November 22, 2006
Additional Information and Resources
Advantages & disadvantges of Down payment
Using Leverage- Sound Strategies For Any Home Buyer
You’ve probably all seen commercials for zero-downloan programs, generally targeting people with no cash for downpayments. While 100% financing is a great way for new, qualified buyers to get into a home, move-up buyers or cash buyers are not always aware of the benefits of financing all or most of a real estate purchase for them.
Leverage is not a new concept, but for many of us, it has been ingrained that we should pay off our mortgage as quickly aspossible, and certainly put as much down as we can when buying a home. While it is true that with at least 5% down, rates will generally be lower, the bigger incentive is usually a smaller monthly payment due to the lower loan amount. Interestingly, many people opt to put money down on their home rather than paying off higher interest credit cards or auto loans, and wind up with a higher overall monthly payment than if they were to do a zero-down loan and pay off all other debt.You should think of debt like fat. Some fats are beneficial, and others are not. Its the same with debt. Unlike credit card or car loan interest, mortgage interest on a primary and secondary residence is tax deductible within certain limits*, so your tax bracket will determine your netmortgage interest rate.
If, for example, you were in a 25% tax bracket, and your mortgage interest rate were 6.00%, your net rate after the benefit of the tax deduction would be 4.5%. Thats lower than current rates on short-term CDs, and thatsnot taking the compounding of interest into consideration. By maintaining a mortgage, Uncle Sam is essentially paying a portion of your interest for you.
In fact, the higher your tax bracket, the greater the percentage of your mortgage interest the government is paying, so those with higher incomes tend to benefit even more from this tax deduction. You can in turn use this savings to build your nest egg by investing it wisely.
Regardless of your income level, speaking with a qualified financial advisor to establish a plan to achieve your financial goals would be a good idea. He or she could provide you with information about stable investments to meet yourcriteria, which in turn could help fund the things that matter most to you, such as your (early) retirement or childrens college education. And dont forget about 401-k matching funds.
If your company offers this and you arent taking advantage of it because you want to pay off your mortgage early, think again. You could essentially double your money, so that you dont have to worry about not being able to pay off your mortgage when the time comes. Invested wisely, over timethis money should earn more for you than the net amount of interest you pay on your mortgage.
If youd like to discuss your financing options, give me a call at (206) 660-0842 (available from 9am-5pm PST) or send an email to melissas@mbahomeloans.com .
Melissa Severance is a Mortgage Specialist with Mortgage Broker Associates, Inc. She is a member of the National Association of Mortgage Brokers. Mortgage Broker Associates, Inc. currently brokers for over 100 local & national wholesale lenders.
*Consult your tax professional for specific guidelines & limitations.
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