I was reading an article on Yahoo Finance yesterday talking about how to get cash out of your home (basically talking about retirees).  Whether a retiree or not, I’ll show you a few additional details not commonly discussed, nor pointed out in the article.  Take a look.

#1.  Sell it…

Selling the house is a great way to get cash, but selling the house plays to the advantage of the realtor.  Actually the equity in the house may be more for realtor protection than the homeowners’.  Here’s what I mean.  First, some people don’t like to borrow money.  Fine.  Sell the house.  Second, and possibly more importantly, look at history.  Until the late 1990’s, Texas did not allow home equity lending.  The realtors lobbied against it.  Common myth says equity is for homeowner’s protection, but in reality, it protects the realtors market.  They need sales!

#2.  Rent it…

Renting property can take a house of brick and mortar with a ton of cash tied up into a business creating income.

#3.  Borrow it…

For homeowner’s who do not go with option #1 or #2, borrowing can be done.  However, home equity loans come in a couple of ways with vastly different approaches.  The first way is a HELOC (home equity line of credit).  A HELOC is simply an amount of money available against the house, but generally uses the house’s original value and does not need new appraisals, etc.  Simply put, homeowners are borrowing their own money.  The next way is a cash-out equity loan.  The cash-out is different than a HELOC, because it allows the current market value of the home to come into play.  Simply put, if the house has appreciated in value, owners can take the profits out of the house without selling the house.  (See why realtors don’t like the loans?)

4.  Reverse it…

Baby boomers are a big target market right now and a reverse mortgage is a hot topic.  One might be lured into the idea of getting money out without ever making a payment.  True, no payments required (with a couple of stipulations), but any money borrowed has to be repaid…by the heirs or estate for example.  If traditional thinking, meaning pay cash or get a loan and pay off the mortgage worked for past generations, why a reverse mortgage now?  Fact is it didn’t work for many people.  Therefore, if an owner needs money, or potentially will need money, why tie up an enormous amount of money into brick and mortar sitting idle for so many years?

The bottom line is how to get cash out of the home should by why put it there in the first place?

Owning a house may or may not be the American Dream we commonly hear and the answers can be broken down into areas.  Real estate decisions and financial decisions.  People spend quite a bit of time looking for a house, but what appears to be minutes in deciding about a loan or paying cash.  In reality, both are huge decision and they are separate, but equal and should be looked at independently of each other.

Read about it in Barking With The Big Dogs and see what is happening to your (and my) money every day.

So many times I have heard the question “what’s the rate” or “what are rates today” or “what rate did you get?” I’m sure I’m not the only one to hear these statement/questions either. Many people say these things all of the time.

From the title of this article, if interest rates are not the importance of the loan, what is?

Let me start by saying interest rates are important, I do understand this. Obviously, rates set the payment and determine how much interest is paid. However, on a calculator (mortgage or other loan), the rate is changed. What this means is that the rate is secondary to the loan calculation, a.k.a. amortization schedule. That’s right the amortization is more important than the rate. This is just one key factor to understanding the bank that I discuss in Barking With The Big Dogs so people can understand the inner workings of the bank. But rather than go into the real meaning behind the amortization right now, which is not to simply just show numbers with payments and interest like everyone else does, let me continue with a question…

If rates were the importance of a loan, then why do banks and credit unions build new buildings when rates are at their lowest?

(You can get the answers in Barking With The Big Dogs…but only for a limited time while it’s still available. Get a copy today before the copies are gone.)

Why is all of this important to you? It’s your money, that’s why!

I was listening to a commercial talking about reverse mortgages. We will probably continue to see and hear more about these loans since with the baby boomers and population are getting older and the market for the reverse mortgage grows.

What I found interesting on one radio slot was the statement about getting monthly income tax free. (Not quoting exactly, but if I recall the statement was very similar.) Tax free income from your home each month, really? I’m not sure if that is entirely true, but taking profits without selling the home may be more inline. And, definitely getting equity money out is true too.

