mortgage

Refinancing Your Home: Keep your head on!

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I have a mortgage refinance story to share with you guys. One that involves a certain levelheadedness to show that refinancing CAN work, but you have to be cautious.

We lived in an area where we had purchased property about 7 years ago. Prices were in the toilet at the time, but soon they they went further down, down by 5% to 10%. We didn’t flinch we just kept paying our mortgage, and concentrated on other issues. Our house price dropped from NT$3.5 million to a little over NT$3 million.

Stupidly though we forgot to check interest rates, as they dropped. Our mortgage payments didn’t drop much at all. By then my wife and I thought it about time to buy a car. We had an opportunity to purchase a parking lot in our community as the investment company was getting rid of the stock, before being liquidated. Never occurred to me to ask why! We delayed purchasing the car for quite some time, though.

So we decided to jump: we renegotiated our house loan with the original financier. We increased the total amount to about NT$2.7 million from the total outstanding. That provided us with a check to purchase our parking lot (about NT$380K). In addition, we negotiated a new mortgage payment about 2/3 of what we had been paying before. It was a win-win deal.

Since then, we have noted that the property prices have increased here by about 50%-60% conservatively. So we benefited in a number of ways:
1. cheap property purchase
2. lower interest rate and lower monthly payments
3. increased property value
4. convenience of personal parking space

But, before you refinance, you need to make sure that you:
1. work to increase the potential return
2. take advantage of poor market
3. can handle the post refinance payments
4. your life is better as a result.

Season’s Greetings.

This posting is sponsored by Personalhomeloanmortgages.com

Assets vs. Liabilities

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A reprise of Rich Dad Poor Dad. There has been much discussion of the authenticity of RDPD’s and the background of the author. You can read about that at other blogs: Rich Dad, Poor Dad, Liar Dad, Thief.  However, one criticism of the book is below along with my own interpretation of RDPD’s theories.

Jeff writes – “You tried to demonstrate that a house is a liability because you pay property tax on it. That is irrelevant. You also have to pay a tax on your car (license fee). Does that make your car a liability? You pay taxes on your income. Does that mean that earned income is a liability?”

Actually, RDPD clearly defines an asset as something that puts money in your pocket and a liability as something that takes money out of your pocket. So, if you live in your house, you pay a mortgage, taxes, etc., it is effectively a liability because the money comes out of your salary to pay this stuff. In other words, the house is costing YOU money.

Whereas if you rent out a house to someone who pays rent, as long as the rental income covers ALL expenses (inc. taxes) plus a little, the house becomes an ASSET, ie. it is making money for you.

In truth, this is a simplification of the situation, as in a balance sheet, a house with a mortgage would be recorded twice, as an Asset and a Liability. Anyway, he makes an interesting point that our passion for buying houses to live in really isn’t such a great way to make wealth (except through capital gains) as it produces no regular benefit.

But I do think he makes an interesting point: somethings that we attribute as having asset value aren’t really assets at all. A Car is a quickly depreciating asset, and if you are paying car loans, some of the time, the net difference between the value of your car and your outstanding loan may turn it into a clear liability on your personal balance sheet, esp. in the first six months where you haven’t paid anything off, and the car has suffered the sharpest decline in its value.

“A house is an asset, period. ”

Another point that RDPD makes is that yes, the house is an asset, but the question is whose? If you buy a house and its price decreases, your mortgage (assuming you have one) shifts into negative equity position, ie. if you sold, you would still have to repay the amount of the loan beyond the sale price of the house. Could it be said to be an asset then?

And if you don’t believe, do you honestly think that housing prices will keep heading up as they have been doing so ‘Mmm’.

Does this clarify things a little?

What I admire is RDPD’s ability to string simple observations out to a whole book! That’s quite an achievement. I did enjoy playing the game, though it is pricy.

Kenneth