The Avalanche Strategy for Student Loan Repayment

On the topic of financing your first home, its important to practice sound financial principals when paying off any large amount of installment debt. One obvious form of installment debt that comes to mind is student loans.

It’s becoming more and more apparent that college graduates are sinking farther into debt. The “Project on Student Debt”, a nonprofit independent research and policy organization dedicated to making college more available and affordable to people of all backgrounds, estimates that 37 million Americans have outstanding Student Loan debt. When you factor in the fact that the average amount of debt for each borrower is somewhere between $24,000 and $28,000, you come to find that the total amount of outstanding student loan debt is about $1 Trillion! This is a staggering number that will undoubtedly continue to grow. It’s also a scary number when you consider we are living in anything but a “stable” economy.

Student Loans can be quite intimidating when you are first starting out on your own. I personally found there to be very limited resources pertaining to how to go about paying back your loans. Lenders offer several different options to help you afford your loan payments. However, one should be weary about doing anything other than paying back using the “standard repayment plan”. At the onset, it might be tempting to defer your loans to the future. But this will lead to a longer repayment period and ultimately more money paid in interest. In this post, I’m going to explain a very simple strategy that will allow you to take control of your student loans, accelerate your repayment, and minimize the amount you pay in interest.

The Avalanche

The Avalanche is nothing more than a repayment strategy that stresses the importance of eliminating your high interest loans. The strategy takes advantage of small supplemental (or “snowball”) payments to speed up your repayment process. Here’s how it works:

  1. Set up your loan accounts to automatically pay the minimum amount each month. Not only is this a good practice to make sure your loans get paid on time, but almost every lender will offer some sort of interest rate reduction for setting up automatic payments. All of my loan accounts reduced their interest rates by 0.25% just for setting up auto pay. You can sleep easy knowing you won’t default on your loans, and you ultimately pay less in interest. If you have not done this yet…do it now!!
  2. Determine a certain amount of money you can dedicate toward a “snowball” payment each month. The key here is that you allocate something. It does not have to be a huge amount! If you can afford your minimum payments…you can afford to make an snowball payment. Whether its $5, $25, $50, $100….it will benefit you in the long run by accelerating repayment and minimizing interest. Start small and increase if you can.
  3. Automatically transfer your monthly snowball amount to your highest interest loan. No matter what you hear, it is simple fact that paying off your highest interest loans first will minimize your interest and total repayment time. You get charged interest for every single day you have a loan outstanding (Even weekends!!!). The total amount due to your lender actually increases by the day. At one point in time, I was racking up more than $20.00 per day in interest. That means that just by doing nothing…I was “spending” $20 every day. That is why it is absolutely crucial to eliminate your high interest loans as fast as possible. This will limit your daily interest expense and speed up your repayment.
  4. Reduce your Minimum Payments -> Increase your Snowball. After you eliminate your highest interest loan, your total monthly minimum payment will decrease. This does not mean you should pay less each month toward your loans! You should continue paying your current snowball + the savings on your lower minimum payment toward your next highest interest account. This means your total monthly contributions to your loans remains the same…but that contribution is more impactful. This has the effect of “increasing” your snowball or additional payment toward your loans. The “Avalanche” effect is what allows you to accelerate your repayment. As you continue to knock out your high interest loans, your snowball increases and your repayment gets faster and faster.

Let’s see how it works!

In the following example, the borrower has 4 different loan accounts all with different minimum payments and interest rates. His total minimum monthly payment is $1,232.52. Based on his income and spending habits, he decides that he can allocate an additional $100.00 per month to his loans. This $100.00 will act as his “initial snowball”. You will see that this snowball will continue to grow and eventually cause an Avalanche that make his loans disappear! In the end, this borrower shaves 1.5 years off his repayment time and saves over $7,000 in total interest!

And that’s all there is to it! Don’t let your debt scare you. Take advantage of the Avalanche, Own Your Loans, and repay your loans faster!

Financing Your First Home

Why America Needs Mortgages!

It is very apparent that the general public is overwhelmingly misinformed and misguided when it comes to real estate financing. Banks, credit unions, and other financial institutions are continuously viewed in a negative light. These institutions are seen as tenacious  villains that would stop at nothing to steal every dime you earn. This apparent hatred for conventional lending institutions is perpetuated by the news media and by “finance gurus” who promise to protect you from the evil banks and get you out of debt…FAST!.

