Wealth has different meaning to different people. To some people wealth is living in magnificent houses while to others, wealth is being able to pay their bills on time. Whichever the case, building wealth is a careful process that requires right information, proper planning and making good choices. It is based on several principles such as budgeting in order to save, controlling the debts and protection of the wealth accumulated. The main objective of this presentation is to discuss how an individual can build wealth to attain financial goals and make right choice in residential mortgages.
How to Building Wealth
Prior to building of wealth, one is supposed to think of personal wealth creation. To do this, there is need for one to embark on a personal wealth creation strategy. This generally requires putting into account of one’s net worth. This comes about by assessing assets and liabilities a person has to be able to arrive at net worth. Consider wealth–creating asset which increases in value or can provide a return such include a saving, retirement plan and stocks and bonds just to mention but a few. On the other side liability are considered to be debt or the money a person owes. Such include a home mortgage, credit card balances or a car loan. Thus, net worth is the difference between the assets and the liabilities, which is the wealth (Michailidis & Michailidis, 2007).
After determining one’s net worth next thing to consider is to what amount would the net worth be desired to be after designated period of time? It is important to know that building wealth is not an overnight issue. It needs setting of both short term and long term goals. Personal wealth–creation strategy is anchored on specific goals. When preparing these goals they need to be realistic and have established time frames by which they should be achieved. On the same note, a plan should be devised on how to undertake this and always flexibility is needed because goals may change at any time depending on prevailing conditions that may have bearing to these goals.
Sound financial management is crucial and a person needs to examine himself to understand what kind of financial manager he is. For instance there some individuals who are strugglers when it comes to financial matters. They find trouble in sailing through the sea with financial storms. They find it overwhelming to budget in order to save. There are those who are deniers. People who belong to this category refuse to admit that there are in financial trouble and hence they do not see point of budgeting to save. We do have another group known as Impulsives. These kinds of people are bound to reach out for immediate gratification. They live for today and tomorrow take cares of itself and therefore, they care less about the budget to save. To be able to build wealth, planners are needed. These are people who have authority over their financial affairs and so they budget to save (Swart, 2004).
Critical changes have to be made so as to keep a close track of income and expenses. These changes can help increase income or decrease expenses; thus enabling you to develop a budget that facilitates more of savings. It is wise to come up with budget changes which is workable and that can be lived by month after the month. To inculcate and maintain discipline to save it ensures that there is saving for every month and if possible have the savings automatically deducted from paycheck or checking account.
After this now you can budget on what is left. What follows is investing your savings. Investing enables you put money you have save to working more money and increase your wealth. This is true because investments increase by generating income inform of interest or dividends. Also, investments can generate income by appreciating value. Both incomes earned from investments and any appreciation in value of any of your investments increase your wealth. However, choosing ways into which to invest your savings is an art. If you put your saving into good investment you will make more money but if you put in bad investment it will cost you money (Marcosson, 2008).
As you are saving and investing, it is worth noting that the amount of expected return is usually based on the amount of risk you have taken with your money. When there is higher risk of losing your money, generally there is higher expected return and the reverse is also true. So it is important to decide how much risk you are able to take. By making use of investment pyramid one can be able to balance savings and investments and move up the pyramid only after a strong foundation has been attained.
When determining the amount of risk that are in position to undertake, several factors are to be considered such as financial goals, time horizon, financial risk tolerance and inflation risk. Financial goals answer the question of how much money needed to be accumulated over certain period of time. Such investment decisions are solely reflection of person’s wealth creation goals. Time horizon determines how long one intends to leave money invested. Perhaps it may be one year or ten years. If a person is not willing to take higher risk, short time horizon would be preferred. The longer the period an individual plan to put money into investment the higher the risk.