Really though, are people getting income, or simply a monthly draw against the equity in the house in the form of a loan? A loan, not income. The balance has to be repaid at some point; either if the house is sold or the estate pays the balance, plus interest. Income does not have to be repaid.

The following paragraphs are excerpts from Barking With The Big Dogs…

“The reverse mortgage lets the owners get the money back out of the house without selling the home. Of course, many reasons, from living expenses to investment purposes, exist for wanting the money out of property and making the choices to access funds. ”

To continue from the chapter Refinancing By Design…

” A reverse mortgage is an adjustable rate mortgage the owner does not have to make payments on, or pay off, provided the owner lives in the house or until the surviving spouse dies. The heirs or estate will be responsible for the debt.

The bottom line for reverse mortgages is simple. If people use their mortgage and resources correctly to begin with, they may want and get a reverse mortgage, but will not need one.”

As I wrote in Barking With The Big Dogs, the saying is true, “debt is a four letter word…it has four letters”. However, borrowing money is not always a bad thing to do, unless you preach debt is dumb.

Many times saying all debt is dumb is easy advice to give. For example, let me ask the question, “do you like to pay interest to someone else, or do you want to save and keep the dollars for yourself?” From a salesman’s perspective, the previous question was a leading question. The answer was already known. Everyone wants to keep money versus giving the funds to someone else. Therefore, telling people debt is stupid or dumb is easy advice to give (or sell). No other explanations are necessary.

Well, I’m not interested in stopping here, some explanation is required for true financial knowledge instead of simply rehashing the obvious mass amount of common knowledge already in existence.

Read the entire article below. It’s short, sweet and easy to read…

Is it smart to pay 10% interest on inventory?

I always keep a cash flow statement close to me. So close, it’s not on a computer or piece of paper, rather I keep it in my head.

Cash flow statements in business are easy to understand. Money coming in versus going out. Cash flow on a personal level is easy to understand too. Paychecks coming in, bills taking money out. Either way, business or personal, if more money is in the checking account at the end of the month, the cash flow is positive. If more money is going out than coming in, cash flow is negative and can lead to deficit spending. (I wish Washington would look at their budgets this way. But I guess this is too simple.)

When looking at a house, figuring the math is very simple.

First, I’ll start with buying a house with a mortgage. Typically, a 30-year mortgage is common.

(I won’t use a 15-year mortgage, because I think the 15-year loan is the most risky loan on the market for the average person. Read Barking With The Big Dogs and you’ll see why.)

Let’s start with a $250,000 house and a 20% down payment.

Using a 30-year mortgage, a loan amount of $200,000 at 6% interest runs $1,200 per month. Taxes and insurance vary, but a good, high estimate is 3% for taxes and 1% for insurance on the value of the property.

3% = $7,500 or $625 per month
1% = $2,500 or $208 per month

When combined, taxes and insurance are $833 per month. Add $833 to $1,200 for a total payment of $2,083 per month.

$2,083 / $200,000 is approximately 1%; therefore, look at paying 1% of the loan amount to own a home. Pretty simple.

(Just as an FYI, the percentage will go up with a smaller loan amount, say 1.5% of the loan amount, but the payment will be less over all, which is what is important. With the maximum amount borrowed, say 100% financing, the percentage is just below 1%. So, for conservative estimates, use 1% of the value of the house. Pretty simple.)

You can see a calculator by clicking here for more precise scenarios.

Now, for those who do not want a mortgage, taxes and insurance are payments you will have every month, year after year, so don’t be fooled in thinking you own a home free and clear. Don’t pay the taxes and see who owns your home.

Also, don’t buy the hype that paying cash is the wisest financial decision either. Yes, paying cash has advantages, but not always financial advantages.

Next, did I mention repairs? Nope.

According to a realtor, expect to budget and pay 3% each year for repairs and maintenance. 3% budgets to $625 per month, just like taxes. More if a foundation or roof needs replacing.

Taxes, insurance and repairs won’t go away just because a loan does.

Read Barking With The Big Dogs for more – and easy to understand – information regarding home ownership, money, loans, investing, that is not commonly discussed – but very important financially.

