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Long Term Financing

Long Term Mortgage Loan — How To Retire It Early, Part 2 of 2

by Pag-IBIG Financing Admin

In Part 1 of this series, you’ve learned that long term home financing could be very expensive in the long run while at the same time it also makes an expensive property look more affordable on a monthly basis.

For many, getting a home loan is the only way to ever achieve their dreams of owning a home.

However, for those who are into real estate investing and know what they are doing, a long term loan could just be another form of leverage that should be taken advantage of.

As pointed out in the previous series, here we’ll touch on the factors to consider when retiring a long term housing loan earlier than its maturity period such that it becomes advantageous on your part as a borrower or investor. Each one of those factors is cited elaborated in the succeeding paragraphs.

Factor #1: Second Property Investment

In one of our conversations, I mentioned to a friend how lucky he was for inheriting a nice home from his parents. It turns out that each one of his siblings (there are four of them) also inherited a property in another place in the same city. He said he was very thankful to his father for all of these. When his father was still younger, he planned about investing exactly four properties and intended to give them to his children. I was really laughing when he said his father made sure these properties are located in the North-, South-, East- and Western parts of the city!

Did you know that Pag-IBIG allows you to have up to two housing loans? Of course, you have to do it one at a time. In other words, you can take on another housing loan provided your previous loan is already paid off completely. And for the second and third housing loan, you still have to undergo the qualification process just like you did when you got your first housing loan.

Is this something you have thought about already?

Ask yourself, “Am I willing to pay off this loan to get another property?”

Factor #2: Liquidity

real estate liquidityDo you know someone whose hobby involves collecting some stuff? You know…old coins, postage stamps, vintage cars, and others.

I’ve met someone whom a lot of brokers would consider a real estate investor. And his hobby? Collecting vacant real estate properties!

Now if you would want to be in this kind of hobby, I would suggest that you get to know what you are getting into. Always have an exit plan in place, just in case something wrong happens that you can’t take it anymore.

The funny thing about real estate brokers is that they are selling properties which they themselves would not even invest. The common reason they say is that a real estate is a dead investment! (Now you know.)

Is there such a thing as a dead investment?

Let me explain it this way: Suppose you have purchased a property a year ago and then suddenly something happened that puts you in an awkward position to want some money – very, very badly. And then you think, one of the ways to raise that amount of money you needed is to sell a piece of real estate that you own. Finally, here’s the catch: “How can you sell the property at the price that you wanted without incurring a loss?”

In an emergency sale, the seller is usually willing to negotiate down the price in exchange for the much more liquid equivalent: CASH.

A dead investment is really just a fancy word for an investment in illiquid asset, such as real estate. It could also mean an investment that does not generate a passive income to the owner.

Ask yourself, “Do I have enough cash in reserve such that I won’t resort to selling my real estate at a loss when an emergency happens?”

Factor #3: Savings

When you retire a loan earlier, you most likely need to you slash your cash reserve to do that. Now that money in some way of another could be earning an interest. Once you use it to pay off the remaining loan balance, you also kill the chance for it to earn the intended interest.

When paying off your loan early, see to it that the money you use to pay off the remaining balance is earning much lower than the interest rate of your mortgage.

Say you have P 700k loan balance and you have that much cash in reserve. Now, compare the interest it will earn if you invest that money versus the interest rate of the loan. If that money is earning you 15% annually — a good rate, by the way – and your mortgage is currently at 10.5% per annum, you are better off not paying the whole balance yet.

However, if your money is giving you a mere 2.5% per annum, plus some more headaches here and there, it would be wise to use that money to pay off your loan balance.

