| Frequently Ask Questions:
(Q) Should I take out a 30 year fixed mortgage?
(A) This answer depends on many factors, but in most cases is simply “no.” The feasibility of the 30 year fixed mortgage is rarely attainable in today’s reality. It’s rare that families in our marketplace purchase a home and reside in this home for the remainder of their lives. Statistically, families have been paying off their home loans every 3 to 7 years. This statistic may be somewhat of an anomaly based on the low nature of interest rates from 2000-2007, fueling multiple refinance booms, however, many consumers are simply moving up from an entry level real estate market to the next level of ownership. Taking out a 30 year fixed rate mortgage is much like paying a premium for an insurance policy on your secured fixed rate. The fully amortized fixed rate mortgage forces you to contribute principal reduction payments to begin paying down your home loan. This is the loan’s primary flaw. 38% of US households that are accelerating their mortgage payments instead of saving in tax-deferred accounts are making the wrong choice. In the aggregate, this choice has contributed to misallocated savings that are costing these US households as much as 1.5 billion dollars per year. There are other staggering statistics that urge you to consider alternative mortgage planning solutions such as: 75% of workers age 55-64 have less than $56,000 saved for retirement, Pensions are down from 85% in 1982 to 34% today, 77% of workers say they will work during retirement when only 12% actually do, 97% of US families do not have a current college savings plan in place with college tuition rising at 2x the rate of inflation, and 20% of Americans have their credit cards maxed out. Should you contribute that extra savings to pay down your mortgage so you own more of an asset that isn’t liquid? We think not but call us and let’s talk about this complicated decision.
(Q) Should I pay points to reduce my interest rate?
(A) This answer also depends on many factors, but in most cases is also “no.” We are advocates of keeping your front end costs as low as possible, but the reduction of the rate and how long it takes to recoup those upfront fees are what really determines the benefit of paying points. Don’t forget to also include what return you would get on the upfront costs had you kept them in your higher yielding investment account. One of the benefits of shopping wholesale and seeking a mortgage broker for your loan processing is that mortgage brokers can be creative in the structure of your financing. In that, since we normally earn a commission from the lender, we can use a portion of this commission to share in paying your overall closing costs. When you factor in closing costs and points to a transaction, it’s possible to have an APR that is 1-2% above your note rate. This is an important part of your evaluation process when shopping rates as the APR is the true cost of the money you are borrowing. We can help you evaluate your options and will honestly discuss costs and fees so you can determine your true cost of financing.
(Q) How much of a down payment should I contribute to the purchase of a new home?
(A) In most cases the answer to this question is “as little as possible.” Money you put into your home in the form of down payment or principle reduction becomes “trapped equity” or idle equity dollars. This money is not liquid and you will be forced to refinance or take out a new loan to access this money. And what happens when the value goes down on your home, can you access the money then? Probably not. Your money is safer and more accessible in another type of investment account. The current tax benefit of the mortgage interest tax deduction is the other reason to put down as small of a down payment as the lender will allow. Consult your CPA or tax professional for the exact details, but the guideline allows you to deduct 100% of the interest on a loan up to $1,000,000 on your primary and second residences and up to $100,000 of a home equity loan. It’s important to understand that if you don’t take out a loan on this property within the first 90 days of purchase, you lose the ability to deduct this acquisition loan interest forever.
(Q) Should I set up an impound or escrow account to make my insurance and tax payments for me?
(A) We never recommend releasing the control of your money to a lender or third party to control your tax and insurance payments. If you are a person that has a difficult time saving for those large premium and tax payments, consider this: Whatever the breakdown of the annual payment is on a monthly basis, you should take this monthly amount and pay it into a compound higher yielding savings account or similar investment. If you do this, not only will you have enough to make those payments when they are due, you will have earned interest income along the way. This also will alleviate any escrow account problems such as shortages and late payments that these companies are notorious for causing.
More to Come…..
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