While driving home, I heard a typical hyped up debt free commercial. The ad said mortgages should be illegal.

If mortgages were illegal, what would housing sales be without loans?

Now considering most people need a place to live, there are a few choices. First, live with relatives, who bought a home. However, did they have to get a loan to buy the house? Second, rent. Renting is not always a bad idea, just as homeownership is not always a good idea. Both scenarios have pros and cons. Third, buy a house. Based upon Census information, about 48.7 million people have regular and/or home equity mortgages.

With a population of 307 million, approximate 1 out of 6 have a mortgage. Estimates show 24.3% are under the age of 18, so homeownership in this age group can be kicked out leaving 232.4 available to own a house.

Households in 2000 were105,480,101 and persons per household were 2.59 in 2000 as well. If you take 307 million people and divide by 3 people per household today, that leaves about 102+ million households which is a close estimate to Census’ past data.

With almost 50 million people having some type of mortgage out of 100 million households, it’s easy to see homeownership would be difficult without a loan. Therefore, if mortgages were illegal, housing sales would be much lower; and a 27% decline would be the good news.

Just as homeownership or renting has pros and cons, so do mortgages. Mortgages have pitfalls as we all know, but provide benefits. The benefits are not just the ability to purchase property, but can increase wealth as well. Therefore, and having said all of this, don’t buy the hype blasted all over the airwaves.

If you want to turn the tides against the economic superpowers and mega-machines, read Barking With The Big Dogs; if not follow the crowd.

About a week and a half ago, Friday the 25th I believe or Saturday, I was listening to Barney Frank give some quick responses to a Q&A session on the steps in Washington regarding recent financial legislation.

A couple comments Mr. Frank made referenced banks which would require them to hold more loans versus selling them on the secondary market. Another topic referred to YSP and mortgage brokers.

I’ll leave the second topic to be discussed in the chapter “The Banker’s Secret” in my book, “Barking With The Big Dogs”, but for now, let’s see if the new legislation is really good for you and me and America as a whole.

When I heard his comments, I immediately thought the comments are good talking points, but more to the story exists which probably won’t be heard on CNN or Fox.

So, here is my take on just parts of the recent financial overhaul.

The new recent proposed legislation requires banks to hold more cash on hand, and is not a bad idea. However, new changes may require banks to hold more mortgages too thus affecting the transfer of loans to the secondary market. (The secondary market is where mortgages are in investments such as mutual funds for example which the Average Joe may own.)

The secondary market helps the big banks and small banks and individuals too regarding the flow of money and money earned. However, small and regional banks may not have the ability to sell as many loans or do as much business, thus potentially hurting the local banking community.

If banking laws require lenders to hold loans and keep larger deposits, the changes could be a huge benefit to the largest banks since smaller institutions may not have the balance sheet requirements to compete. Holding loans also reduces liquidity, the free flow of markets and the ability to loan money to more people can diminish.

I tell clients all the time when starting a business, find the money first before signing any contracts. As much of a “no-brainer” as the previous statement seems, it happens.

I know people who paid rent for six months before getting the funding for their business. Fortunately, the time was only six months. Could you imagine being in a contract for three years at $1,500 per month without a business? You would be out $54,000!

Before getting the keys to the property, first do a business plan so see the feasibility of the project. Next, find the money.

When finding the money, where do you look?

As I’ve stated before in my article, “Why Small Businesses Can’t Get Loans”, only about 4% of money for start up business comes from banks. Some of the big banks (such as Bank of America as I am told) have blanket policies not to lend to start up business. Wells Fargo had an advertisement talking about new business owners having friends around in the beginning, but now the people are gone and Wells Fargo is there to help. Is this a way of Wells Fargo saying they don’t lend to start up businesses?

Some banks won’t make a commercial loan for under $200,000 as well.

When a bank doesn’t lend to start up businesses, this practice may be their policy; however, if the project is good enough, the bank can seek the backing of the SBA and still do the loan.

