Staying out of trouble with your mortgage loans.

 With all the talk about forecloses and getting debt free, I thought it was time to give you some rules of thumb for staying out of mortgage loan trouble. Getting debt free as Dave Ramsey (of radio fame) suggest is an honorable and noble goal. But if getting rich is your goal, I can not agree with leaving one of your “Get Rich tools” on the bench. Borrowing to make money is not necessarily a bad thing.

Using borrowed funds cuts the time to get rich by 50% and can double your rate of return. Used unwisely borrowed funds can bury your investment. Here are the rules I use to stay out of borrowed money trouble.

Using these rules as guides, you should stay out of trouble. All it takes is a little discipline. As the years pass and you pay down the mortgage notes your equity grows, the rents go up, and the value of the properties increases, and your net worth position improves.

Personal mortgages on a home to live in: The loan should not be more then 80% of the homes value. You want a to have at a minimum a 20% equity in the house. You also want a fifteen or a twenty year, fixed rate mortgage. You should have six months worth of payments in the bank in case you get a reduction in income. The payments including taxes and insurance should not be more then 25% of your families take home pay.

For a rental property mortgage: Commercial mortgages most often have a twenty year amortizations, with a five year balloon payment, written on a variable interest rate. Because of this need to refinance every five years I use three criteria when considering a commercial loan. The loan to value should be no more then 66%. The net rental income should be 130% of the payments. (I like the note payments to be one half of my net rental income or less.) You should keep six months of payments on hand in cash. With these criteria you can stand up to a 30% vacancy factor and still make your note payment. The bank when you go to refinance will want you to have a 30% minimum equity position and six months of payments, in cash on hand. The bank will look for an income to loan coverage of 120% or higher. The bank will want to see five year leases on non-residential properties.

I have made a lot of money over the past thirty-five years buying properties on credit, paying them off with the renters money, then selling the properties and carrying back the notes. With out the ability to borrow, I might not have ever gotten rich. If you are lucky enough to have the cash to do your deals, by all means pay cash. But borrowing, using smart, carefully thought out criteria, is a good thing too.

See also Borrowing your-self rich http://www.towardswealth.com/node/206