Sunday 23rd July, 2006

 

Checking, balancing towards your dream

 
 
 
 
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I often think that life doesn’t get any easier, but it gets better. It gets better when we remain optimistic because we believe there is enough for every body. As for those economic theories of scarcity, they are artificial.

Everyone should own a house; it is fundamental to the concept of the household as a basic unit within the society. The majority of people dream of a home they can call their own, and soon after the car.

To own your first car, you need a down payment, if you don’t have all the money, and need a loan. To get a loan, you need collateral. Often, the prospective first-time owner has no other property and no collateral. So lenders ask for life insurance.

In order to use life insurance to help with qualifying for the loan, the important consideration is the duration of the loan. If the loan is short-term, say four to five years, like a typical motorcar loan, the life insurance policy must have enough cash value.

In order to have enough cash value, the life insurance policy must be at least five to seven years old. That kind of time frame will normally allow for enough cash value.

Brand new policy contracts have very little cash value and are not useful in motorcar loans.

If you fail to make the monthly payments for the car, the car will be seized and you can lose everything.

If you fail to make the payments on the insurance policy, the cash value will be used automatically to pay the premiums for as long as possible. When there is no more cash value, you will lose that too.

So it is not wise to enter into that kind of financial transaction unless you have done some checks and balances. You must also have some reserve cash, for accidents and incidents.

When you want the home, you will need a down payment. Some lenders require five per cent while others maintain the typical ten per cent on the local market.

In the foreign markets, a home mortgage transaction requires a down payment that can be higher than 20 per cent of the market value of the property.

Once again, you will need life insurance for collateral. Since this is now a long-term loan, 20 years on average, the life insurance cash value is not necessary. Most lenders will accept term insurance, with no cash value.

A mortgage for half a million dollars, requires cash in hand of at least $50,000.

How can you accumulate that sum?

If you can find a plan that pays nine per cent per annum, you can deposit $2,000 per month, and in two years, “your business fix.” Or, you can deposit $400 per month, and in eight years you should have the cash in hand.

The problem is that plans that pay as high as nine per cent per year, will not give you short-term access to your funds. Seldom can you get back your money after two years. So if you have the time, you can accumulate the funds.

If you have the down payment, and qualify in terms of salary, do you have the life insurance collateral?

The next step is getting the loan. This is where you have to do some footwork and some headwork.

As a rule of thumb, one loan arrangement is never significantly cheaper than another. They are all priced in the same market, and give more or less the same value for your money.

So what you have to shop for is the payment plan that is most convenient to your life plan.

Next week, we’ll see what the market has to offer. And it does get better.

©2005-2006 Trinidad Publishing Company Limited

Designed by: Randall Rajkumar-Maharaj · Updated daily by: Sheahan Farrell