Financial Planning and Your Mortgage
By John Dillard, CPA
Partner, HIS CPA, P.C.
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 the best type of mortgage to pursue, whether interest only, fixed rate, variable rate, and for what term.
Care should be given in all financial matters to review a particular household's short and long term needs, and then balance these needs as much as possible in an effort to gain the greatest possible financial advantage while not exposing the household to too many unneccessary risks.
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 loans require the borrower to pay only the accrued interest due, with no principal payments being required. Borrowers considering interest only loans should exercise care to ensure that they do 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. In this situation, a buyer can essentially acquire 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 borrowers to gain access to the equity in their homes without having to move. Reverse Mortgages especially provide a way for individuals living on a fixed income to gain access to their net worth by converting it to cash flow that the borrower can use to pay their normal monthly expenses. Like other loans, the loan amount of a reverse mortgage can never exceed the value of the property. Care should be exercised to ensure that payments will last throughout one’s lifetime. These loans should be viewed as incremental dollars to those otherwise being set aside for retirement.
Variable Rate Loans
Variable or adjustable rate 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 interest rates. While these loans, with the interest rate changes and annual caps, could eventually exceed the percentage paid on a fixed rate loan, they have proved to be very cost effective in providing suitable financing for purchasers, particularly those who expect to be moving to a new house within a few years.
Fixed Rate Loans
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.
I always recommend that in addition to maintaining a three month cash reserve, 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!
About HIS CPA, P.C.
John Dillard is a Certified Public Accountant with over 25 years experience assisting individuals and small businesses with their accounting and financial planning needs. Mr. Dillard's firm, HIS CPA, P.C., is located in Atlanta. He can be reached at 770-814-9304, or through the HIS CPA website, which describes the accounting and tax planning services offered by his firm.
Capital Mortgage Services, Inc. : 1105 Lakewood Parkway : Suite 475 : Alpharetta, Georgia 30004
800-859-5648 :
