1. Tools & Techniques of Financial Planning Leimberg, Satinsky, Doyle & Jackson Financing Asset Acquisitions

2. 7-2 Leverage  Financial: use other people’s money Real estate  $1,000,000 apartment building 20% down; annual cash flow $50,000  Positive Rate of return > cost of funds  Tax advantage Generally can deduct interest expense on investment loans

3. 7-3 Margin Trading  Stocks eligible for margin Most large cap stocks Can’t margin in retirement account  Minimum margin Generally $2,000 to start  Initial margin: 50% per Regulation T  Maintenance margin:25% But brokerage firm can set higher  Buy 1,000 shares INTC @$30

4. 7-4 Margin Trading  Buy 1,000 shares INTC @$30 Margin 50% of $30,000 = $15,000  INTC drops to $16 Stock value $16,000 Margin loan $15,000 Maintenance margin:25% of $16,000  Need equity of $4,000; have $1,000  Margin call $3,000

5. 7-5 Mortgage Loans  Fixed rate Rate on loan vs. ARM Jumbo loans: above $417,000  High cost areas: above $625,500 15 vs. 30 year amortization  Amount of payment  Amount of interest paid Interest only mortgages  Pay interest only for 10 years, for example Points  Average time in home:  Average time keep loan:

6. 7-6 Mortgage Loans  ARMs Initial fixed rate period  3/1: three year fixed; adjust annual after that Caps: on interest rate changes  2/5: 2% per year; 5% life of loan Can it go below initial rate? Not all ARMs adjust downward… Index and margin:  Index: T-bills vs. prime vs. LIBOR  Margin: credit score Rates on ARMs

7. 7-7 Mortgage Loans  ARMs Index and margin:  Index: T-bills vs. prime vs. LIBOR  Margin: rates on ARMs Credit score Negative amortization  Payment < Interest as rates rise Mortgage insurance more expensive for ARMs

8. 7-8 Home Equity Line of Credit  Turning your home into an ATM???  Interest on loans up to $100,000 deductible  Only pay interest on funds you borrow  Interest rate often based on prime rate  Initial revolving period No amortization 5 – 10 years; then starts 15 year amortization

9. 7-9 Balloon Loans  Term of loan 10 years; amortization 30 years Fixed rate for term Longer amortization  Common with commercial real estate

10. 7-10 Refinancing Mortgage  Interest rates decrease Should I refinance?  Change in rate?  Closing costs Increasing? Impact on APR if pay loan early?  Reduce loan term?  Cash out Lower loan to value limits