor performance on entrance exams

Some teens who fit the bill enroll at a 4-year college anyway and are stunned when their midterm grades come out.  Some will correct and work harder, swimming, while many more will not come to terms with their shortfalls, do nothing, and sink.  Aside from a lack of money, the inability to keep up with the rigor has to be another reason for America's huge college dropout rate crisis.

In my latest book I champion falling in love with effort instead of earned grades.  I use the following example to make my case that effort is more important.  If two students in the same class both earn an A, but one does the minimal amount needed while the other works her tail off, who is winning?  The one who is learning the role of effort in life clearly will win in the end because the natural will hit an eventual plateau and not risk trying for fear of failure.

Is your student in love with his/her grades?

Are they content in earning high marks, pushing themselves only insofar as it keeps them in the top 50 of their high school ranking?

Wake them up!  Tell them they are but tiny fish in all of the earth's oceans.  Don't let their inflated egos convince you, mom or dad, of paying any amount of money for attendance at a 4-year college.  Have them prove themselves at the local Junior College first.

Thanks for reading!  

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4 Reasons Why Latinos Don't Get Life Insurance

So I'm on day five of our 7 day family vacation that included a two-day stay in Los Osos-Morro Bay CA.  Currently typing this post up at my parent's condo in East San Jose.  It's been a few years since last the Gomez family visited the Bay Area.  It's always cool to see how much things have changed.  What's changed about San Jose?  1) More traffic  2) New shops and businesses replaced those that failed during the Great Recession 3) More new home construction everywhere and 4) Home values are even more unaffordable than ever before.  But I'm not here to talk urban sprawl and real estate bubbles.

View from my retired friend's house where we stayed, Los Osos, CA.

I'm here to talk why Latinos don't purchase life insurance.  You see, being here with my parents has given me time to talk face to face with them about their finances.  My dad is open to sharing how hard it is becoming for him to afford the mortgage.  Helping my two Millennial siblings out with car insurance and the occasional bill is part of his problem.  Also, my younger brother lives at home and isn't putting in his fair share.  Now 64 (dad) and 60 (mom), my parents worry about leaving all of us burdened should they die unexpectedly.  And they should, considering neither of them have life insurance!

Farmer's Market in Baywood.

A study conducted by the nonprofit LIFE Foundation and LIMRA in 2013 concluded that only 54% of "Hispanics" owned a life insurance policy.  In contrast, 76% of African Americans and 62% of whites had policies at the time of the survey.  I really doubt much has changed in 4 years.  So we can probably safely say that Latinos still lag in life insurance policy consumption.  The question is...Why?  I have some researched answers taken from Spanish speaking sites as well as thoughts of my own on this.  This one in particular had a lot of great insight.  It said that "Hispanics"...

(For the record...we don't like the word "Hispanic."  We prefer Latino or the gender neutral term Latinx)

1) They don't "get" life insurance.  In other words, if you were to ask some Latinos to tell you what they know about life insurance, many of them would say, "Que es eso?" with a puzzled face.  Clearly there is an education gap that must be closed if consumption of life insurance products are to happen.  They need people to take them through the basics, from what they are to how they can benefit.

2) Cuanto cuesta?  (How much is it?)  Many Latino families, alike all other American families, prioritize other financial expenses (medical bills, retirement savings, etc.) over life insurance.  When I asked my dad why he never got life insurance, he said, "O pago, o como."  Translation: I either pay or I eat.  He said he couldn't find a policy he could afford.  This is a big misconception among Latinos that know about life insurance.  They believe it's costly when under the right situation, term life insurance policies can be bought for under $50 a month.

3) Trust.  Many Latinos, especially first or second generation, still mistrust anyone associated with the financial system.  Remember what happened to Latinos during the Great Recession?  They got burned in droves and many among them lost their homes.  All because they had very little understanding of how subprime home mortgages worked and they were easy prey for lenders.  An interesting finding from the LIFE survey was that 14% of Hispanics purchased life insurance online versus only 7% of whites and 8% of African Americans.  Could it be because they trust what's in writing more than what someone tells them face to face?