Financial risk tolerance requires a person consider if he or she is in position to invest in a riskier alternatives. If you cannot afford to loose your investment or have it value fall then you should not take high risk when you are investing. Finally, inflation risk is another important factor which needs to be put into consideration. Inflation risk reflects saving’s and investments’ sensitivity to inflation risk. A good illustration for this is considering an investment such as a savings account which does not have risk default. In such investment, there is risk that inflation may rise above the interest rate on the account. If the account, let say earns about five percent interest, inflation has to remain lower than the interest rate if at all a profit is ever to be realized (Anari, & Kolari, 2002).
After you have attained a good savings foundation you may need to diversify your assets among different types of investments. Diversifying your investment helps smooth out potential ups and downs of your investment returns. In this case several tools of investment may be used such as bonds, stocks, mutual funds, house or stating a business. While debt is a good tool if carefully used if misused, it may get out of hand. Debt is a liability that reduces the net worth and hence it affects wealth.
Several reasons make people find themselves in serious debt. Such may include inexperienced financial stress that is caused by unemployment, medical bills or divorce, inability to control spending due to failure to plan for future and lack of knowledge of financial and credit matters. It is of great significance after building wealth to protect it. Insurance protection from major financial loss at this point is necessary. Insurance acts as reimbursement for a loss incurred in return for a premium paid. Ensuring you have bought appropriate insurance that match your needs is vita (Adkisson & Riser, 2004).
Challenges Faced When Choosing Residential Mortgages
When shopping for a mortgage loan choosing a mortgage lender is the most important thing even before looking for new home. When you identify a lender, the loan officer is supposed to not only gather necessary information for loan approval but also help to choose the right mortgage program. As it has been the trend, borrowers make a rush decisions that are solely based on the lowest quotes rate though interest rate actually vary with small different rates in different programs. It is not a surprise that some of the lenders make lower quotation rates and supplements the rates with additional fees and charges that end up making no difference. Therefore, extra care is important to ensure that the homebuyer does not get in such kind of a trap. When dealing with the reputable mortgage professionals, most borrowers find little difference in these fees and rates (Stolz, 2008).
Therefore, selecting a mortgage is a challenging task which is not only confusing but also time consuming. This occurs due to the fact that there are several varieties of loan packages out there in market. One needs to be well informed so that correct decision on mortgage is arrived at from different rates, varied costs, multiple terms and conditions and fees available. Above all, when choosing a mortgage, mortgage rates are of great relevance. The reason behind this is that interest rates do fluctuate depending on the different factors that affect the economy. It has been found that if the economy is performing well and the demand for mortgages is high, their interest rates will subsequently be high. Similarly, when there is economy crisis demand for mortgages is also low and so is their interest. Nevertheless, there are other most important factors that a person may need to put into account besides mortgage interest rates (http://www.jadefinance.com/choosing_mortgage.php, 2007).
Specific Factors to consider when taking Residential Mortgage
There are core factors that need to be considered when a person is selecting a residential mortgage. An individual needs to consider the nature of interest rate if it is fixed or variable. When mortgage interest rate is at fixed rate, it does not change through out the entire duration of the loan. As such, it helps you to be aware of exactly your periodic payout and the amount of the mortgage to be paid off by the end of the term. For instance, in the U.S there is Federal Housing Administration Insured loans (FHA) that are insured by the Department of Housing and Urban Development. FHA mortgage can be used both to purchase and refinance owner occupied house. Those buying residential house can put down as little as 3% of lesser of FHA appraisal value or purchase price. This type of mortgage has qualifying standards which are not strict as most conventional mortgages do. They also have interest rates which is relatively lower.
Veterans Administration loans (VA) is another type of loan program which is offered to veterans and their spouses, active duty personnel or reservist. There is no down payment required but a certificate of eligibility from the Department of Veterans Affairs is need. There is also another type of loan program known as Farmers Home Administration Loans (FmHA). This suits low to moderate –income earners who intend to purchase rural property. It does not need any down payment loans. Where appraisal value warrants, closing cost can also be included (Leu, 2004).
