Posts Tagged "trade offs"

Refinancing your home Part 2: An Example

Posted by Preet on Jul 27, 2007 | 2 comments

Okay let’s show how an actual couple ended up freeing $915.80/month by refinancing their home. I’ve rounded the numbers, but they are from a real life scenario. We’ll begin with a snapshot of what their financial situation was BEFORE:

Home Value: $250,000

Mortgage: $150,000 balance, 20 years left, 6% interest rate = $1,070 Monthly Payment

Credit Card Debt: $10,000 balance, 18.8% interest rate = $500 Monthly Payment

Vehicle Loan: $26,000 balance, 8% interest rate = $500 Monthly Payment

Department Store Charge Cards: $5,000 balance, 28.8% interest rate = $250 Monthly Payment

In this case, they have a total debt obligation of $191,000 and total monthly payments of $2,320.

By refinancing, they were able to take out $41,000 of equity from their house to pay out the vehicle loan, the credit cards and the department store charge cards. This increases the mortgage from $150,000 to $191,000. Plus, let’s add a $5,000 charge to break their existing mortgage for a total new mortgage balance of $196,000.

However, that entire amount is now being charged 6% interest and amortized over 20 years.  The new mortgage payment is $1,404.20. …but that’s the only payment.

So: Old Total Monthly Payment ($2,320.00) – New Total Monthly Payment ($1,404.20) =

$915.80 Saved Per Month

Take this with a grain of salt.  You have to factor in the trade-offs. Yes, you free up a lot of money monthly, but it has to be put to good and productive use. Also, before they would have freed up the $500 monthly vehicle loan payment in 4 years anyways, but now they blended it into a 20 year mortgage, effectively paying for that vehicle for 20 years. In many cases, these trade-offs are more than acceptable to people who are looking into refinancing as they are in dire need of a short term solution and even just a little breathing room is enough of a dangling carrot for them to proceed. In this particular case, a $915.80 monthly savings was very compelling and they are currently saving $700/month out of that into an investment account.

So how do you become wealthy?

Posted by Preet on Jul 24, 2007 | 0 comments

I Suppose that’s the ultimate question, isn’t’ it? If I had to boil it down into the shortest space possible it would be this: trade-offs. Specifically, you have to look at the trade-off within each financial decision you face.

Let’s look at an example. Should I buy a Honda Civic or a Porsche Boxster? What would be the trade-off in this case? If you get the Honda, you will be spending less on all your costs associated with cars (vehicle payment, insurance, gas, maintenance, etc.). If you get the Porsche you pay more and perhaps have a more enjoyable driving experience, get noticed more and that’s about it. So the trade-offs in this case are: 1) How much money you have left over each month and 2) How much pleasure you derive from driving a nicer car.

So does that mean everyone should go out and buy a Honda Civic? (or Toyota Corolla? etc.) Of course not. You have to make that decision yourself. But obviously, with all else being equal, the person who buys the Civic would have more disposable income left over. That income could be used for numerous things: savings, vacations, dining out, etc.

Of course there is a bit of a paradox, no? I’m pointing out that in order to accumulate wealth (which will let you buy a big house and lots of Porsches) you have to forego the Porsche. (?!)

…but only for NOW. One of the biggest trade-offs you will have to consider is putting off immediate frivolous consumption. The second thing to consider is that you have to put your savings from your trade-offs to good and productive use! If you just end up spending it on other stuff instead of saving or investing… well then you should’ve just bought the Porsche! :)

There’s so much more to this discussion than what’s written here obviously – I certainly cannot cover it all in one posting. I think my main goal will not be to provide the answer to every question for you, but rather to empower you with the financial decision making skills to make your own decisions that will ultimately lead you to a financially healthy lifestyle.