How Do I Choose the Right Home Mortgage?
With all the different types of mortgages and fund investment strategies it is difficult, if not impossible, for the average investor to make a decision about what is the best type of mortgage to pursue: interest only, fixed, variable, or for what term. Care should be given in all financial matters to review a particular households short and long term needs and then ideally balancing as much of these as possible so as to gain as large a financial advantage as possible while not unnecessarily exposing itself.
As a Gwinnett CPA we have helped scores of Atlanta taxpayers find the right mortgage to fit their family needs and to assist them with business financing as well. With growth rates of real estate continuing with no apparent end in sight, leveraging or mortgaging real estate still seems to make financial sense. In this way a borrower gains the financial advantage of the growth in value of the total amount of the real estate while not having 100% equity by financing some or most of a real estate purchase.
Interest Only Loans
As our society continues to be mobile, interest only loans have gained in popularity. These are loans that require the borrower to pay only the accrued interest on a loan with no principal payments being required. Care should be exercised with these loans to ensure that one does not purchase more than they can afford just because they might qualify. Remember the old adage that “creative financing” means you probably cannot afford it. These loans have become very popular on vacation or second homes where the growth rate of the value of the property might be even higher than on other real estate as these allow a buyer to acquire essentially an investment while not putting a damper on their cash flow.
Reverse Mortgages
Reverse Mortgages are also gaining in popularity as our population ages. These loans allow a borrower to gain access to their equity in their home without having to move. Reverse Mortgages allow those especially living on a fixed income to gain access to their net worth by converting it to cash flow that a borrower can use to pay their normal monthly expenses. A loan amount, like other loans, can never exceed the value of the property. Care should be exercised to ensure that payments will approximate one’s lifetime and that these loans should be viewed as incremental dollars to those otherwise being set aside for retirement.
Variable and Fixed Rate Loans
Variable loans continue to be popular and have proved, in spite of their ability to fluctuate, to be excellent opportunities for borrowers to gain access to lower rates. While these rates, with the rate changes and annual caps, could eventually exceed the rate of a fixed rate loan, they have proven to be very cost effective in providing suitable financing for purchasers.
Fixed rate loans which had been the mainstay for years in the mortgage business are still widely used and often rates are less when acquiring a 15 vs. a 30-year loan. Care should be exercised on all mortgages to ensure that a suitable, preferably at least a ninety day liquidity, be maintained at all times to cover at least three months of expenses should anything happen to interrupt one’s ability to pay their obligations.
Recent Uncertainty in the Mortgage Market
In light of tightening of credit the home mortgage industry there is evidence that perhaps loans that were made in the past are no longer going to be accessible to those who do not qualify. In the last several years in response to a good economy and increased competition, loans were extended for which the underwriting requirements were not as strict or severe as they had been in the past. When competition rather than prudence dictates the extension of a loan you are apt to create a meltdown as we have seen in the recent past whereby the shakedown of the good credits from the bad are a predictable day of reckoning.
Interest only loans have been very popular as of late offering the allure of a lower payment, since no principal payments are required. But as with all marketing teasers there is always a catch and for mortgage loans there is no exception. If you have substantive other capital available to pay off a loan if need be, then an interest loan might be a prudent and wise decision. However, if the appeal of a lower payment is the primary motivating factor when choosing a loan, then it might be wise to consider another option or to downgrade the size of the purchase you are considering.
It is wise that one acquires an equity line on their home that will allow them to quickly handle any financial emergencies as well as making these monies potentially deductible when their personal return is filed. Mortgage interest continues to be one of if not the largest itemizations that one can take when preparing their taxes. Home ownership is still one of the best investments around; just be sure that the loan you pick is the right one for you!
Though many times you will be offered financial options that are presented as the deal of a lifetime, they are often the worst deal you can select for you and your business long term. We help you determine which plan is best for you and carefully assist and guide in ensuring that you are not biting off more than you can chew.