4)  Not enough talk of death.  To this day, my parents haven't told me how they want to be put to rest.  I don't know if they want to be buried here in San Jose or back in Mexico where they were born.  Heck, I don't even know if they want to be buried!  They may want cremation.  My point is that many Baby Boomer Latinos don't talk with their generation X or Millennial children about death in general.  Planning for the unexpected is obviously very important and sure, we Latinos are known to be a happy group (fiesta!!) so talking up a depressing topic may not be our style, but we can leave ourselves in serious financial peril if we don't take care of our business after life.

A term life insurance has many benefits.  If you have a policy and you should die unexpectedly, your beneficiaries can use your money to,

A.  Pay off your mortgage.
B.  Cover your burial or death related costs.
C.  Have an inheritance.
D.  Replace your income.  Your wife and kids won't have to deal with all of the bills without you.  

Latinos, we need to do better!  You can't live in America and not have a life insurance policy.  The risk of death any day is real and not being insured can be financially life threatening to your familia.  We're all about the family and working our butts off in life to make sure our kids have what they need, but we are leaving out accounting for one key event.  Do yourself and your family a huge favor, give them peace of mind, and get life insurance.

Thanks for reading. 

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Summer, Kids, Money & Hostage Negotiations

"Become a teacher," they said, "you'll get your summers off."  Well, folks, teachers don't get their summers off when they have small children, and that goes for all stay-at-home adults.  You see...little kids are like terrorists.  They have one mission during summer vacation: Fun!  They don't care what you, the parent, have to do on any given day of the week.  In fact, they don't even care that you have to use the bathroom from time to time.  If you don't meet their demands, they'll be hell to pay.

Brain Freeze!

So this month I convinced my wife, Jessica, to allow me to take out both our children from part-time pre-school/daycare.  My kids were going twice a week, on Tuesday and Thursdays, 8:00 a.m. to 6:00 p.m.  These days coincide with my wife's 2-day a week work schedule as a dental assistant.  I was thinking that it made no sense to spend $600 this month when 1) I'm at home anyway and 2) We're going on a week long road trip to central and northern CA.  Tuesdays and Thursdays in mid to late June were pretty darn sweet for me.  I'd drop off the kids and have the whole day to myself.  I went on some long road bike rides, wrote more blog posts, and even published my latest book.

The first Tuesday I had alone with the kids was okay.  I took them to the park, the library, and ice cream.  We have a favorite ice cream shop.  It sells Mexican style ice cream.  Not only is it full of unique creamy and water-based flavors, but it's also cheaper than Cold Stones or Baskin-Robbins.  For $5 dollars, I can get two, one-scoop cups, and one, two-scoop cup.  Providing my kids with opportunities for physical activity and mental stimulation, without breaking the bank, was proving to be an easy task.  Until week two.

Yesterday, I had to go to Costco.  The wife wanted some salmon for dinner.  So I tell the kids what's on the agenda for the next couple hours.  My daughter, "Can we go to Trader Joe's?"

Me: No, I don't have to buy anything from there.  Both of you (my son was next to her) go get dressed.
My daughter: But I want to go to Trader Joe's!
Me with a stern voice: I need to go to Costco to buy salmon.  There's nothing I need at Trader Joe's.  Please go get dressed.

My son chimes in.  He just turned 4.

Son: No, daddy!  I'm not getting dressed unless you take us to Trader Joe's!

Pushing the small carts and getting a free lollipop was why they wanted to go to TJ.

There was no winning.  I agreed to their terms and took them to Trader Joe's if they agreed not to ask for anything at Costco.  Has this ever happened to you?  Are you currently being held hostage by your kids?  Do you have to constantly be in fear of being discovered every time you crack open your laptop, or sneak into the bathroom?  If so...you are not alone.  Seek immediate help.