Ask yourself, “How does the interest rate of my mortgage compare with my interest if I would invest the money I’m planning to pay it off with?”

~~~

“Long Term Mortgage Loan — How To Retire It Early”
is written by Carlos Velasco. This is the second part of a two-part series. Read the first part here.

Filed Under: Housing Loans, Real Estate Finance, Tips and Traps Tagged With: Amortization, Housing Loan, Liquidity, Long Term Financing, Mortgage Loan, Savings

Long Term Mortgage Loan — How To Retire It Early, Part 1 of 2

by Pag-IBIG Financing Admin

Some of you may have already thought about, or even calculated, the real cost of getting a mortgage loan to finance your home purchase. If you did, that’s a good sign that you are savvy when it comes to your money. Keep that good habit alive.

The calculation is actually very simple and straight-forward. All you have to do is multiply the amount of monthly amortization by the total number of months – say, by 360 for a 30-year loan term – and that’s it. It’s no brainer, actually.

However, if you want to find out the total amount of money that goes to paying the interest, you need to use the Online Calculator which you can find at the Right Panel of this website or by following this link. With the help of that calculator, it’s easier to figure out how much of you payment is being swallowed by the interest payments.

(See also: Mortgage Loan Calculator.)

Long Term Home Financing and Its Effects

Did you notice that a long term loan of 20 to 30 years could literally cost three times, or even more, than the original amount that you borrowed? That is, if you borrowed P 1M and plan to pay it off in 30 years at 10% per annum interest rate, it will actually cost you roughly P 3M in combined interest and principal payments alone!

pag-ibig long term housing loanFor some people, that is enough to spin their heads around and decide against ever using a long term loan. One site visitor was thinking along this line and left a comment this way:

“wow! now I see it’s better to buy a property in cash than finance through PAG-IBIG. The interest almost exceed the principal, you can even buy another house with that interest!”

Do you agree?

Well, actually he was right about the enormous amount of money at stake in the long term. But, let’s get real and think along this line:

“At your current level of income and lifestyle, how many years do you think it will take you to raise the amount of money equivalent to the selling price of the house that you wanted to buy?”

Let’s put a real figure this time, “How many years will it take you to save P 2M?” I’m assuming you are eyeing a house with a P 2M price tag. When answering that, you should consider the following:

  • Your Income. Or your combined income if you are married
  • Your Lifestyle. Is it high- or low-maintenance?
  • Your Priorities. Make a list: your wedding, advanced education, job placement fee, etc – anything that costs money and that is important to you.
  • Your Foundation. Think: the people who depended on you for financial support.
  • Your Debts. Don’t ever forget this part before taking on another debt, your house.

How many years, then?

  • 1 year? This is not impossible at all. But for most Filipinos, no matter how hard they work, are just not on that level yet.
  • 3 years? Congratulations! You probably should aim for a higher priced home.
  • 5 years? Congrats even more! Have you ever heard of the term inflation? Well, that’s a nasty word which means that the P 2M house you originally thought about buying should have already increased in price by that time.
  • 10 years? Sigh… finally! But hey, are you still motivated about buying a home after the long wait?

You may want to disagree here, but if we get REALLY real, the sad answer to that question is FOREVER. Many people will reach their prime age without ever accumulating that amount in liquid asset – that is, in cold CASH. Hard to believe? Well, if the dead could only speak, they would all nod their heads in agreement. 🙂

Long Term Home Financing — The Beauty And The Beast, 2-In-1

The beauty of long term home financing is that it makes a financially-out-of-reach real estate appear light on the budget on a month-by-month basis.

Recently, I came across a real estate ad that says something like, “Own a home. Only 249 per day!”

That’s a brilliant Marketing Strategy and I bet it works. Thanks to Long Term Home Financing, owing a home gets even more affordable. That is, if you have the discipline to say goodbye to Starbucks.

But of course, a long term loan doesn’t always mean you have to pay off the loan to its last payment schedule. You can always retire it earlier than that. There are advantages and disadvantages in doing so.

In part two of this series, we’ll touch on the reasons for retiring your loan earlier than its maximum term. Plus, some tips on how to do it.

UPDATE: The second part of this article was already posted. Please check it now.

~~~

“Long Term Mortgage Loan — How To Retire It Early” is written by Carlos Velasco. This is part one of a two-part series.

Filed Under: Housing Loans, Real Estate Finance, Tips and Traps Tagged With: Amortization, Housing Loan, Long Term Financing, Mortgage Loan

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