Have you ever heard the radio commercial from John Cummuta?? It starts by saying, “Mortgages should be illegal!”. He goes on to explain that throughout the term of a traditional mortgage, the borrower ends up paying more for his home because of the interest he owes to the bank. While the listener with a basic 5th grade education would understand that interest payments are a fundamental necessity of any kind of financing, I fear that many listeners would find themselves nodding their heads in agreement. As they listen to this ridiculous monologue from a  self proclaimed “finance guru”, they become potential victims to yet another scam promising to “wash away your problems”.

The indisputable truth is that mortgages are absolutely essential to the American Dream of home ownership. If mortgages were indeed illegal, the more than 80% of home buyers who utilize mortgages to finances their home purchases would be renting and/or homeless. Does the average Western New Yorker have $150-$250K sitting in their bank account just waiting to be spent on a home purchase? Of course not! Hence the need for conventional financing.

The good news is that mortgages have several built in benefits that are intended to serve the borrower. The simple truth is that banks are interested in making low risk loans and getting their money back on a consistent basis. To this end, banks offer rather favorable terms and conditions. One such condition which is an attribute of almost all conventional financing is the ability to pay back your loan earlier than it is due. This means that you have the option to make larger payments that are required so you can save on your long term interest costs. The bank is willing to make less profit just to ensure that their investment is secure.

Will you Qualify for a Mortgage

Banks consider several factors when deciding if and how to lend you the funds to purchase your first home. The first factor they consider is your credit score. Your credit score is a quantifiable measure used to indicate your “creditworthiness”. That is, “How likely is it that you will make your payments to fulfill your debt obligations?”. Things that effect your credit score are the following:

  • Payment History – 35%
  • Current Outstanding Debt – 30%
  • How Long You Have Had Credit – 15%
  • Last Application for Credit – 10%
  • Types of Credit you are Using – 10%

There is a lot that can be said about strategies for maximizing your credit score. That can be saved for a more detailed post. In general, if you make your payments, and don’t go crazy applying to 1,000’s of credit cards, you should be fine. If you are interested in buying your first home, chances are you have not filed for bankruptcy in your life. That is a good thing! Credit scores break down as follows:

  • 726-850 -> Excellent
  • 700-725 -> Good
  • 626-699 -> Average
  • 330-625 -> Poor
  • 0-329 – >Limited / No credit

If your credit score is over 626 you can expect to be approved for some kind of mortgage. Obviously your terms and conditions improve the higher your credit score.

Another factor that has a major influence on your ability to obtain a mortgage is your current monthly debt obligations. That is, “How much do you owe per month to pay off your debt?”. This is the sum of all the mandatory payments you make on a monthly basis. This consists of student loan payments, credit card payments, car payments, payments on another mortgage, etc. The bank needs to know what other debts you have to pay off to ensure that you can afford to pay everyone and keep all your creditors happy. A factor that goes hand in hand with your monthly debt obligations is your pre-tax income. Banks need to know how much you make on a monthly basis to make sure you have enough money to pay off your debt and keep yourself alive with other costs of living. The bank will require you to provide at least 1 month’s worth of pay stubs from your employer.

There are many other factors that could come into play when applying for financing. These factors include potential rental income from the property you are trying to finance and income you generate from self-employment. These factors get quite complicated and will be addressed in a later post.

In general, the banks will use a combination of your credit score and your ability to make monthly payments to determine whether to approve you for a loans and for what amount you can be approved. When you hear of a person or family being “pre-approved” for a loan, this means they have been to the bank and have gone through this exercise. Getting a pre-approval letter is the first step toward getting serious about buying a home.

There are countless tools that allow you to get a quick idea of what kind of home you can afford. Give this a try to see where you stand: Yahoo Affordable Home Calculator.

To be Continued! – In the next post we will discuss where to go to seek out your first mortgage and what documentation will be required.

As always, you can check us out on Facebook / Twitter. Or on our website: http://www.nyhsolutions.com/

78 Mariner – Dollars and Cents

Its been awhile since we’ve provided an update on our project in Allentown. That is basically because we’ve been very busy with the rehab!

Things are going well as we can finally see our vision come to life. The project gets more exciting as time goes on. This is mainly because you start doing more and more finish work as you near the end of the project life cycle. As opposed to working on the “rough structure” or “major systems” of the house, the finish work yields tangible results that you can see and touch. This finish work includes new hardwood floors, kitchen/bathroom tile, countertops, cabinets, fixtures, etc.

I’ll have plenty of pictures up in the coming days. However, before we get to that, I wanted to touch a bit on some things we’ve learned about managing a project budget.