I have great kids.  They prefer playing to watching television.  That's a good thing, except...they always want me to join them.  It's like I'm part of the club.  So I play with them until I tire out.  Occasionally I read to them, give them cleaning "challenges," and even give them family science lessons with items in my kitchen or from their toy collection.  Last Monday Jessica and I took them to the mall.  A kiosk vendor had set up several iPads and chairs at kid eye level.  My kids ran to them.  (We have an iPad 2 at home).  What was loaded on the iPads?  ABCMouse.com.  I'd seen their commercials and had even tried to load it at home.  But upon seeing the price tag, I'd decided not to.

Getting a tour of the app made all the difference.  I really liked the various learning games and other activities that came with the app.  I also liked that you can build avatars for your kids and put their quest challenges at their age level.  I decided to give it a go.  Cost: $7.95 a month.  It amounts to another hour of adult time for me every day I have the kids all to myself.  And, another way my kids can learn during the summer.  (Note: I'm not getting paid to promote the app).

Some parents are willing to pay up to have their children experience busy summers.  You can pay for summer camps at the YMCA or other organizations, swimming lessons, camping trips, or just take your kids on multiple vacations.  For those that can't afford it, or who perhaps want to live more frugally, there are options like:

1) The park
2) The library
3) Play dates
4) The pool at a friend's house
5) Local gardens that only charge for parking
6) Museums
7) Small aquariums
8) Baby Zoos

Was taking them out of daycare/pre-school worth it?  

Despite it all, I'm enjoying the days with my children.  We're about to go on our road trip and the money we saved from not having them at pre-school will go far to pay for gas, and entrance and food at the S.F. Zoo.  You have to make hard decisions when it comes to money.  These decisions are even more complicated when kids are involved.  If you must make a money decision that will impact your kids, be prepared.  Don't wing it like me.

Thanks for reading!  Until next time.  
        

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Survey Finds Americans Still Misunderstand Credit Cards, Credit

Credit cards and credit is not rocket science, but for many Americans, it may as well be.  A recent survey of 1500 Americans with credit scores under 640 ("Fair" to "Very Poor") by U.S. News produced some alarming findings.  Most Americans will agree that many among us misuse credit cards.  In 2016, the U.S. Census Bureau and Federal Reserve's data reported that the average credit card debt (for households that use credit cards and carry a balance) was a whopping $16,048!  But America's plastic problem actually begins well before people's first purchase with a spanking new card.

U.S. News' survey discovered that 35% of people with bad credit don't even take the time to research before applying for a credit card.  Why?  Lack of financial literacy was cited.  I agree with this, of course, and I'm conjecturing here, but could it also be that many Americans don't like to read?  Or maybe they see the act of shopping and comparing credit cards online as a waste of time?  Too boring?  Laziness?  Whatever the case, it's outright deadly to your finances not to look for your best credit options.

Look, you must at minimum seek out three specific items from an application for a credit card: 1) The Annual Percentage Rate or APR, 2) Charges you can expect for any late payment or for going over your credit limit, and 3) If there are any annual fees for membership.  Write this info down somewhere and keep it handy as you size up other cards.  What if, because of your credit score, all of the credit cards you can choose from offer the same or a similar APR, charges, and fees, meaning, it's like a tie?  Now it's okay to consider things like loyalty points, rewards, and cash back perks.  Don't choose a credit card with fancy gimmicks at the expense of higher interest charges or fees!

Another alarming finding in the U.S. News survey is that almost one-third of respondents aren't even trying to improve their credit score.  Meanwhile, 20% of respondents don't even know where to begin to improve their score.  If you were to ask Americans randomly, How do you go about improving your credit score?, what do you think they'd say?  Giving my fellow Americans credit, pun intended, I think many of them would say, "Paying off all of my balances!"  This would be an acceptable response, but it would demonstrate the lack of understanding about how credit works and how credit scores are determined.