Another important factor to consider when choosing residential mortgage is the duration. This is the length of the current mortgage agreement. Typically, a mortgage has duration of six to ten years. Under normal circumstances, short term loans tend to have low interest rates. Short term mortgage take two years or less while a long term take three years or more. Short term mortgage is preferred by people who feel that interest rates will drop in future especially during renewal period. On the other hand long term mortgage is preferred by those who consider current rates to be stable, reasonable and want the security of budgeting for the future.
Determining if a mortgage is closed or open is an important factor. Open mortgages are usually short term loans which can be amortized at any time without any penalty. This type of mortgage is preferred by people who plan to sell in near future or need flexibility to make lump-sum payments before maturity. Closed mortgages are committed after considering specific terms. You only pay off the mortgage balance until maturity date arrives or pay a penalty.
The last but not least factor to consider when going for a residential mortgage is if mortgage is conventional or high ratio. A conventional mortgage has less than 75% of the appraised value of the purchased price of the property and balance amount is paid through one’s resources. It is also referred to as down payment. Those who have to borrow more than the stipulated 75% they need a high ratio mortgage. When down payment is less than 25%, the mortgage is insured and a fee is changed by insurer that is determined by the amount borrowed and the percentage of down principal (Brenda , 2007).
Insurer’s fee change ranges from 1% to 3% of the principal amount that can be paid up front of added to the principal amount of the mortgage. Despite all these considerations, not every mortgage fits completely to individual’s specific needs however, the most crucial thing is to determine the goals both personal and financially and this will help make a move. To be able to keep residential mortgage costs down it is prudent to have a long term mortgage with low interest rate and make large down payment while keeping payments within your budget (http://www.mortgageproguide.com/selecting-a-mortgage.php, 2007).
Building wealth is a deliberate plan rather than an accidental outcome. It requires a careful planning and a lot of discipline in regards to adhering to personal wealth creation strategy. It needs considering wealth creating assets and liabilities to determine one’s net worth. The net worth which is wealth required to be built by increased it and this start with budget to save. As an individual save it should be accompanied with investment which is an art and needs to be done through diversified means. This can be through bonds, stocks or buying a house.
Buying a house also requires a careful planning because it often requires huge amount of finance. For this reason, going for a mortgage is the best decision. However, there are many challenges that many people faced when looking for a mortgage lender as there are several of them in the market with varied interest rates. When looking for as residential mortgage specific factors need to be considered. These include, interest rates, duration of the mortgage, and nature of mortgage if open or closed and whether it is conventional or high ratio.
Adkisson, Jay & Riser, Chris (2004); Asset Protection: Concepts and Strategies for Protecting Your Wealth.ISBN 0071432167, 9780071432160, McGraw-Hill Professional
Anari, Ali & Kolari, James (2002); House Prices and Inflation. Real Estate Economics Journal, Vol.30
Brenda Bouw (2007); Home Girl: The Single Woman's Guide to Buying Real Estate in Canada. ISBN 0470839244, 9780470839249, John Wiley and Sons
Choosing A Mortgage For You (2008); Retrieved on 17th February 2009 from:http://www.jadefinance.com/choosing_mortgage.php
Leu, R. K., (2004); Shopping for a Mortgage Loan. Retrieved on 17th February 2009 from:http://www.fmcloans.com/how%20to%20pick%20a%20lender.htm
Marcosson, I. F., (2008); How to Invest Your Savings. ISBN 0559827334, 9780559827334, BiblioBazaar
Michailidis, J. A. & Michailidis, J. A., (2007); Beginner’s Guide to Building Wealth Buying Houses: The Foolproof Roadmap to Real Estate Riches Without the Risks and Hassles of Landlording. ISBN 0978819098, 9780978819095, Brain Forge Press
Selecting a Mortgage (2007); Retrieved on 17th February 2009 from:http://www.mortgageproguide.com/selecting-a-mortgage.php
Stolz, R. F. (2008); David G. Kittle on Residential Mortgages and Building Wealth.
Journal of Financial Planning, Vol. 11
Swart, Nico (2004); Personal Financial Management. ISBN 0702155144, 9780702155147, Juta and Company Limited