As I’ve stated previously, there are three important factors to consider when managing a budget:

  • Do your research and set a firm “Baseline”
  • Track “Actuals” and resist the urge to adjust your Baseline budget
  • Analyze the variance in your Baseline and use this information to make future budgets more accurate

We’ve learned a great deal about the various costs associated with a major residential rehab. One reason this was a great first project is that the rehab is extremely comprehensive. We have touched just about every aspect of a full rehab that you can imagine (with the exception of the new roof that came with the house!). This includes full exterior makeover, tearing out floors, destroying walls, adding rooms, changing the layout, re-routing plumbing and electric, new appliances, a brand new heating system, etc. The full range of improvements will serve as invaluable experience for future projects. It also allows us to gain insight into the various costs associated with major rehab activities.

With less than 2 weeks to go until the project is completely finished, we are within $200 of our baseline budget! On the surface, this may seem like a phenomenal feat for our first project; however, that would be extremely inaccurate. In realty, we’ve come under budget in several areas totaling a $3,980 surplus. We’ve also gone over budget in several areas totaling an overage of $4,127. This gives us a net variance of -$147. This means we severely under estimated in some areas…and severely over estimated in other areas. We were lucky that this all evened out quite nicely (we also have yet to touch our “Contingency Budget” of $1,700).

The bottom line is that we don’t really care how close we are on the budget. Of course we would like to limit expenses as much as possible. However, we understand that, more than anything else, this first rehab is a learning experience. The goal is to complete this end-to-end rehab, analyze our performance, and use what we’ve learned for future projects. The real work begins when start looking into the reasons why we went over/under budget. We then find ways of making our budget estimates more accurate. We are continuously working to decrease our degree of variance. This will allow us to take on more projects in the future because we will be more confident in our ability to accurately estimate improvement costs.

Below is a snapshot of our current project variance. Here are a few things to keep in mind:

  • Total Surplus / Overage is the total of the “Actual” and the “Future”
  • The future numbers are costs that haven’t hit our books yet, but we have a firm idea of how far over/under we will be

We’ll provide further updates as we finish up the project over the next couple of weeks. Thanks to everyone who has helped out. Please let us know if you want to come check out the property or if you know someone who might be interested in buying it!

As always, you can check us out on Facebook / Twitter. Or on our website: http://www.nyhsolutions.com/

Real Estate Agent or No Real Estate Agent?

A key decision after deciding to buy a home is deciding whether or not to sign with a Real Estate Agent to help you throughout the process. NY Home Solutions has yet to sign a formal contract with a real estate agent, but we’ve met with and worked with a number of agents within the Western New York region. Speaking with real estate agents has helped to expand our network and to learn more about the process. We fully intend on hiring a selling agent for the final sale of our house on Mariner.

In almost all situations, I would recommend signing with a buying agent to purchase your first home. The main reason why signing with a buying agent is a good idea is that in almost all cases, ITS COMPLETELY FREE! Typically, the home seller pays the real estate agent commission. The seller’s agent charges a percentage of the sale prices once the house sells (typically between5.5%-7.5%). If the buyer also has agent representation, the selling agent splits the commission with the buying agent. Because most people use real estate agents, the above scenario takes place the majority of the time. This means that there is rarely any risk associated with hiring a buying agent. If they are able to help you find a house you like, Great! You get the house you want, and the seller pays your agent! If you aren’t able to find something you like in a set amount of time (typically 3-6 mos), the contract with the buying agent is void and you both go your separate way (that is if you do not decide to re-sign).

Below are some key advantages to signing with a Real Estate Agent when searching for a home: 

  • As mentioned, its usually FREE!
  • They provide insight into average prices within your target market
  • They will help you with negotiating the final sales price
  • They can help you set up property insurance and utilities
  • They will point out factors to consider that could be easily overlooked by the real estate novice.
  • They typically have a large network of inspectors, mortgage brokers, contractors, and attorneys
  • It’s always good to have someone else to bounce your thoughts off of!

Given the above list, you may be wondering why NY Home Solutions has yet to use a real estate agent for the purchase of a home. First, one of our core competencies is that we are able to close a real estate sale extremely quickly. This happens because both the home seller and NY Home Solutions are not represented by a real estate agent. The seller is not willing to pay a real estate commission fee, so he/she does not use an agent and would not be willing to pay for an agent representing NYHS. Another reason we do not use a buying agent is because we have built up a strong knowledge base of the Western New York real estate market. When buying a home, we are comfortable contacting the seller or selling agent, walking through the home, presenting an offer, and conducting negotiations. It is simply quicker for us to do these steps ourselves as opposed to having a real estate agent do it for us. However, we have built up strong relationships with several talented real estate agents. We look to continue to build upon these relationships and utilize their services in future real estate transactions.

