Friday, October 30, 2009

Refinance Advantages and Strategies

Property prices are appreciating on an annual basis or at times there is appreciation on a monthly basis. So it makes a great deal of sense to think about refinancing after five years, perhaps even after three years.

Another advantage of refinancing is within the mortgage instrument that we use, at the end of five years, the program goes over to a fully indexed rate. At that point the monthly payment could increase, but not necessarily.

It would make sense then for the borrower to go back to the original monthly payment, by using either the minimum payment or the ‘‘smart loan’’ program.

With both the pay rate and the interest rate continuing to drop, you have the opportunity to lower your mortgage payments and increase the amount of cash you are taking out of the property by refinancing. You could then take that money and do something else with it.

USE LEVERAGE TO CREATE WEALTH.

As we like to say, there is ‘‘good’’ debt and ‘‘bad’’ debt.

Of course some would say all debt is bad. In some respects we might agree with that, but we’re aware that ‘‘good’’ debt enables you to create wealth.

The one advantage you have in a real estate transaction is that real estate can appreciate in value. It’s leverage that makes money for you. If you do not use leverage in a real estate transaction, you might as well go buy a bond because it’s the leverage that increases your return on investment and increases your yield.

Investors can only benefit by shifting their investing strategy away from building equity toward creating cash flow. Paying off the mortgage deprives the investor of large quantities of cash flow.

Real estate is a great investment because it has one trait that no other investment possesses: it is not perishable. With real estate, it’s possible to extract the equity built into it—and yet hold on to the asset and retain the value of the asset. Extracting equity means to take out the equity, reaffirming the fact that once the equity is sold, it’s gone. Stocks and bonds don’t allow for that.

The financing is based on one’s credit and one’s ability to make the monthly payments. It is not based entirely on the value of the property. If your credit is not good, greater attention is paid to what you own by way of real estate; and you are going to wind up with a much lower loan to value and a much higher interest rate.

You must find a mortgage first, the best possible mortgage that works best for you; it will be the mortgage that goes hand in hand with your qualifications. Finding the right mortgage is crucial. It must be a mortgage that allows the investor to free up lots of usable cash. That means finding a mortgage in which the monthly payments are as low as possible.

Being financially creditworthy is important. It does not do you much good to have a great income and good assets if you have a poor credit score.

Credit scoring is tough. Sometimes simply checking one’s credit can pull the credit score down. That can really add up if multiple sources are requesting credit checks on you. If you signed on to a mortgage company, and you gave them your Social Security number, that would provide them the opportunity at their discretion to look at your credit. Those inquiries count against you. They can pull your credit score down.

Without usable cash, it was impossible for the investor to think about purchasing real estate on a continuing basis. Without usable cash, the investor could not exploit the new mortgage and real estate vehicles.

As long as such people cling to the wrong-headed mortgage strategy of putting ‘‘dead money’’ into the equity in their homes, they are going to be unable to take advantage of the newly created mortgage and real estate instruments.

Spurred on by the banks, new investors mistakenly thought that becoming debt free was desirable. They owned homes that were sometimes worth millions and certainly hundreds of thousands of dollars but they had no disposable cash—making for an absurd situation.

But the people who got bad advice, and so they put their money into non-cash items, especially fixed term mortgage instruments. As they reach their golden years, these homeowners no longer qualify for mortgages that could ease them out of their house-rich and cash-poor dilemma. They could get cash, of course—by selling their property, or by doing a reverse mortgage—but these were hardly optimal solutions.

If you want to build equity in your investments, how much better off you would be to build equity in a home without spending your own earnings to pay down the mortgage.

The banks and financial institutions have enshrined as a sacred value the notion that everyone should be debt free. The only way to do that, they insist, is to pay down a mortgage as quickly as
possible until the balance is zero. Only then, say the banks, does it make sense to seek to extract profit from a property.

The source blog about money and further investments is money knowledge.

Related Posts:


Documentation types for refinancing
Introduction to Refinancing the mortgage
Refinance your Home and get free money to make further investments
Refinance and types of mortgage

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