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CMPS Article

How to Finance the Roth IRA Conversion Strategy

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What is a Roth IRA?

A Roth IRA is a retirement account where (1) you invest your money after you've paid taxes on it, and (2) you can withdraw your money without paying taxes on the withdrawals.

Traditional IRA	Roth IRA
Invest money before you pay taxes on it	Invest money after you pay taxes on it
Grow the money in the account tax-free	Grow the money in the account tax-free
Pay taxes when you withdraw the funds	No taxes when you withdraw the funds

What if you leave the funds in your traditional retirement account?

Consider a situation where you have a traditional retirement account worth approximately $300,000. Assume the market goes up by an average of 6% per year over the next 5 years and your account goes up in value to $400,000. You will need to pay taxes when you withdraw the $400,000 from the account. Assume you are in a 33% income tax bracket. Do you think your tax bracket and/or the income tax rates in the future will be higher, lower, or the same as today? Most people would agree that tax rates will probably be higher - especially given the enormous US federal budget deficit. Even so, let's assume your tax bracket in the future is the same as today, around 33% in our example. When you withdraw the $400,000, you will need to pay $132,000 in taxes (33%). If you leave the money in the account to be inherited by your heirs when you die, they will need to pay income taxes on the money when they take distributions, and they are required to take distributions over their life expectancy. They also might need to pay estate taxes on the funds, depending on the value of your estate.

Why Convert the Funds from a Traditional IRA into a Roth IRA?

In the example above, let's assume you convert the $300,000 into a Roth IRA. In this case, you will not need to pay any taxes at all as you withdraw the funds when the account goes up in value to $400,000. However, you will need to pay taxes now on the $300,000 ($99,000 in taxes assuming a 33% tax bracket).  In this example, you would save at least $33,000 in taxes by paying the 33% tax now on the $300,000 account value instead of later on the $400,000 account value. Your savings will be even greater if tax brackets are higher in the future and/or if the retirement account goes up in value more than expected. If you don't take the distributions yourself, the funds will be distributed income tax-free to your heirs. If the market goes down, and the account loses value after the conversion, you could simply change your mind, "re-characterize" the account, and then convert the funds again later at the lesser value. This would save even more money in the upfront taxes that would be due.

Where to get the money for the tax bill?

In our example, you would need to pay approximately $99,000 in taxes to make the strategy work. You could pay the taxes out of the retirement account itself, but that would almost defeat the purpose of the conversion.  Instead, it may be smarter to take advantage of the record low mortgage rates that are currently available. You could bump up the balance on your home mortgage, and use the extra funds to pay the taxes on the conversion:

	Pay Taxes Using Cash on Hand	Pay Taxes Using Mortgage
Funds Needed	$99,000	$99,000
Opportunity Cost %	6%	-
Opportunity Cost $ (what you would have earned by keeping your money invested)	$5,940	-
After-tax Mortgage Cost % (based on 5% mortgage rate)	-	3.35%
After-tax Mortgage Cost $	-	$3,317
Annual Benefit	-	$2,623/year

As a mortgage professional, I work together as a team with your financial advisor to help you evaluate your mortgage options in the context of your overall financial goals. Let me know if this idea is something you'd like to consider in more detail!

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Jay Sibley 321-689-0089
NMLS Number: 383991
Sibley Mortgage Group, LLC
Corporate NMLS Number: 1041547
jay@sibleymortgage.com

(321) 689-0089
919 Timber Isle Dr
Orlando, Florida 32828

   

Is Student Debt Standing in the Way of Homeownership?

Student loan balances have doubled since 2007 to well over $1 trillion. Meanwhile, millennials are taking much longer than previous generations to buy their first home.  A recent study examined whether student loan debt is preventing young adults from purchasing homes*.

Surprisingly, the study concluded that there is no causal relationship between student debt and delayed homeownership.  In fact, debtors in their late 20s were more likely to own a home than non-debtors.  The study gives several alternative explanations for why millennials are delaying their first home purchase when compared to prior generations.  Mainly, the delay in homeownership seems to be part of a larger trend of delaying the period of life known as “transition to adulthood”.  For example, the share of 18-34 year-olds who are married with children has also fallen from 27% in 2000 to 20% in 2015.