U.S. News' guide recommends you look over your credit report at least once a month, and provides CreditKarma.com or CreditSesame.com as alternatives to paying for this service.  Just note, these sites will require some of your personal info and they only give you what's called an "educational" credit score.  This is in essence a simulated score that is calculated in much the same way that FICO does it.  So don't rely on it!

Let me give you a little story about why it's important to thoroughly review your credit report often.  When I was applying for my very first home mortgage, way back in 2002, the good people at Bank of America almost denied me a decent mortgage rate and wanted me to pay a point (fees paid to reduce my rate) because I had too many outstanding balances on my credit report.  Come to find out my father had made his way into my credit report.  We share the same name (I'm a Jr.), but obviously not the same social security number.  Still, there were his unpaid credit card balances ruining my chances at an affordable mortgage.  I disputed these errors and in due time all was well, and I moved into a townhouse in San Jose that year.  Moral of the story, view your credit report often and dispute any error or false information.

Unfortunately, using high interest rate credit cards to pay for monthly expenses has become normalized in America.  Many Americans fall short every month and use their credit cards to cover the gap, piling on debt just to stay afloat.  This type of existence becomes a new reality where people stuck in it don't see the truth: they are living above their means.  The solution, either making some serious cutbacks or finding ways to make additional income, becomes "too hard."  The irony of it all is that using credit responsibly will lead to people earning a better credit score which in turn will lead to people qualifying for credit cards with better rates, saving more money every year.



How can you start rebuilding your credit using credit?  If you're struggling to even get a credit card, one way to rebuild or repair your credit is to use an unsecured card for subprime borrowers or a secured card.  U.S. News recommends First PREMIER Bank Credit Card (unsecured, at 36% interest rate) or First PREMIER Secured Bank Credit Card (19.9% with a $200 security deposit).  Both of these cards provided by the same bank come with hefty fees, but that's the price you'll have to pay to move up in the world, so to speak.  When evaluating cards if you have bad credit it's even more important to be extra diligent.  Find a card that works for your situation, factoring in when your check comes in, what type of purchases you need to make using credit, and how often you expect to use your card.

There's no excuse for failing to make sense of credit cards or figuring out how credit works.  The 8th graders I teach each year learn and apply Newton's Three Laws of Motion, so I know that as adults, you can all easily handle a simple credit card application.  Until next time!                         

Car Title Loans In San Antonio And Texas

Let's face it...there's no state in the union like Texas.  My love for the Lone Star State began in the city of El Paso, the first U.S. city I set foot on.  Every time I travel to Texas, and I've also been to Houston and Dallas, I feel very much at home.  The cowboy hats, the boots, and other Western attire people wear regularly in Texas...well, that brings a smile to my face, being born in Chihuahua, Mexico.  Unfortunately, here in California, you're more likely to see shorts, tanks, and flip-flops.



Two major cities in Texas I still have to visit are San Antonio and Austin.  I've heard great things about the River Walk and Austin's food carts.  Well, this post isn't all about Texas tourism and its nuances.  I'm actually here today to talk title (car) loans in San Antonio and Texas.  I'll be breaking down this topic as comprehensively as I can, to give you the ins and outs of this financial process.

First, a "title loan" is a short-term (30 days), potentially high cost, secured loan (because your vehicle is the collateral).  People who are in dire straits, needing for example, cash to pay their rent, a medical emergency, or an unexpected and must fix repair are the most likely consumers of title loans.  Why?  Perhaps they've tried to get loans conventionally from their local bank/credit union and didn't qualify on the basis of low income, bad credit, or both?  Perhaps they didn't have the luxury of time to go through with a loan application from a bank, meaning, they needed cash urgently?

So how does a title loan work?  Nowadays you can provide all of your pertinent information about your car online and get an estimate amount of what you can borrow.  In other words, the process has gotten a whole lot easier.  You can expect a lender to give (qualify) you as much as half of your car's value and sometimes, depending on the lender, you may qualify for more.  As a consumer, you are entitled to a full breakdown on the loan terms.  This includes being told exactly how much in "prepaid finance charges" you'll have to pay upfront.



