How the wealthy handle their Real Estate? March 18, 2008Posted by shaferfinancial in Uncategorized.
Tags: equity management, interest only loans, mortgage planning, mortgages, real estate, variable rate loans, Wealth
I recently read an interesting article in the NY Times about the wealthy and their real estate financing.
When the NY Times writes about finance ideas you know that the wealthy have used these ideas for years. Typically, the NY Times doesn’t define “wealthy,” but they do make a very important point. Those that are buying their first home, that have little in the way of reserves, that have low credit scores, should get a 30 or 40 year fixed rate mortgage and learn how to make those payments and build up some equity before they can move on to more advanced financial techniques. You have to learn how to walk before you run!
Now, for the rest of us I will quickly go over the more advanced techniques that I have been getting my clients into for years.
1. Interest Only Loans. This loan, although slightly more expensive than the fully amortizing loans create maximum cash flow. You can get them with a variable rate or a fixed rate. Basically, your required payment is the interest due on the loan each month. So you gain the tax benefits of mortgage interest, but are not required to make a principle payment for years (10,15). This allows you to keep more money for yourself, to invest in, college funding, etc. And if paying off your mortgage is your goal, you can make a principal payment anytime and lower your required payment. This works especially well for those who have variable income, or who get bonuses or those that invest and make money from their investments periodically. It puts you in charge instead of the lender.
2. Variable Rate Loans. The bain of the sub-prime set, offers advantages for the financially responsible. These range from monthly re-sets (Home Equity Lines are usually set up this way) to fixed for 3-5-7-10 or 12 years before they reset. Very few people are in the same loan for more than 10 years. They either move to another home, or refinance. So why pay the extra expense for a 30 year fixed rate loan? Now, sometimes the variable rate loans have a much lower interest rate, while other times the spread is minimal. Bottom line, you should check the difference and make your decision based on what your past habits and future plans are.
3. Equity Management. I have blogged on this extensively in the past. Just click on the link to the right for details. Bottom line, people who could afford to have a paid off home, choose not to because they can put that money to work for them, instead of leaving it inside the walls of their home. It is a time tested strategy and recently has been the topic of several financial best selling books.
Don’t think that these strategies are only for the rich, the reality is exactly the opposite. The rich put these strategies in play to get wealthy!!!