Special Mortgage Advice
Congratulations. You've reached the VIP suite of mortgage loans. Beyond the velvet rope. Sit back, relax. You're in the right place.
Buying a home is a different process for you. The down payment isn't a major consideration. You may be able to pay cash. But from a financial planning perspective, paying cash or paying your mortgage off quickly might not be the best option because of the after-tax benefits of mortgage interest. Let's say you're deciding between a 15 year fixed rate mortgage and a 30 year fixed rate. The 15 year fixed is essentially a forced savings plan. The payment on this loan is going to be several hundred dollars higher than a 30 year fixed. Most of that difference is the extra principal you pay off each month. You're building equity in your house faster, but you run the risk of foreclosure if by some chance you can no longer make those higher monthly mortgage payments. The benefit is that you will own your house free and clear in 15 years and pay less mortgage interest, which sounds good. But what is the consequence of paying more mortgage interest in a 30 year fixed rate mortgage? A higher deduction on Schedule A of your tax return - so you end up paying less income tax. And with a 30 year fixed rate, you could take that extra several hundred dollars and invest it in your children's college education or save for your retirement.
The most important concept for you to grasp regarding your mortgage and overall financial situation is that nothing matters until you take taxes into account. Say your mortgage interest rate is 6% and you pay 33% of your income in state and federal taxes. When you take into account the tax deductiblity of your mortgage interest, the real after-tax rate on your mortgage will be 4%. Here is the question - if you're in a higher tax bracket and you can borrow money at 4% on an after-tax basis, why would you want to pay it off in a hurry? Mortgage interest is always on sale. If you could invest in a something you're comfortable with and this investment vehicle can earn more than 4% after taxes, you're essentially mirroring what banks do every day. They take in deposits, which means they're borrowing money from you. The cost of their loan is the interest they're paying you on your deposits. So if they're paying you 1% interest, they're borrowing money from you at 1%. What do they do with all this extra money? They invest it by making loans to people. You can end up being a wealthier person if you have the discipline to take that extra income and invest it in something that grows at a rate higher than your interest rate.
The more you make in income and the higher your income tax bracket, the more you want to think about stretching your payments out and using that tax deduction to your full advantage. You can use your mortgage as a financial planning tool to acheive other goals.
Accunet can tell you how much equity you'll build up with a 15 year loan versus what you may save in another investment vehicle based on your income and income tax bracket. We also offer 20 and 25 year loans and principal-optional loans. We can help you quantify your choices - so you'll be better off financially. Let us spin the numbers for you. We've facilitated your application options through Accunet's streamlined loan process. Our loan type comparison page will allow you to make an informed decision that you're comfortable with. Thinking of buying a retreat home in Florida or Colorado? Check out our vacation home info page. Learn more about us.