The SBA (partially) guarantees loans to bank. The idea is when a loan falls outside the banks normal lending practices and/or the client cannot get money elsewhere, the SBA comes in to help businesses get the funding. The SBA has been called “the lender of last resort”. Businesses do not deal directly with the SBA. However, the ultimate decision still rests upon the bank.

So where does the money come from?

55% – your savings

10% – relatives

7% – partners

6% – charge cards

4% – venture capitalist

3% – friends

3% – Angel investors

3% – mortgage property

5% – other

Now consider grant money.

Grant is money that does not have to be repaid.

Most grants however require matching funds meaning the recipient also has to come up with funds in addition to the grant money they are receiving.

Grants are usually available through public or private community foundations primarily granting monies to not-for-profit agencies and rarely, if ever, grant money to for-profit businesses. The grant money for small business may come in the form of assisting you with help and education, not direct funds.

WATCH OUT FOR GRANTS – some grant wording changes throughout the conditions to terms such as – grant – to loan – to equity position. In addition, to satisfy the conditions of a grant, you may have to spend the money received to do so, thus netting you no additional funds to operate.

When getting help from the government, there’s one thing you need to know right up front about getting money from the government…

They don’t have a single dime to directly lend to you for the start-up of a small business.

You may believe this statement to be untrue because of the way the term “government loan” is thrown around, and we hear about government loans all the time. (Refer back the the SBA. The bank is the SBA’s client, not the business.)

The bottom line is there is no direct money. But that’s okay…

If the government had to give money to any American who wanted to start a business, just imagine how much money they would have to collect in taxes to fund such a program.

Besides, a capitalist system works best when the government uses a hands-off approach with regards to the competitive market system. Having the government choose who gets funded and who doesn’t is socialism not capitalism.

Finally, getting a funding may not be as difficult as it sounds because money is out there. If you have a good plan, collateral, credit scores, etc., you can find money. However, be prepared to face rejection and get creative if you decide to follow your dream.

Getting money for a small business is not easy for many reasons.

First of all, owners and prospective owners need to cut through the sales hype.

Advertising my say the President has ordered banks to loan money to those who qualify, but in reality, the President can’t simply do such actions.

Banks have internal business practices and structures just as any other business operates. Did you know some banks won’t loan on start up businesses or until a business has operated for two years? Some banks won’t make commercial loans under $200,000. Not all banks or credit unions do commercial lending.

Not lending is not always a bad thing. When we put money in a savings account, for example, we want our money protected. In order for our money to be protected and safe, we should want to bank to make prudent lending decisions, not risky loans. Risk is more for investors and with the added risk, investors should reap the rewards knowing the potential losses could be great.

In addition, a bank or credit union has regulations to meet before a loan can be approved on top of their standard operating procedures. If a loan falls outside the lender’s normal business practices, or parameters, but wants to do the loan, the bank can seek the assistance of the SBA. The SBA has guidelines determining lending activities too.

Next, take secondary market issues. Many loans are sold on the secondary market. What may make lending difficult in the future, as we have seen in the past couple of years , is obviously related to people making money on investments. The market has been in the tank starting in 2007; therefore, no one wants to investing losing propositions.

Moving right along, consider taxes. In 2011, tax laws revert back to pre-2003 levels. Dividend rates will go back up to 39%! Higher taxes and less profits on investments may lead to lower values on investments due to lack of demand, thus people once again losing money.

Investments and dividends are not just for the wealthy or Wall Street execs, but also the average Joe’s IRA and 401k accounts, mutual funds, exchange traded funds, etc. (Check out my article, “Kissing retirement money goodbye“.)

So when looking for money, according information derived from the Small Business Development Center, only about 4% of the money for start up business comes from the bank – approximately 55%-65% comes from personal finances or relatives.

Other forms of money comes from selling assets, home equity loans, partners, investors, etc.

Grant money is for another topic, but basically there is not any grant money “for profit” businesses and the government isn’t a direct source of funding (or cash) for business, which is not a bad thing either; but I’ll go into this at a later time. In the meantime, consider what our taxes would be if the government provided loans to everyone.

In summary, the business idea and creating a business plan may take the least amount of time, but finding money could take months so be prepared and possibly be creative.