You can expect to pay a high Annual Percentage Rate (APR) for your loan.  Typical APR(s) for a title loan can be anywhere from 300-400%.  Bad?  Yes, especially if you don't pay-off the loan when it's due, meaning, like in 30 days!  You should be expecting to get paid from work (or another source of income) enough money to pay off your loan in the allocated amount of time.  Think about your title loan like a credit card payment on steroids.  You wouldn't want it to get out of control.  The finance fees include simple interest that you'll be responsible for in addition to the loan principal.  So please make an effort to understand every fee you're responsible for.  The last thing you need on your plate is your car repossessed.  Yes, this is the ultimate risk with these types of loans.  Although you get to walk out with money AND your car, if you don't pay anything and don't communicate, expect a repossession.

What if you can't pay off the loan in full when it is due?  Please go back to the lender and have a heart to heart talk with them.  They may allow you to refinance, meaning, the loan will be renewed and you'll have to pay another fee to start the process again, albeit under different terms.  This isn't what you want, of course.  If you have to refinance more than once, you probably shouldn't have ever taken a title loan out.

STATISTICS TO BE AWARE OF    

1 out of 5 auto title loans result in a car being repossessed (Source: Consumer Financial Protection Bureau, or CFPB, 2016)

Approximately 2 million Americans take out an auto title loan each year (CFPB, 2016)

In Texas, you can expect to pay about $23 for every $100 of borrowed funds.

My Advice

I'd like for you to first exhaust all of your possible options for fast and easily accessible cash before going to a title lender.  Note: A Payday lender is not one of them.  This means talking with family, close friends, and even buying yourself more time somehow so you can apply for a conventional loan with more favorable borrowing terms.  Only after you have exhausted all your options should you consider taking out a title loan.

Make sure that your lender is up front and gives you the exact APR that you'll be paying.  This is the interest rate you'll pay if the loan were to be carried through a whole year.  Don't just let them give you the monthly interest rate because this doesn't include any additional fees and charges.  Also, read the fine print.  I can't stress this enough.  People got bad home loans in the early 2000's because they weren't reading any of the print and we all know how that turned out.  Lastly, before taking any action, look to see if your city in Texas has passed any ordinances or regulations that are favorable to consumers.  You want to know when lenders are crossing the ethics line, right?

Well, I know many of you are hurting out there.  No matter how tough it gets, don't lose your head.  Keep making sound financial decisions for you and your family.  Thanks for reading!

Disclosure: This is a sponsored post, meaning I'm being paid to write it and to provide links for Texas-titleloans.com/San-Antonio.

My Rental Property Refinance Fail

If you haven't been paying attention, it's a great time to refinance!  30-year mortgage rates are still very low, and property prices have risen considerably.  If you bought a home during the 2009 crisis, well...congratulations!  You are probably sittin' pretty right about now with a ton of equity.  Still, this doesn't mean you should refinance your property, i.e., get a new 30-year mortgage.

If you have a rate above 5%, refinancing to a lower rate makes perfect sense.  If you're scared to take cash out from refinancing, you don't have to, just be prepared to either pay up front for the process, or use some of your equity to pay for the added points to bring you near a 4.0% rate, 4.0+% APR.  But at least this way you get your lower rate without bringing cash to the table.

I'm a big proponent of doing cash out refinancing for investing in more real estate.  My conditions are sound: 1) Make sure you can capture a lower interest rate than the one you have currently and 2) Make sure there's enough equity so you don't have to pay for any refinancing fees, other than the appraisal and 3) Make sure your new mortgage still keeps you at 30% of your income going to housing and 4) Make sure you get enough cash back to put it to work immediately...no sense in keeping cash in an account losing value.

Well, I had met all of my refinancing conditions this past month (June) and had a sweet deal planned out for my cash back money...I was going to buy a half-acre lot in Nevada in an up and coming city and with my father-in-law, build a spec home to sell.  In mid June, I started the refinancing process.  Here's what I did,

I went online to Lendingtree.com.  I called their number.  Within minutes I had a Loan Originator that was licensed to operate in the state of Mississippi, De Soto County where my rental is...a few minutes drive to Memphis, TN.  He gave me some preliminary numbers and potential outcomes given my conditions.