The study did find one major correlation between student loans and delayed homeownership: student loan debtors who dropped out of college did have much lower rates of homeownership vs. student loan debtors who graduated from college.

Moral of the story?  If you’re going to take out student loans, it’s better to graduate from college with a degree that leads to a high-paying job.

Jay Sibley 321-689-0089
NMLS Number: 383991
Sibley Mortgage Group, LLC
Corporate NMLS Number: 1041547
jay@sibleymortgage.com

(321) 689-0089
919 Timber Isle Dr
Orlando, Florida 32828

   

Why You Need a Certified Mortgage Planning Specialist

Your mortgage is most likely your single largest debt, and your home is most likely your single largest asset. The strategy you use today carries financial consequences that can impact your life for years to come.  As a Certified Mortgage Planning Specialist (CMPS®), I can help you answer these questions:

• Should I rent or buy a home?
• How much of a downpayment should I use when purchasing a home, and what are my options?
• How much should I budget for my monthly housing expenses, and what if I budget less or more?
• How will my mortgage decision impact my ability to help my children pay for college?
• How will my mortgage decision impact my ability to help take care of my elderly parents?
• How will my mortgage decision impact my ability to retire within a budget and timeframe that works for me?
• How will my mortgage decision impact my monthly cash flow situation?
• How will my mortgage decision impact my financial ability to save money for the future?
• How will my mortgage decision impact my ability to manage and reduce my debt in a timeframe that works for me?
• Should I purchase real estate for investment purposes?
• What mortgage strategy should I use when buying a vacation home or investment property?
• How can I improve my credit score?
• How can I better manage my cash flow before, during and after a major career or life change?
• How can I work with a mortgage professional who is committed to higher standards of competence, ethics and communication during the home buying and refinancing process?

Contact me so we can get started!

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Jay Sibley 321-689-0089
NMLS Number: 383991
Sibley Mortgage Group, LLC
Corporate NMLS Number: 1041547
jay@sibleymortgage.com

(321) 689-0089
919 Timber Isle Dr
Orlando, Florida 32828

   

How to Successfully Get a Mortgage in 2016

Imagine going into a restaurant and getting seated only to have the waiter check your wallet, find out you have 20 times the amount of cash required to pay for your meal, call your bank, find out you have double that amount of cash in the bank, ask you to produce even more documents, and then act like nothing's wrong, it's all normal and you're the one with the problem. Sound a little crazy? Well, that's kind of what it's like to apply for a mortgage loan in 2016!

Thank you Congress... Way to Go!

The US government has basically recruited the entire financial services industry in its fight against terrorism through a law known as the Bank Secrecy Act. The Anti-Money Laundering provisions of the Act went into effect across the mortgage industry in 2012. These rules are commonly referred to as the BSA-AML rules. In short, the BSA-AML rules require mortgage companies, banks and financial institutions to document every minute detail of your financial life when you apply for a loan! In fact, mortgage companies are often required by law to ask you for:

• Exact source of funds used for your downpayment and earnest money deposit. This includes where the money came from, how it got there, when it got there and why it got there.
• If you have large deposits in your bank account: where the money from, how it got there, when it got there and why it got there. Large deposits can be classified as any deposit representing 10% - 20% of your normal monthly income. For example, if you earn $10,000 per month, and you had a deposit for an additional $2,000 in your bank account last month, the mortgage company may be required by law to ask you to prove exactly where that money came from, how it got deposited in your account and why it was deposited there in the first place
• If you are selling investments to use that cash for any reason related to the home purchase, you'll likely be asked to document:
• Precisely which stock(s) or bond(s) you are selling
• Whether the trade cleared and when exactly the funds from the investment sale got deposited into your account

Is There Any Way to Avoid All This Invasive Prying Into Your Financial Affairs?

The only way to really avoid this is for you to pay cash for your property. Unfortunately, most people are not in a position to do this. Further, even if you could pay cash, it may not be smart to do so from a financial perspective.

What CAN You Do About This?

First of all, choose the right mortgage professional to help you with this transaction.  Although everyone has to play by the same rules, some mortgage professionals play more competently than others. As for me, I've voluntarily agreed to abide by the CMPS Code of Ethics to handle your transaction with a higher duty of care than most others in my industry.