If you are looking to buy your first home, its probably a good idea to sign with a buying agent. If you’re not sure where to start, try contacting one of the agents below:

Gino Albini– Realty USA (Grand Island)

Anna Baldo– Realty USA (Orchard Park)

Jackie Rice – Realty USA (Hamburg)

Amy Pasinski – Realty USA (West Seneca)

NY Home Solutions has no direct affiliation with any of the agents listed above.

Next post in this series: Financing Your New Home

Buying Your First Home – Part I

Home ownership is a great experience! Not only can owning a home add to your quality of life, but it could also be a wise financial decision. I’ve written previously about the financial advantages to owning a home as opposed to renting. In most situations, home ownership has several clear advantages to renting.

Some of these advantages include:

  • Building Net Worth
  • Tax Advantages
  • Control of the Property
  • Potential Cashflow from Rental Units
  • Collateral to Borrow Against

While many people realize the benefits associated with buying a home, few are comfortable with the process. Common questions include: “How much should I pay?”, “Where should I live?”, “Do I need insurance?; What kind of insurance?”, “Do I need to hire a real estate agent?”, etc.

Over the past year, I’ve learned quite a bit about the home buying process. This has come from research done for NY Home Solutions as well as a great deal of first hand experience. This series of posts will serve as a guide to those who are interested in buying their first home. Even if you think home ownership quite a way down the road, it will be worth while to learn about the experience. As always, your comments, tips, suggestions, and questions are welcome and encouraged!

Getting Started

There are a few key steps to take upon making the decision that you want to buy a home. The first thing you certainly MUST DO is visit Zillow. Zillow is a free website that gathers information from the Multiple Listing Service (MLS) and Real Estate Broker sites and combines it all in one place. Zillow shows homes for sale, recently sold homes, and houses for rent. Zillow also uses a complex and top secret algorithm for estimating the value of every home in the country! (While this is pretty cool, I’ve often found these estimates to be inaccurate and a poor guide to property valuation). Nonetheless, if you are even slightly interested in buying a home, hop onto Zillow and start searching around. Check out you current house/apt, your neighbor’s house, your friend’s house, the huge mansion you drove by the other day….it’s fun. After you feed your temptation to look up the home values of all your friends, start looking for homes that are for sale in an area that interests you. Look at the neighborhoods, the prices, the pictures, and the property details. This will give you a general idea of what homes go for in any particular area. After a week or two browsing on zillow, you will be able to estimate the value of a given home based on its size and neighborhood!

When buying a home (and browsing zillow), pay attention to these basic factors:

  • List Price & Pricing History
  • Square Feet (Divide Price by Square Feet to determine Price/SQFT)
  • Style (Ranch, Colonial, Cape Cod, Raised Ranch, etc)
  • Bedrooms & Bathrooms (Half Bath = Toilet and sink/vanity; Full Bath = Toilet, Sink/Vanity, Shower/Bathtub)
  • Year Built (Old homes could need quite a bit of updating to the structure, utilities, windows, roof, etc)
  • Garage
  • Basement / Foundation

Soon you’ll get a feel for what is standard in your target neighborhood. This will help you determine what is within your acceptable range for all these factors. For example, you may decide that you need 3-4 bedrooms and at least 1.5 bathrooms. You can then create custom filters in zillow to search only houses that meet that criteria.

A good guide for determining whether a house is priced right is to compare “Price/SQFT” for similar homes in the same or nearby neighborhood. This can be done by looking at recent home sales. Take a fairly large sample of similar houses sold within the last 6 months and determine the average Price/SQFT.Then compare this Price/SQFT to the house or houses you are interested in. While this is a great guide to get started, further investigation is required to fully determine whether or not you are getting a good deal.

The great thing about searching for a house is that you can do quite a bit of research without spending a dime. You don’t have to make a serious commitment to start looking into a home purchase. Start looking on zillow and you will get a feel for what’s out there and what will fit your tastes.

Next post in this series: Hiring a real estate agent

Learning from Mistakes – Keeping a “Frozen” Baseline to Improve Future Projects

Things are coming along at our Allentown Rehab: 78 Mariner. As the exterior is pretty much finished up, our focus has shifted to interior finish work. Over the next 2 weeks, we plan to make significant progress by adding kitchen cabinets, counterops, and flooring.

