Episode 21: First Mortgage After Prison

Success After Prison with Michael Santos

First Mortgage:

Carole and I met with a mortgage banker and provided all of the documentation requested. We took the next step of ordering an appraisal of the property. By considering comparable prices in the neighborhood, the appraiser provided documentation valuing our property at $454,000.

To avoid additional charges for mortgage insurance, we agreed to accept a mortgage of 80% of our home’s appraised value, or roughly $363,000. We wrote a check for $17,000 to cover the remaining amount we would owe to pay off the note to ABS Development. With the $12,000 we had put as a down payment when we initially signed the purchase agreement, and the $17,000 in additional funding we had to pay at the time of the close, our total out-of-pocket investment in the property was $29,000. But in less than 18 months of ownership, our total equity in the property surpassed $90,000—or more than three times what we put into the property.

In applying for the mortgage, Carole and I considered the term of the loan. Traditionally, most people finance their properties over a 30-year term. The longer amortization brings the advantage of lower monthly payments. With the longer term, however, payments during the first half of the loan went primarily to satisfy interest. Since we wanted to build equity in the property at an accelerated rate, we chose to finance our property over a 15-year term. The monthly payments on such a loan would be around $2,500, but each payment would reduce our principle balance by more than $1,500.

The advantage of owning real estate that we financed over a 15-year term became readily apparent to us. As long as the housing market continued to heat up, our property’s higher valuation would increase our equity. If we looked at a five-year plan, and property values increased by 20% over that term, our $454,000 property would be worth $544,000. In addition, by making our mortgage payments on time over a five-year term, we would reduce the amount of mortgage debt we owed on the property by at least $100,000. If those plans worked out, we could project an equity in the property of more than $280,000 after five years—a 10x return on the money we invested to purchase the property.

As I made these projections, it became clear that real estate ownership could and should play a significant role in my plan to build credibility. If I could replicate the strategy a few more times, it would seem that I could reach the goal I had set of building a $1,000,000 net worth by August of 2018, five years after I concluded my obligation to the Bureau of Prisons. I would only need to make my mortgage payments on time, and build my career.

To build my career, however, I would still need to persuade more institutions to purchase The Straight-A Guide. Without independent research to validate the program as being evidence-based, however, I would continue to meet resistance in the marketplace. Administrators would object, saying that although I used the course to become successful, there was no guarantee that others could do the same.

To overcome administrative objections that I anticipated, I would need to build more credibility. One strategy to build that credibility would be to write more, to speak more, and to create opportunities that would put me in front of more prospective buyers. Each one of those strategies required financial resources. Accordingly, I needed to figure out ways to obtain more working capital that would allow me to reach a broader market. As the old saying goes, it takes money to make money.