WARNING: Many Home-Owners Could Be Living Above Their Means!
San Ramon, CA -- Federal Reserve Board Chairman, Alan Greenspan,
commented best when he stated "Homeowners might have saved tens
of thousands of dollars had they held Adjustable-Rate mortgages
rather than Fixed rate mortgages during the past decade". If you
own a 30year fixed mortgage, the first 10years of your payments
will be applied towards paying down your mortgage interest; on
average only 15% of your original principle balance will have
been reduced. Considering the fact that most people will live in
their homes approximately 5 to 7years, it makes since to plan
what your goals will be before deciding on a loan program; your
decision could affect your financial planning for the next
10years.
Statistically speaking, if you have a family of four (2 adults
and 2 kids), a loan balance of $400K with an interest rate of
4.5% (4.642% APR), you'll need a Combined Yearly Income of
$140,000 just to Almost Break Even each month; actually you
could have a loss of approximately $478 per month.
Here's the breakdown: Income $140K per year x 35% (tax bracket)
= $91K per year ($7,583 mo.) Monthly Expenses: $2,027 (Principle
+ Interest) + $417 (taxes) + $117 (home insurance) + $1K (2 car
payments) + $800 (food) + $500 (health insurance) + $2K (family
of 4 living expenses) + $300 (student loans) + $300 (credit
cards) + $600 (childcare services) = $8,061 Total Expenses.
These figures don't include any increases from your local county
assessor's office, car repair bills, cost of living increases,
cable or satellite services, utilities, etc.
Rather than considering shorter termed loans (with more
favorable rates and payment options), the customer will keep
their existing loan (they like the current low rate) and take
out a Home Equity Line of Credit.
Currently our economy is prospering; this good news creates a
rising Prime Rate, which increases the payment rate on your
Equity Line of Credit. Some people are using their Equity Line
of Credit accounts in order to maintain their current standard
of living. One of two things will eventually happen: a) The
client will have to prematurely sell their home because they
can't afford the payments or b) The client will maximize their
existing equity and be forced to make higher payments; this
scenario has the possibility of a foreclosure waiting to happen.
In addition to establishing your goals and determining the right
loan program, you should also understand the character of a real
estate investor. Treat your property as an Investment and NOT a
Retirement! Learn to use your equity as leverage in order to
obtain greater wealth! Ask yourself what are you trying to
accomplish with this transaction? In our opinion, "rate
shopping" is the old process for selecting a mortgage loan and
it should be replaced with "payment shopping". Did you know
there's a loan program available that may have a higher interest
rate than you currently have, but provides you with a lower
monthly payment (plus extra monthly cash-flow), and no negative
amortization? Also, don't view negative amortization as a dark
cloud in terms of loan programs; depending on how long you plan
on staying in your home, this lower payment option could be a
blessing in disguise for the true Real Estate Investor.
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