Don't Pay-Off

You don’t want a mortgage, you want a house, but to get a house, most people must obtain a mortgage. You hate having a mortgage and you’d love to pay it off as soon as possible. You know that over 30 years, you’ll pay more interest than you paid for the house in the first place. You’ve been taught that the best thing is to own your home outright.

Despite this, a big, long-term mortgage is best. Though advice you’ve been given to pay your mortgage off may have once made sense, today it’s not the best decision. In today’s economy, a high loan-to-value, long-term mortgage is great. Don't pay the mortgage rapidly, never pay extra, and never use a bi-weekly payment plan. You know paying off the mortgage early will save huge in interest cost, but there’s another side you may have overlooked. Consider the following justification for carrying a big, long-term mortgage.

Your home’s value has nothing to do with the mortgage
Despite how you finance your home, it’s going to fluctuate in value without consideration of the loan balance, and the odds are good that it’ll appreciate. Many homeowners try to build equity by paying off the mortgage, but that produces minimal results compared to the equity built through appreciation. Spend the extra money you’d pay on the mortgage to upgrade the home. You'll enjoy your home more and create a more valuable asset.

A mortgage is cheap money
There’s no way to borrow money at a lower rate than a mortgage. A high quality mortgage to a creditworthy borrower, secured by a residential property is considered one of the safest investments for lenders so they offer low rates to entice borrowing.

Mortgage interest is tax deductible
In addition to great rates, the government subsidizes borrowers by making interest tax-deductible. You can save as much as 33% on the interest. That means a 6% loan really costs as little as 4%, making the cheapest money even cheaper.

Mortgage interest is tax-favorable
Assume you have a 6% mortgage and a 6% profit on your long-term investments. The mortgage is deductible at your top tax bracket, but the long-term investments are taxed at 15%. Say you’re in the 33% tax bracket, the mortgage will cost you 4%, while the investment nets 5.1% after taxes. In other words, tax law makes it beneficial to maintain your mortgage. Compounding increases the yield of the investment as well, creating a greater arbitrage and thus enhancing the tax-favorable situation.

Mortgage payments get easier over time
A long-term, fixed rate mortgage guarantees the payment will never rise. Alternatively, inflation is eroding the value of the dollar and inflating income. Therefore, the payment becomes cheaper relative to your income, making it a smaller percentage of income and easier to pay.

Large mortgages are safer
Assume you have $200K and want to buy a $500K home. How much should you put down? The entire $200K or a 20% down payment? Put down 20% and borrow the extra $100K. This allows you to retain liquidity while controlling additional appreciable assets that can compound wealth. What if you were suddenly without income? The payment wouldn’t matter because with little to no reserve funds, you’d be in danger of default. With the additional $100K liquid investment, you’d have the ability to sustain the payment and your other life expenses for an extended period of time. What if the payment is just too much some months? Subsidize it by taking money from the liquid account. It probably made enough return to not have to draw against the principal anyway.

Mortgages let you create more wealth
Wealth is created by owning appreciating assets. Acquiring the assets is best done by diverting cash flow to purchase and sustain them. To do that, lower your expenses with a long-term loan with lower payments than a short-term loan requiring larger payments. They allow more cash flow to be diverted to control more assets.

To sum up, the advantages and safety of liquidity, controlling additional assets and current tax laws make borrowing more money a prudent decision. If you’re still hesitant, be sure to discuss your options with an experienced mortgage consultant and your personal tax advisor before making any decisions.

Credit Scores: How They Can Be Drastically Impacted

Everyone has heard how important credit scores are when applying for credit. The higher an individual’s scores, the better the terms of financing that are available. Understanding what actions to take to avoid getting a lower score or improving a score is something of a science.

Certainly the area of most concern is payment history. Being late however on a debt is not bad if the payment does not go beyond 30 days late. Only after being 30 days late (from the original due date, not the grace period date) will the institutions report you as delinquent. You will still have to pay the massive late fees however, which is a burden on your cash flow.

If your cash flow simply will not allow you to meet all of your obligations in a given month, pay your real estate debts first, your installment loans next and finally your credit cards. Missing even one mortgage payment in the last 24 months can disqualify you from some lenders’ best programs. The credit scoring systems assign more weight to installment loan delinquency than to credit cards.

Taking a cash advance on a credit card to pay other debt is much better than allowing any delinquency to take place. Although the extra debt will decrease the score temporarily, it will not be nearly as damaging as late payments. You can also recover from a balance increase and quickly erase it, but a delinquency will show on your report for 7 years.

Spread your debt around. It’s not how much outstanding credit a consumer has that is important, it is what amount of available credit is being used. For example, a person with a credit card that has a limit of $4000 and carries a balance of $4000 on the card is going to be severely impacted. While in comparison, the same $4000 distributed at $1000 each over four credit cards that have available balances of $4000 each will get a great score. The difference being the first consumer was carrying 100% of the available balance as opposed to the second one who was only carrying 25%. The logic holds true that if a person appears to need to borrow money, no one wants to loan it. Ideally keep the balances below 30% of the available credit limit on each card.