The CMPS Code of Ethics requires me to:

• Maintain regular and proactive COMMUNICATION with you during the loan process
• Utilize professional COMPETENCE in making the loan process go as smoothly as possible for you
• Implement CONTINUOUS IMPROVEMENT in my business affairs by conducting after-closing surveys and learning how my team and I can improve our service to you

Let's go back to the restaurant example we started with. When you walk into my restaurant, my team and I will do whatever we can to give you a 5-star dining experience! That's our commitment to you. We believe we can do this in spite of all the government regulations. If we didn't believe that, we wouldn't be in business. We take pride in our work, and we're passionate about helping you in any way we can.

What Else Can Be Done To Make This Process Go Smoothly?

The second thing you can do to successfully get a mortgage in 2016 is get all your paperwork prepared ahead of time. This includes:

• Last two months bank statements (all pages, front and back) of any account where you'll be using money for a down payment and/or earnest money deposit; and,
• Explanation of any large or irregular deposits in those accounts

Separately, I'll send you a checklist of documents that are specifically required for your loan program. Please keep in mind that I'm not asking you for items on that checklist to make your life hard. (Believe me, it would actually be easier for me if there were less documents required.) I'm asking you for those documents because I'm required to do so.

Thanks again for choosing me to help you with this financial transaction! I'm truly honored that you've entrusted me with handling this very important part of your life. My desire is to really make this a 5-star experience for you in any way I can!

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Jay Sibley 321-689-0089
NMLS Number: 383991
Sibley Mortgage Group, LLC
Corporate NMLS Number: 1041547
jay@sibleymortgage.com

(321) 689-0089
919 Timber Isle Dr
Orlando, Florida 32828

   

Five Things To Consider Before Buying A Home

Here are five of the most common risks associated with buying a home:

1. House price risk (up or down): what if the house goes down in value?  That's why it's important to evaluate mortgage, cash flow and debt planning strategies that won't put you in a bind if house prices stagnate or go down a little bit.  On the other hand, what if the house goes up in value and you haven’t pulled the trigger yet?  That's why it's important to get yourself a solid mortgage approval BEFORE you go house shopping, and be prepared to act quickly if you find what you're looking for.
2. High costs of sale (8% +): do you realize that you’d have to sell the house for at least 8% - 10% more than what you paid for it just to break even and cover the real estate commissions and transfer taxes?  That's why it's important to make sure that buying this home is part of a longer-term strategy.
3. Improvements, Utilities & Maintenance Costs: have you considered the costs of improvements, utilities and ongoing maintenance expenses?  That's why it's important to:
   • Get your home properly inspected before the closing
   • Investigate the cost of utilities, and make sure to budget for them
   • Budget 1%-2% of the home's value for annual maintenance expenses
4. Opportunity cost: what rate of return could you have earned in a different investment with the funds you are spending on your down payment?  That's why it's important to perform a buy vs. rent analysis and run the numbers for your specific situation.
   
5. Long-term Commitment + Changing Cash Flow Needs: how does this decision impact your family’s college funding, retirement planning or elder care funding strategy?  That's why it's important to consider mortgage strategies that take into account your changing cash flow needs.

The mortgage is most likely going to be your single-largest debt; and your home is most likely going to be your single largest investment. That’s why it's important to work with a qualified real estate professional and a Certified Mortgage Planning Specialist.  Together, we can help you consider these risks and compare your options. Contact me so we can get started!

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Jay Sibley 321-689-0089
NMLS Number: 383991
Sibley Mortgage Group, LLC
Corporate NMLS Number: 1041547
jay@sibleymortgage.com

(321) 689-0089
919 Timber Isle Dr
Orlando, Florida 32828

   

How To Improve Your Credit Score

Your credit scores usually determine the price you pay for your money (your mortgages, your auto loans and leases, your credit cards, business loans, etc.). Perhaps the most significant part of your credit report is your credit score. Credit scores range from 350 to 850, with 850 being the best possible credit score that you could receive, and 350 being the worst possible credit score. There are five factors that determine your credit score:

