Why Mortgage Planning?
Because most people spend more time researching their next "tech-toy" purchase than they do making sure that the home financing they select will best achieve their financial goals
For almost all of us, our mortgage is the largest financial obligation we will ever make. Our mortgages typically require more of our income than anything else. Over time, mortgage interest is one of the most expensive things you will ever pay. Depressed yet? No, don't go rent! The point to be made is that this is a very serious matter. Wouldn't you agree that since a mortgage has the most influence over your cash flow that it also impacts your ability to pay other debts, save, plan for retirement, and your children's education? There are hundreds of ways to structure mortgages, all of which can have a positive or negative influence on your financial goals. One size does not fit all anymore. No one else has your exact circumstances, needs, financial goals, or capabilities. A mortgage is a very personal matter. There are not many absolutes where you can say always do this or that a certain way.
Mortgage Planning is the art of personally tailoring your mortgage to best achieve your overall financial goals, payment and cash flow objectives, and your lifestyle application. Most lenders just quote rates in an application taking, order filling format that has no regard for the other areas of your financial world. Integrity Home Mortgage believes that Mortgage Planning is too important to overlook so we feel an obligation to help people make the right choices. Please review the following article to better understand the importance of Mortgage Planning.
Mortgage Planning
It's not just a home loan anymore!
By: Sonny Allen
President
Integrity Home Mortgage
Well known mortgage expert and CNBC commentator, Barry Habib, indicates "Most people spend more time researching the VCR or DVD player they plan to buy than they do making sure the mortgage they select is right for their financial needs". While many mortgage clients may spend some time shopping for the best rates, very few seek professional advice on how different mortgage structures can impact their financial gain, or loss.
For almost all of us, our mortgage is the most significant debt we ever have in our lifetime. As our largest debt, our mortgage has the greatest impact on our cash flow and thus, our ability to pay other debts and save. Depending on a homeowner's financial needs, they can manipulate their home financing to help them eliminate other debts, build cash savings, retirement or education savings, create tax savings, fulfill life insurance needs, or many other financial goals.
For most mortgage customers, this process involves an evaluation of five major areas that their mortgage can impact them. The first major area is their payment or cash flow objectives. Almost all individuals seek the lowest payment possible with consideration to other needs. This is sort of where the rubber hits the road. The less you pay on your mortgage, the more you can apply in other areas like debt reduction, savings, or maybe even paying more toward the principle on your loan. The payment objective is also a significant factor in qualification. The fact that mortgage underwriters evaluate payment in qualifying ratios should reinforce the importance of creating and maintaining payment objectives. Instead of asking "how much do I qualify for", individuals should be asking "what is my payment objective that allows me to meet my other financial goals".
The next major area involves obtaining the financing at the lowest possible cost. Almost all customers shop for the "lowest rate", but very few understand that rate is only part of the cost in obtaining a mortgage. The lowest rate quote is not always the least expensive loan and the lowest rate quote is also not always the most accurate quote. While there are legitimate closing costs or fees associated with mortgages, many lenders pad their profit by charging extra costs or "junk fees" to make up for a lower rate quote. First of all make sure you are dealing with a legitimate company that has a track record of delivering what it has quoted. Don't be afraid to ask for references and find out if they do a respectable amount of business. Also, find out where they are physically located in order to see if they are an established business or just an individual broker working from home. Next, make sure to get an accurate breakdown of the closing costs ("Good Faith Estimate"). Mortgage rates change constantly so compare at a given point in time and not over several days. Also, don't be afraid to ask the lender for a copy of your rate lock registration to confirm that they really are locking your loan. Understanding the overall cost of your loan will require more effort on your part but could save you thousands of dollars over the life of the loan.
Building equity is the next important area. This begins with determining how much to pay upfront in down payment. There is no perfect formula for determining down payment. It all depends on individual needs. Borrowers should have a safety savings cushion equal to six months income. Otherwise, they should consider financing with zero down until savings is established. There is a wide variety of 0% down mortgages available in today's market. Well established borrowers who are able should consider a 20% down payment because with less than 20% down, borrowers will be charged mortgage insurance or will have a second mortgage usually with a higher rate.
Beyond the down payment, equity can also be obtained by making additional principal payments, realized appreciation, and also by setting up a "home equity side fund". Making additional principal payments is a good strategy for some borrowers. However, national best selling author and financial expert, Douglas Andrew, recommends in his book "Missed Fortune", that borrowers limit, if not eliminate, having any equity tied up in their home. The concept focuses on the aspect that basic equity has no rate of return. Andrews recommends separating that equity and investing it in something that is relatively safe, liquid, and that can offer a return. The success of this concept hinges upon the discipline of the borrower to save and not consume the separated equity.
One of the most important areas of mortgage planning is the consideration of income tax advantage. Ironically, it seems to receive the least attention. The fact is that a mortgage is about the best friend a tax payer has left. Consider this, on a $200,000 standard mortgage at 6% a borrower in a 33% bracket would receive about $4,000 in direct tax savings. Throw in the property tax deduction and you have about another $2,000 for a total of $6,000 in direct savings to the borrower. It gets even better when you consider some of the popular interest only mortgages where the total payment becomes a tax deduction. A good way to look at it is to consider the effective rate of mortgage interest after the tax benefit. For instance, at a 33% tax bracket a mortgage rate of 6% would effectively be about 4.2% after the deduction. If you use the "missed fortune" concept previously mentioned and invest the equity, you can usually achieve an earnings higher than the effective cost of the mortgage and hence, make money just by having a mortgage. Renters and first time homebuyers are often amazed at how much they save on their income taxes just by having a mortgage.
Finally, the most important consideration in mortgage planning is the borrower's emotions. How you feel about your financial obligations is way more important than simple financial logic. If saving a few dollars is going to keep you up at night worrying about your loan, then you should find a plan that makes you comfortable. Maybe its an adjustable rate, maybe its an interest only loan with no equity, maybe it's a higher payment used to establish a savings instead of making a down payment, whatever it is, there is some risk associated with most mortgage planning strategies. Make sure to invest the time to become comfortable with the strategy you have chosen in order to prevent future anxiety.
A mortgage is a big debt but by focusing on your payment objective, cost of the financing, equity objective, tax advantages, and your emotional comfort zone, you can structure your home financing to help you achieve overall financial success in all areas of your life. Don't go it alone. Seek the advice of a good financial planner and CPA and always work with a mortgage professional who understands mortgage planning.