Have enough funds to pay down some but not all of your high credit card debt before applying for credit? There are computer programs now that allow lenders to input scenarios to determine where best to apply available funds. For example: If a borrower has $5000 to use to improve a credit score, some credit companies’ software will allow the lender to submit a “What If” scenario that will tell the consumer exactly which debt to apply the $5000 to for the best score improvement and it will even project what the new score will be. For example, it may tell you to not pay anything toward an old charge off, while telling you to pay down only $50 on a Visa card. This is a tremendous tool that can create thousands of dollars in savings if leveraged.

Don’t close that credit card account! A seasoned borrower will always score higher. Closed accounts are not given near the historical value as active accounts. Ideally, use available credit to continue to score in this area, but sparingly.

Remember that the credit score is a computerized calculation. Personal factors are not taken into consideration when a credit report is generated. It is merely a snapshot of today’s credit profile for any given borrower and it can fluctuate dramatically within the course of a week.

Big Mortgages Are Better

I know that you don’t want a mortgage, you want a house, but to get a house most people must obtain a mortgage. You hate having a mortgage and you’d love to pay it off as soon as possible. You know that over 30 years, you’ll pay more interest than you paid for the house in the first place. You have been taught that the best thing possible is to own your home outright.

Despite all of this, a big long term mortgage is best. Although the advice you have been given to pay your mortgage off may have once made sense, today it is not the best decision. In today’s economic environment, a high loan-to-value long term mortgage is the best thing you can have. Don't pay off the mortgage rapidly, never make extra payments, and never use a bi-weekly mortgage payment plan.

You know that paying off the mortgage early will save you huge amounts in interest cost, but there is another side you may have overlooked. Consider the following reasons why you should carry a big, long term mortgage.

Your homes value has nothing to do with the mortgage; you’re going to build equity anyway.
No matter how you finance your home, it is going to go up or down in value without consideration of the loan balance, and luckily the odds are quite good that it will appreciate. Many homeowners try to build equity in their house by paying off the mortgage, but that produces minimal results when compared to the equity you’ll build through appreciation. Spend the extra money you were considering paying on the mortgage to improve and upgrade the home. In doing this, you'll enjoy your home more and create a more valuable asset that way.

A mortgage is cheap money.
There is no source to borrow money at a lower rate than a mortgage. A high quality mortgage to a creditworthy borrower, secured by a residential property is considered one of the safest investments for the lenders, so they offer their lowest rates to entice borrowing.

Mortgage interest is tax deductible.
In addition to the great rates, the government even subsidizes the borrower by making the interest tax-deductible. You can save as much as 33 percent on the interest cost, so for every $1000 of interest paid, you can save as much as $330 in taxes. That means a 6 percent mortgage loan really costs as little as 4 percent, making the cheapest money already available even cheaper.

Mortgage interest is tax-favorable.
Assume you have both a 6 percent mortgage and a 6 percent profit on your long term investments. The mortgage is deductible at your top tax bracket, but the long term investments are taxed at 15 percent. Let’s say you’re in the 33 percent tax bracket, this means that the mortgage will cost you 4 percent, while the investment nets 5.1 percent after taxes. In other words, tax law makes it beneficial for you to maintain your mortgage. Compounding increases the yield of the investment as well, creating a greater arbitrage, therefore further enhancing the tax-favorable situation.

Mortgage payments get easier over time.
A long term fixed rate mortgage guarantees the payment will never rise. On the other hand, inflation is eroding the value of the dollar and inflating income. Therefore, the payment over time becomes cheaper relative to your income, making it a smaller percentage of income and easier to make the payment.

Large mortgages are safer than smaller ones.
Assume you have $200,000 and you want to buy a $500,000 home. How much should you put down? Should you invest the entire $200,000 in the home or make a 20 percent down payment of just 100,000? Put down only the 20% and borrow the additional $100,000. This allows you to retain liquidity and diversity while controlling additional appreciable assets that can compound wealth.

What if you were suddenly without income for some reason? It would not matter what the payment was, with little to no reserve funds, you would be in immediate danger of default. With the additional $100,000 in a liquid investment, you would have the ability to sustain the payment and your other life expenses for an extended period of time until changes could be made.

What if the larger payment is just too much some months? Subsidize the payment by taking money from the liquid account. It probably made enough investment return to not have to draw against the principal anyway.

Mortgages let you create more wealth.
Wealth is created by owning as many appreciating assets as possible. Acquiring the assets can best be done by diverting as much cash flow to purchase and sustain them as possible. The best way to do that is to lower your monthly expenses. That’s why long-term loans that create lower payments are better than shorter-term loans which require larger payments. They allow more cash flow to be diverted to control more assets.

To sum up, the advantages and safety of liquidity, the controlling of additional assets and the current tax laws make borrowing more money a prudent investment decision. Furthermore, if you still have any hesitations, always be sure to discuss your options with an experienced mortgage consultant and your personal tax advisor before making any decisions.