Your Payment History: 35% impact on your credit score

Paying debt on time and in full has a positive impact. Late payments, judgments, charge-offs, collection accounts and bankruptcies have a negative impact. If you have had any bankruptcies within the last 7 years, it will seriously affect your ability to borrow or establish new credit accounts.  If you have had any judgments within the last several years, it is very important that you pay off the judgment and get a "satisfaction of judgment" from the court. Any unsatisfied or recent judgments will make a bad dent in your credit scores and adversely affect your ability to borrow. Usually, judgments and liens must be paid prior to the closing. Timely mortgage payments are weighted heavily by the scoring systems and are one of the most vital requirements that lenders look for when evaluating your credit history. Many times a single late mortgage payment within the last 12 months can hold up your file or spell the difference between the best interest rate and the next credit level. Your payment history on other debts (car payments, credit cards, etc.) is also given a lot of weight.
The credit scoring systems evaluate how many late payments you have had and whether they were 30, 60 or 90 days late, or whether they are currently in default, with default being the worst situation. Additionally the systems look at whether the late payments were consecutive. If you only have one or two minor late payments on your report with no other derogatory marks, your score will not be terribly affected, but you will have a tough time getting over the critical 700 level.  Here are four practical steps that you can implement to improve your credit score in the area of "Payments":

• Make all your payments on time.
• Past dues on any account will destroy your score - bring your delinquent accounts current immediately.
• Pay your bills before they go to a collection agency.
• Check your credit report for accuracy on a regular basis; and make sure that disputed bills are not negatively affecting your credit scores.

The Balance You Owe vs. Your Available Credit Lines: 30% impact on your credit score

Keeping your credit balances below 50% of your available limit is very important. Keeping your balances below 30% of your available credit is even better. For instance, if you owe $10,000, and you have $100,000 of credit available to you, you are only using 10% of your available credit line. On the other hand, if you owe $10,000 and you only have $10,000 available to you, you have "maxed out" your available credit and your credit scores will be very negatively impacted. Therefore, it is not how much you owe, but how much you owe compared to what you are able to borrow.

Here are three practical steps to improve your credit score in this area:

• Don't close your credit accounts unless it is necessary to do so. It is better to have many open accounts with little or no balance than to have just one or two accounts regardless of the balance.
• Don't concentrate large balances on just a few accounts. Pay outstanding debt down as close to zero as possible, and evenly distribute the remaining balance across all your open credit lines. The key is to keep the balances down below 30% or at the very least 50% of your available credit line(s).
• Call your credit card companies and try to increase your available credit lines if they can do so without pulling a new credit report.

Your Credit History (how long your accounts have been opened): 15% impact on your score

The longer your accounts have been opened, the higher your score will be; newly opened accounts will bring your score down. Here are three practical steps for you to improve your score in this area:

• Don't close your credit accounts. If you must, close the newest ones instead of the oldest ones. Your score will improve over time if you keep accounts open and use them every once in a while.
• Think twice before jumping on that latest 0% credit card offer or opening a new card just to get a 10% discount at a department store.
• If you don't have much of a credit history, and you are planning on taking out a mortgage in the future, it may be a good idea to establish a few open credit lines with little or no balance on them. Although newly opened accounts tend to lower your score initially, they will improve your score once they've been open for awhile, somewhat active and paid off with little or no balance.

Type of Credit that you have open: 10% impact on your credit score

A good mixture of auto loans and leases, credit cards and mortgages is always best. Too many credit cards is not a good thing, and having a mortgage does increase your score. Practical steps to improve your score in this area include: (1) Having 3-5 revolving credit cards open is optimal.; and, (2) Having a good mix of auto loans, credit cards and mortgages is better than having only credit cards.

Number of Recent Inquiries made by creditors: 10% impact on your score

Inquiries affect the score for one year from the time they're made. Your score isn't impacted when you check your own report. It's only affected if a potential creditor checks your credit. These include department stores, as well as credit card, auto finance and mortgage companies. Here are three steps you can take to improve your score in this area: (1) Multiple auto and mortgage inquiries are treated as only one inquiry if made within 45 days of each other. So, it's better to shop for a car or a mortgage over a two week time-frame, rather than to prolong it over a longer timeframe. (2) Don't apply for a lot of credit or open multiple credit cards at the same time; and, (3) If you're thinking of applying for a mortgage within the next 90 days, it would be good to wait until after your loan closes before you apply for any new credit.

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Jay Sibley 321-689-0089
NMLS Number: 383991
Sibley Mortgage Group, LLC
Corporate NMLS Number: 1041547
jay@sibleymortgage.com

(321) 689-0089
919 Timber Isle Dr
Orlando, Florida 32828