Three Wealth Building Scenarios
The three scenarios below represent refinancing scenario's that have been done. Each is a bit different from the other however the underlying purpose of all was to increase wealth over time in essentially two ways… either by reducing the level of interest paid out and/or by using a portion of existing equity to fund another real estate investment or a savings plan/retirement plan. As you know, any home financing plan under consideration should take into account your own unique financial situation as well as your own goals. The strategies you see here may or may not apply to you. However, whether or not they do apply, I hope you will find the following information helpful and thought provoking and perhaps they may give you some wealth building refinance ideas of your own to consider.
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| SCENARIO 1 |
| Let us assume that your current mortgage is a fully amortized loan whereby a certain ( usually very small ) portion of your monthly payment reduces your principle. What is missing however in your financial equation may be a realistic savings or tax deferred retirement account. Have you noticed that your home appreciates at the very same rate regardless of whether you have $500,000 of equity in it or $100,000 of equity. If the market value of your home is $650,000 and appreciates only 5%, it will then be worth $682,500 regardless of the equity level you have. To put it another way, your next door neighbor who has a $650,000 house with only $20,000 of equity will realize the same $32,500 gain.
In this scenario it was decided to fund a retirement savings plan by switching to an interest only mortgage whereby they would then take the principle normally given to the bank each month and instead placing it in a tax deferred high growth retirement plan. This could be as small as $3,000 per year but it helps build wealth over time if invested wisely. Also, there was no negative amortization involved therefore the principle did not increase. Essentially, this borrower took a very small portion of a non performing asset ( the principle payment) and turned it into a growth vehicle ( a savings plan) to help fund retirement or anticipated college costs.
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| SCENARIO 2 |
| Your home has a current market value of $800,000. Your current mortgages total $450,000. You owe $20,000 in high interest credit card debt and your savings plans both cash and retirement are really not what they should be.
Have you thought of choosing a mortgage that allows you to tap into say $50,000 of your current $350,000 in equity? Certainly this is a small portion of the equity. This would allow you to reduce or erase the credit card debt most likely carrying non tax deductible double digit interest and at the same time invest the remaining $30,000 into a growth savings account and/or IRA. In this particular case a homeowner was able to move the money saved in interest expense along with a small amount of future equity into a savings account. The rationale here is that you can build wealth by changing a non performing asset into a growth asset. The proof can be found by simply doing the math.
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| SCENARIO 3 |
| You own a home with a current market value of $775,000. Your current mortgages total $500,000. Your credit card debt is relatively low and manageable. Your savings and retirement accounts appear to be adequate.
You are however searching for another way to increase you net worth over time. Have you considered using just a fraction of your $275,000 equity for an investment property? Here is what investment properties are all about…two appreciating assets are better than one. Real estate appreciates over time at the same rate regardless of your level of equity in the property. This is a primary reason why people buy investment real estate.
In this case a homeowner used a portion of their dormant home equity to buy into another asset which could and should appreciate over time. This is one way people accumulate wealth. It's why some people you know own more than one property. Increase your performing assets and you can increase your wealth. Please note however that successful investors do their research prior to purchasing investment property. It's important to pay the right price going in. Tips and strategies that can help you do this are found on this web site along with suggestions regarding cash flow and tenant/property management matters.
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I have offered you three brief scenarios which were inspired by actual refinances. Obviously there are more. Please note that none of these scenarios involve some of the current what I call "get rich quick" promotions you see advertised. Those programs rely on luck and pure speculation. That is not what I would recommend. The methods employed above were based on a much more prudent approach to investing and can be supported by doing the math. You may also have noticed that in none of these examples has the borrower used cash from a refinancing to purchase vacations, jet boats or luxury cars. Although they sound like a lot of fun, those expenditures obviously are not growth investments and certainly wouldn't contribute to anyone's wealth.
These scenarios employed some of the same investment approaches I have used over the years. I hope you find the information helpful.
I am always available to answer questions you may have or to offer constructive suggestions regarding home financing, refinancing and investment properties. Please know there is never any obligation. If I can offer you some solid advice then you may decide to allow me to help you further when the time is right.
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