House Rich
“The ability to discipline yourself to delay gratification in the short term in order to enjoy greater rewards in the long term, is the indispensable prerequisite for success.” – Brian Tracy
The cover story of the February issue of Money magazine touted Extreme Money Makeovers and inside they made over the portfolios of five typical families. In my opinion, the couple having the speediest chance of getting back on track was Nelson Handel and Elicia Laport. They were billed as being house rich but cash poor - it’s not a surprise that they happen to live in Los Angeles. Their house is valued at $1 million (four times what they paid for it in 1995).
They have a $250,000 adjustable-rate loan that will be soon be adjusting upward. They also have a $30,000 home-equity line and $12,000 in credit-card debt. Suze Orman would rant at this point about their debt, but we’ll give them a chance and see if Money can make a fix. Their advice was good… a bit risky, but good… although it still requires discipline to execute.
So here’s what the experts suggest: take out a new $500,000 ARM. This sounds aggressive and super risky, but Tara Kalwarski writes, “Handel and Laport can pay off their existing mortgage before the rate rises and retire their other debts. They can put the remaining $200,000 into stock and bond funds.”
“To be sure, borrowing against a house to put the proceeds into the market rarely makes sense. But in Handel and Laport’s case it does because so much of their net worth is tied up in their home, and the super-hot L.A. real estate market looks primed for a fall.”
“They can convert equity that might melt away. And with a $500,000 mortgage, even if the L.A. market drops 30 percent, they would still have substantial equity in the house, which they hope to sell in five to seven years. Over time, their investments should grow by more than the interest rate on their mortgage, which should be under 6 percent.”
It’s unconventional advice, but I think it will work for them. It requires though that they use a professional money manager and juggle things to handle the new mortgage payment (a payment that likely will double). If they had $12,000 on credit cards and blew through their $30,000 equity line… well, then there are still some fundamental problems about learning to live within their means. But at least this approach would wipe the slate clean.
In the same Money issue, there was another article called Pop Goes The Bubble. They offered the same advice to people thinking of staying put in their homes. Cybele Weisser suggests, “Cash out with caution. When interest rates were low and home prices soaring, you could cash out a big chunk of equity and get much of it back (on paper, at least) within a few months. Kiss that good-bye. If you’re going to borrow against the value of your home in the near future, make sure it’s for things that create long-term value, like a child’s education, not a TV.”
Back to Robert Kiyosaki’s number one rule: buy assets not liabilities.
The cover story of the February issue of Money magazine touted Extreme Money Makeovers and inside they made over the portfolios of five typical families. In my opinion, the couple having the speediest chance of getting back on track was Nelson Handel and Elicia Laport. They were billed as being house rich but cash poor - it’s not a surprise that they happen to live in Los Angeles. Their house is valued at $1 million (four times what they paid for it in 1995).
They have a $250,000 adjustable-rate loan that will be soon be adjusting upward. They also have a $30,000 home-equity line and $12,000 in credit-card debt. Suze Orman would rant at this point about their debt, but we’ll give them a chance and see if Money can make a fix. Their advice was good… a bit risky, but good… although it still requires discipline to execute.
So here’s what the experts suggest: take out a new $500,000 ARM. This sounds aggressive and super risky, but Tara Kalwarski writes, “Handel and Laport can pay off their existing mortgage before the rate rises and retire their other debts. They can put the remaining $200,000 into stock and bond funds.”
“To be sure, borrowing against a house to put the proceeds into the market rarely makes sense. But in Handel and Laport’s case it does because so much of their net worth is tied up in their home, and the super-hot L.A. real estate market looks primed for a fall.”
“They can convert equity that might melt away. And with a $500,000 mortgage, even if the L.A. market drops 30 percent, they would still have substantial equity in the house, which they hope to sell in five to seven years. Over time, their investments should grow by more than the interest rate on their mortgage, which should be under 6 percent.”
It’s unconventional advice, but I think it will work for them. It requires though that they use a professional money manager and juggle things to handle the new mortgage payment (a payment that likely will double). If they had $12,000 on credit cards and blew through their $30,000 equity line… well, then there are still some fundamental problems about learning to live within their means. But at least this approach would wipe the slate clean.
In the same Money issue, there was another article called Pop Goes The Bubble. They offered the same advice to people thinking of staying put in their homes. Cybele Weisser suggests, “Cash out with caution. When interest rates were low and home prices soaring, you could cash out a big chunk of equity and get much of it back (on paper, at least) within a few months. Kiss that good-bye. If you’re going to borrow against the value of your home in the near future, make sure it’s for things that create long-term value, like a child’s education, not a TV.”
Back to Robert Kiyosaki’s number one rule: buy assets not liabilities.
posted by Nina Smith at 5:54 AM
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