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Understand the difference between your income and your debt and the importance of these two factors with regards to your Mortgage(s). This simple Mortgage Calculator is tied to income. It can be used by someone buying their first home or someone with 30 investment homes.
The software is completely standalone and is completely free. You are free to distribute the software amongst your friends, family and colleagues. I only ask that you do not use it for any commercial purposes or use it in any official capacity.
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Thursday, January 8, 2009
The Humble Mortgage
There are literally hundreds of books and hundreds of seminars "out there" on property investment - all proclaiming the joy and wealth that can come from said venture - what is amazing though, with so much information on a single subject with a multitude of variations on the same, there is very little information on how the humble mortgage works. In fact, mortgage concepts are virtually ignored and yet mortgage and mortgage structure remain the one single and underlying constant that has not changed over time.
Now, from time to time, as fortunes and trends change, mortgage rules do change - but regardless - the fundamental principles of the subject remain remarkably consistent.
While lending practices between 1999 and 2008 changed (for the worse), the mortgage structure and its built-in sensitivity to economic pressure from the real world did not change, and today (late 2008), that pressure has catapulted the Western World and emerging nations into a Global Recession.Who 's to blame? Well, many say the "housing market." Personally, I think not, but the housing market has proceeded the recession by at least a full year.
The job of explaining the complexities of the financial melt-down is the responsibility of an economist - not mine. But what I will say is this: a mortgage does not live in a bubble. A mortgage is exposed to the real world by the interest portion of its structure. Also, too income tax plays a large role is determining eligibility. It is through these two windows the error of lax lending practices will drive home values down and has set the stage for a spectacular fall in asset-value the world over.
Now, from time to time, as fortunes and trends change, mortgage rules do change - but regardless - the fundamental principles of the subject remain remarkably consistent.
While lending practices between 1999 and 2008 changed (for the worse), the mortgage structure and its built-in sensitivity to economic pressure from the real world did not change, and today (late 2008), that pressure has catapulted the Western World and emerging nations into a Global Recession.Who 's to blame? Well, many say the "housing market." Personally, I think not, but the housing market has proceeded the recession by at least a full year.
The job of explaining the complexities of the financial melt-down is the responsibility of an economist - not mine. But what I will say is this: a mortgage does not live in a bubble. A mortgage is exposed to the real world by the interest portion of its structure. Also, too income tax plays a large role is determining eligibility. It is through these two windows the error of lax lending practices will drive home values down and has set the stage for a spectacular fall in asset-value the world over.
Buying back your house
1. Buying principal on your mortgage.
2. Reducing your total exposure to market forces.
There are a lot of different ways of looking at loans. Most people consider a loan a negative however; if I make the statement, that a loan (for any amount) is tax free; one could be forgiven for thinking that a loan could be a positive thing.
1. Let’s say you purchase a $330,000 home and you borrow the total amount (example only). The amount borrowed is based on 25 years at 9% and let’s assume that the interest rate never changes (example only) therefore, over the life of the loan, your total amount paid to the bank is $830,805. While this astronomical difference, $500,805, is the price of borrowing the $330,000 in the first place. When I say buy back debt I mean reduce the $500,805 in interest payments.
How? Buy buying principal. What ever you can manage will reduce the life of the mortgage, and when you reduce the life of the mortgage you reduce the amount of interest paid ($500,805).
2. Some Property Investors use a system based on increasing their debt exposure, then from the mathematical perspective, the system can only work in one direction, that is, when the market is increasing, and even then, can be highly volatile. When the market decreases the only way these Investor types can continue to thrive is to divest themselves of their properties in the order of least desirable (those creating the least amount of income), and this is exactly how these individuals survive (but they wont tell you this). Basically, they are selling debt to purchase less debt. The system can work but you need to be one step ahead of the market place, also, and most importantly, you cannot form emotional ties to your properties. It sounds goofy but the greatest downfall of most property investors has been that emotional attachment to what they believe to be the greatest piece of property the world has ever seen (I’ve been there so I know how this feels).
The biggest deterrent to chasing the market is the simple fact that mortgage structure defeats the race to riches. Take the above example: if you borrow $330,000 to buy a $330,000 home and then you spend the next 25 years paying the home off, which will cost you exactly $830,805, ask yourself this: will that home actually be worth $830,805 in 25 years? The answer, interestingly enough, is most probably. The reason: interest rates are tied to the rate of inflation. So, the only way this system can work is if our $330,000 home, that we buy today, is actually worth more than $830,805 twenty five years from now.
Unfortunately, the law of averages is but one factor working against this idea. The most important truth of the whole mess is that mortgage structure, good lending practices and anti-usury laws are not designed to make people rich but allow the average honest citizen to purchase a big ticket item like a home that he could otherwise not afford. But, you say: some people do get rich in real estate! True, but they do it by buying back debt when times are bad and borrow cautiously when times are good. They sell assets as needed to generate equity for themselves and to protect their other investments from market swings. Basically, people get rich in real-estate when they are cautious and use good old fashion common sense – something that has been sorely lacking from the housing marketplace for the last 5 years!
2. Reducing your total exposure to market forces.
There are a lot of different ways of looking at loans. Most people consider a loan a negative however; if I make the statement, that a loan (for any amount) is tax free; one could be forgiven for thinking that a loan could be a positive thing.
1. Let’s say you purchase a $330,000 home and you borrow the total amount (example only). The amount borrowed is based on 25 years at 9% and let’s assume that the interest rate never changes (example only) therefore, over the life of the loan, your total amount paid to the bank is $830,805. While this astronomical difference, $500,805, is the price of borrowing the $330,000 in the first place. When I say buy back debt I mean reduce the $500,805 in interest payments.
How? Buy buying principal. What ever you can manage will reduce the life of the mortgage, and when you reduce the life of the mortgage you reduce the amount of interest paid ($500,805).
2. Some Property Investors use a system based on increasing their debt exposure, then from the mathematical perspective, the system can only work in one direction, that is, when the market is increasing, and even then, can be highly volatile. When the market decreases the only way these Investor types can continue to thrive is to divest themselves of their properties in the order of least desirable (those creating the least amount of income), and this is exactly how these individuals survive (but they wont tell you this). Basically, they are selling debt to purchase less debt. The system can work but you need to be one step ahead of the market place, also, and most importantly, you cannot form emotional ties to your properties. It sounds goofy but the greatest downfall of most property investors has been that emotional attachment to what they believe to be the greatest piece of property the world has ever seen (I’ve been there so I know how this feels).
The biggest deterrent to chasing the market is the simple fact that mortgage structure defeats the race to riches. Take the above example: if you borrow $330,000 to buy a $330,000 home and then you spend the next 25 years paying the home off, which will cost you exactly $830,805, ask yourself this: will that home actually be worth $830,805 in 25 years? The answer, interestingly enough, is most probably. The reason: interest rates are tied to the rate of inflation. So, the only way this system can work is if our $330,000 home, that we buy today, is actually worth more than $830,805 twenty five years from now.
Unfortunately, the law of averages is but one factor working against this idea. The most important truth of the whole mess is that mortgage structure, good lending practices and anti-usury laws are not designed to make people rich but allow the average honest citizen to purchase a big ticket item like a home that he could otherwise not afford. But, you say: some people do get rich in real estate! True, but they do it by buying back debt when times are bad and borrow cautiously when times are good. They sell assets as needed to generate equity for themselves and to protect their other investments from market swings. Basically, people get rich in real-estate when they are cautious and use good old fashion common sense – something that has been sorely lacking from the housing marketplace for the last 5 years!
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