One main goal of this initial investment is to use it as a learning opportunity. Although there was a great deal of research that went into our prospecting and planning processes, there is no substitute for real life experience.  A key focus of this entire project is to track progress in the most accurate way possible. While it would be great to meet all budget and schedule projections, we realize that it is unlikely on our first rehab. It’s important to track our deviations from plan and determine what could be done to make improvements in the future. To accurately track our progress, I again turn to integrated business systems and tools.

Baseline vs. Actual

When managing any project, it’s important to differentiate your “baseline” from your “actuals”. This takes patience and discipline! It’s very difficult to set a budget or timeline and not change it after other variables are introduced or realized. However, that is the whole point! It makes no sense to set a “baseline” schedule and then change it after you learn that your cabinet delivery will be delayed by a week! That delay is the exact deviation from plan that you want to track. The main point is that you must know what went better than expected and what needs to be improved. Over time, your actual vs. baseline data will help you to improve your planning in the future. This is a common pitfall in project management. PMs always have a desire to change their projections after receiving additional data. Do what ever it takes to avoid this trap. Your interest must be in the long term success of your project or business. The more disciplined you are at baselining and keeping your plan “frozen”, the more accurate your projections will become in the future.

In our case, we really dropped the ball when scheduling and budgeting our tile floors.  We made assumptions about our installer’s schedule as well as the price of materials. We later found that we wouldn’t be able to get the installer within the required time frame and that we would have to pay a bunch more for an alternative installer and for materials. When the dust settled on the situation, we ended up spending $750 over our tile budget! Did we go back and adjust our budget? No! You keep the budget “frozen” and track to actuals to see the deviation. We will go over in some areas, under in others, and analyze the data at the end. With each project, we will get more accurate with our budget and schedule estimates.

Leveraging Online Business Apps

NY Home Solutions operates entirely on a “Google Apps” platform. That means that virtually every tool we use for the business is somehow integrated with a web app available on Google Apps. One app that is absolutely crucial to keeping our financial status organized is Wave Accounting. Wave Accounting is an app very similar to Mint.com. It connects with our bank account and allows us to carefully track project expenditures. Not only does this app give us a real time view of our financial status, but it allows us to download data and compare it to our pre-project budget. We are able to see the financial health of the project in real time. We see that we went over budget in one area, but we saved in another. All this data helps us learn for future projects. While our goal is to hit our budgets, we know that it can’t happen. As we continue with subsequent projects, our expectations will continue to increase. We will expect the gap between our “baseline” and our “actuals” to continuously narrow. Wave Accounting is a great free tool that helps us to stay organize and track our performance. There are other apps available that have similar functionality. Freshbooks and Zoho Books are a couple examples. I’m currently sticking with Wave because it’s free. I plan to explore the other options in the future.

I’m very enthusiastic about our use of web-based tools and applications to make our business automated and scalable. I think its absolutely crucial for small businesses to embrace the power of the internet and take advantage of the low cost tools that can help you to grow your business. I recently wrote about what I’m calling “The Software Exodus” on my personal blog. We’ll discuss additional ways to take advantage of business apps in future posts.

78 Mariner – Playing up to the Neighborhood

In describing the kitchen, I mentioned that we were making renovations to “fit the character of the neighborhood”. Making renovations to “fit in with the neighborhood” is one of the most important aspects of a successful rehab; In the case of NY Home Solutions, it is the driving force behind any and all of our major rehab decisions. While this may seem like a rather obvious factor to consider, many real estate investors tend to ignore it and over or under rehab their properties.

Our eventual buyer will have several expectations about the home before they come for a walk through. Because the house is in Allentown, they will expect the home to have the same eclectic, quirky, and upscale feel of the rest of the neighborhood. That’s why it’s imperative that we make all renovations to keep the house in line with the neighborhood standard. Its very easy to get wrapped up in the renovations and go overboard.

One example of such a decision can be found in the existing 2nd floor bathroom. The house was left with this classic claw foot tub. It needs some patching here and there…but overall its in pretty good shape. Personally, I don’t like the look of this tub and I would never have it in my own home. However, this is the perfect example of an attribute that may fit perfectly into the Allentown neighborhood. What do you think? Should we refinish the tub and keep it in the new bathroom? Or should we make a full scale change and replace it all together?

78 Mariner - Claw Foot Tub

As always, you can check us out on Facebook / Twitter. Or on our website: http://www.nyhsolutions.com/