1% Mortgage Loans… What's The Catch?
While there are several different types of 1%
mortgage loans, there are really only two major keys to winning with a 1%
mortgage loan.
The first key is to make sure the loan is set
up correctly from the beginning.
And the second is to make sure you are using
the loan correctly to gain the most benefit.
First, let’s talk about how the loan
works. Then we’ll get into how to set
the loan up correctly so you can reap the financial rewards these mortgage
loans have to offer.
To start with, 1% mortgage loans have payment
options. Each month when you get your
mortgage statement you will have the option to make a 30 year fixed payment, a
15 year fixed payment, an interest only payment and a minimum payment at 1%.
Although you are given several payment options,
you should only select the 1% minimum payment.
Why?
Because if you wanted to make a 30 year fixed,
15 year fixed, or interest only payment, you would be better off getting that
type of loan. Typically, these payments
are higher with a payment option mortgage loan.
If you select the 1% minimum payment your first
benefit will be a significant monthly payment reduction. Your mortgage payment will likely be cut in
half. Of course, this is a pretty
attractive first benefit for most home owners.
To compound the effectiveness of selecting the
1% minimum payment you should save what you save. For instance, let’s say you refinanced your
home with a 1% mortgage loan, paid off all your credit cards, and reduced your
monthly payment by $1,000 a month.
Now, if you save that $1,000 a month for
yourself instead of giving it to your creditors, you will have $60,000 in cash
at the end of five years - And that’s with a zero percent return.
Here’s the second benefit to selecting the 1%
minimum payment option:
Tax savings.
If you make an interest only payment your
mortgage balance will stay the same. If
you make a 1% minimum payment you are actually paying less than interest
only. Therefore, you are creating
deferred interest which makes your mortgage balance increase each month.
Before you freak out, keep in mind that
deferred interest is mortgage interest and is therefore tax deductible.
Let’s say your home is going up in value $2,000
a month. The 1% mortgage loan will allow
you to take a small piece of that appreciation, say $500 a month, and turn it
into a tax deduction.
So you are taking a small piece of your equity
each month and turning it into a tax deduction.
If you did not do this, all of your appreciation would be locked up in
equity.
Equity is terrific and is certainly one of the
many benefits to home ownership. But
investing in equity will get you a zero percent return.
No one is going to cut you a check each month
for the equity in your home. As a matter
of fact, if you wanted to get the equity out of your home you would have to
sell your home or get a loan. And you
better qualify or you will not be able to get a loan.
So why not take a small piece of your equity
each month, turn it into a tax deduction, and at the same time save $1,000 a
month for your self? You will still have plenty of equity but with a 1%
mortgage loan you will have cash AND equity.
If you do this for any length of time you will
come out way further ahead financially than if you did a regular 30 year fixed
or an interest only mortgage loan.
By the way, if the deferred interest is a concern,
try making bi-weekly payments. Making a
bi-weekly payment will reduce, and in some cases eliminate the deferred
interest all together. Which means your
mortgage balance would not increase.
How to set the loan up correctly:
1) The 1% payment option on these loans is only
available for the first five years. But
you could actually keep one of these loans for 30 or 40 years. If you select a 40 year loan your monthly payment
will be lower but the payment options will not last for five years. The name of the game is to keep the 1%
payment for as long as possible. So get
a 30 year amortization.
2) The 30 year, 15 year and interest only
payments are tied to an index. Select a
slower moving index like the MTA (Monthly Treasury Average) instead of a faster
moving index like the Libor (London Inter-Bank Offered Rate).
So how can you lose with a 1% mortgage loan?
Answer- depreciation.
If homes in your area are rapidly going down in
value, deferred interest could cause you to become upside down in the home.
But if your area is experiencing a 3% to 5%
rate of appreciation and you save what you save by making the minimum payment,
a 1% mortgage loan can have an incredibly positive impact on your financial
future.
For more information about 1% mortgage loans
and other mortgage related topics, please visit:
http://Mortgage-Training.Mortgage-Leads-Generator.com
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