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The Concept Of Increasing Your Assets Using Refinancing
The concept and idea of “good debt” and “bad debt” really entered the mainstream from the mid to late nineties.
Those who are conservatives will still maintain that all debt is bad especially with the current mortgage rates. I won’t argue with that.
Although there’s a part of us that do not like the feeling of owing money to someone else, we know that money is needed to generate more cash. That’s a classic law of wealth building.
There is an advantage that most home owners are not consciously aware that they have. And that advantage is that real estate can appreciate in value. And that increased value can be drawn out as funds for other investments.
Most people take up a mortgage for the sole purpose of having a home without being aware that taking advantage of the current interest rates can be the first step to financial freedom.
Leveraging your cash with refinancing is making the most of what you have for a good yield.
If it had never came to mind that a refinancing your mortgage can help you leverage your asset, I bet one day you will realize that you are behind a lot of people in where you stand financially.
Why mortgage refinancing?
Let’s use an example.
Let’s say you have bought a $300,000 house, and you can accumulate a rental of $21,000 a year. This means that it is getting you a 7% return a year.
That’s a good return. There are a lot of cash vehicles that wouldn’t even come close to giving you that.
But if you use the house to take up a 75% refinancing deal at an attractive interest rate and end up with a monthly payment of $1000, it will costs you $12,000 a year.
If you minus that from the $21,000 rental, you are left with generating $9000 a year.
And since now you have only $75,000 of home equity in you house, you are now getting a return of 12% from refinancing your mortgage. That is almost double your original return. And you will end up with $225,000 liquid cash.
Not bad at all.
You can then put that remaining money from your generated cash from home equity into 3 more houses (assuming $75,000 down payment for each house). If everything plays out accordingly, you will be controlling $1,200,000 worth of properties from a deft move of refinancing your first house.
Do note that this is a grossly simplified example to help you better understand the concept of the benefits of appreciating home equity. You should always seek advice from a professional or specialist.
Do you now see that minding your mortgage has nothing to do with stuffing your hard earned money into long term fixed rate home loans?
You are not maximizing the use of your home equity when you continue to obediently service that one housing loan instead of taking advantage of credit facilities available to homeowners.
Paying off that one loan deprives you of capitalizing on the funds that can potentially quadruple your personal net worth.
You can guess what I’m about to suggest next. You may have never heard something as radical as the way I’m saying this. But my point is to never fully pay off your mortgage.
This is probably a fully fledged contrary to the idea of fully paying off your home. This is an idea that has been sold to you since you were a kid when you saw your dad stressed out on the payments to the family house. You learned that a loan is a scary thing that can create tension within the family.
So you have decided to settle a loan as soon as possible.
Advisers and consultants at the lenders will tell you otherwise and insist you take up a package with good interest rates.
What you can potentially achieve when you make a conscious decision to mind your own mortgage, is a good legal way to build up your money and you personal net worth.
You are protecting your principal while making a full exploit on profits.
The more your money is put on different channels, the more your risks are managed. And you are doing that at a cost of a low or fixed interest rate. In a way, see it as a hedge.
Think long term assets instead of short term cash flow relief.
The good thing about your house is that you can make use of the equity you have build up in it while still owning it yourself and retaining it’s value.
Refinance With Your Existing Lender – Yes Or No?
There are some compelling reasons for you to go back to your current lender. Some of them are pretty common sense actually.
Firstly, your lender already has most of, if not all, of your documents required for application. They also have a clear record of how timely you have been making repayments on the loan.
If you do most of your banking with them, they may even make it easier for you to get a deal that is out of the public domain.
With all these in place, not only will you save some of your precious time, you will probably save some of your precious money as well.
Saying that, you should always check out the market on what is available at the point in time where you are looking at better deals.
This is so that you know what will be a good deal and what is not when your lender makes you an offer.
Lenders understandably want to retain you on the original terms that was signed in the first place. But once they get wind that you are looking around for a new lender, they might offer to restructure the loan for you unless the market is clearly going down.
Home loans is a very competitive market. Many times, competitors are willing to go the extra mile to acquire you as a new customer.
Especially if you quantum is a significant one.
For straight out refinance, new lenders will be more than welcoming. But for refinancing that include home equity loans, a more stringent check can be expected. They might think that the reason you are seeking more funds is that you are running into financial difficulties.
The best reason for staying with a lender is the lesser hassle.
As mentioned previously, you can expect a much smoother application compared to a new lender. In fact, often times, all you need to provide are you most recent income statements or salary stubs proving your income.
Sometimes, you might find the weird situation that your current bank is offering you a deal that is not as good as what is available in the market.
This is a puzzle that is hard to solve.
Taking into account that you have already spent a few years with them, you would think that they would be the first to give you a deal you cannot refuse. But that is seldom the case.
When the time comes, take up a new deal if the terms are overwhelmingly better than what you have at the moment.
Loyalty to the current lender takes a back seat when you own personal finances is top of the agenda. You are not obligated to serve anybody’s interest other than those of yours.