I also talked with Chase bank because they currently own my mortgage.  The loan originator gave me similar numbers.  Ultimately, I decided to go with the loan originator referred to me by Lendingtree.  His name is Christian Robinson...great guy.  Christian works for Amerisave.com.  I was dreading having to go through the paperwork process, but things have changed dramatically since I last applied for a mortgage, 2013.

Christian gave me a link to his Amerisave.com page and guided me from point A, creating an account and login, to point Z, the last questions about my qualifications.  It took us at least an hour to get through it together, but he stayed on the line the whole time.  On the rates page, I had to make a choice.  I could buy one or two points at $3K a pop and get my rate down to 4.0%.  Or I could not pay any money (other than the appraisal fee) and lock in a rate of 4.75%, 4.9% APR (not the same as the monthly rate).  I chose the no money to close option.  My new mortgage and principal payment would increase by $37, so instead of paying $680 a month (this includes taxes and insurance), I would be paying, $717 a month.  I collect $1,050 a month on this property so as you can see, I'd still be cash flowing.

More importantly, at a stated valuation of $133K, I'd be getting a cash out check of $21K at closing.  Not bad, huh?  I had to provide Christian what I thought the property was worth.  I looked at both Zillow.com and Redfin.com and the property's valuation ranged from $125K to $138K so I thought $133K was conservative.  After completing the online application, I was given a list of documents I needed to upload to the server at Amerisave.com.  These included my W2's from the previous two years, 2015 and 2016 tax returns, lease agreements for my rentals, proof of insurance for my rentals, my personal residence's proof of insurance, property tax statements, and the list goes on.  I had at least 20 documents to upload.  Luckily, I had many of these already in PDF.  Those I didn't have, I found hard copies and scanned into PDF format.

It only took me about 2 hours to upload all of the requested documents, but that's because I knew where everything was.  Note: You should PDF all of your tax returns, W2s, and pertinent documents.  You never know when you'll need to apply for a conventional loan.

After docusigning some last minute documents, all that was left was to authorize a home appraisal online by providing my credit card information.  The appraisal cost was $575.  Christian looked over my documents and verified my income.  Once my income was sufficient to handle the new loan amount/monthly payment, he sent the paperwork to his Underwriter.  Quote Christian: "You were so fast getting all of these docs in that closing should be sometime in mid-July."  I was sooooo excited!  Here comes the money, I thought.

My wife, Jessica, and I were already writing up the offer document to the lot owner in Nevada.  The appraiser contacted me and asked about access to the property.  I told him I'd contact the property management company and make sure he'd get full access to the property.  I even told him how much we would appreciate (hint, hint) if the property appraised at $133K.  He laughed, getting the hint.

5 days later, because that's how long it took the appraiser to do the report, the underwriter called me with the bad news.  My rental property appraised $19K under the stated value!  What the heck!!  It didn't make any sense.  So what happened here?

Lessons I learned

For starters, appraisers are using criteria that is black or white, no more of this fluff we used to have in the good 'ol days.  Appraisers are now the "deal" gatekeepers of every homeowner, homeowner to be, and investor.  Be even more conservative with your numbers.

I also learned that sites like Zillow.com and others can't be trusted.  In fact, if you search your property on all the available sites that value homes, I guarantee your property's value will be all over the place.  You'll be lucky if two sites match up.

I spent $575 out of pocket for this roller coaster experience, and I can tell you that I didn't like the ride, my friends.  However, I did like how much easier it is now to apply for a mortgage.  I don't want to discourage any of you.  It's a great time to refinance to a lower rate and get cash out to invest with.  Don't let my fail moment get your own hopes down.  Refinancing is worth the shot!

Thanks for reading.  Until next time.          

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