Mortgage Loan Solutions

Finding the ideal mortgage loan for your situation is much more than obtaining a rate quote. I suggest taking a different approach from the typical lender/broker by focusing on the use of your mortgage within your financial blueprint. In other words, pinpoint exactly what you want to accomplish with your mortgage as it relates to your financial goals and current financial situation.

Many different types of loans are available with various time lengths: Fixed Rate, FHA, VA, Adjustable Rate, Interest Only,  Option ARM, Option FIXED, Home Equity Line of Credit -- all with either full documentation or stated (i.e., no income verification and/or no asset verification) up to, in very rare instances, 100% loan to value. Recently, lenders have tightened loan requirements by increasing credit score qualifications, verifying income and lowering loan to value percentages. Occasionally, some lenders will have special rates and/or borrower qualifications.

 

When individuals obtain a loan, they satisfy at least one or more of the following mortgage uses: (1) affordability, (2) flexibility, (3) debt consolidation and (4) building wealth for financial security. Lets review each use.

Affordability -- Everyone is familiar with this concept. Borrowers desire the lowest payment, whether it be a fixed rate, an interest only option or a minimum payment. Important lender factors to consider include credit score, loan to value, current earnings, future cash flow savings and how long the borrowers intend to own the property. The best choice for the exact type of loan depends on what borrowers specifically want to accomplish with their mortgage.

Flexibility -- This use appeals to borrowers who want their mortgage payment to fluctuate with their monthly earnings or to have leeway for unexpected emergencies. In essence, borrowers desire monthly control over their mortgage payment by having the ability to select various monthly payment choices. Self-employed, commissioned earners and seasonal workers are ideal for this concept due to the inconsistency of monthly earnings -- they like the idea of paying a lower mortgage payment when income is lower and can choose a higher payment when their monthly income is higher.

Debt Consolidation -- This scenario is for refinances only and appeals to borrowers who want to convert credit card debt, other high interest debt and their current mortgage debt into one lower payment. Often the equity appreciation in property presents a cash out situation where borrowers can pay off the entire non-mortgage debt and have a "clean slate"; at the very least, a sizable portion of credit card can be eliminated with the remaining balance paid off by future cash flow savings from their mortgage.

              The Credit Card Dilemma
                Average household has $12,000 in credit card debt.
                2% minimum payment on $12,000 @ 18% with no future charges takes over 51 years to pay off!

Credit card debt is bad debt (high interest rates, no tax advantages). In contrast, good debt has lower rates and tax benefits in property that continues to appreciate in value. An important concept: if you must have debt -- and most us must have debt -- then hold debt in an appreciating asset.

Building Wealth for Financial Security -- mortgages can be an effective tool in the pursuit of financial independence. In today's economy and standard of living, it is challenging for people to have available investment money after monthly expenses. As an example, a family of four with $100,000 in annual gross income would seem to be in good shape -- lets take a look:

                        Taxes:                $30,000
                        PITI:                    30,000
                        Automobile:           6,000
                        Credit Cards:         9,000
                        Total Expenses:  $74,000        Balance: $26,000 or $2,166/month 

                                   Other monthly expenses?   Utilities                     250
                                                                            Telephone & Cell     200
                                                                            Auto Insur. & Gas    450
                                                                            Food & Clothing      700
                                                                            Child Care             1,000
                                                                            Cable & Internet       100
                                                                            Net Income           -$533/month

                    What about...Retirement?    College Fund?    Restaurants?    Entertainment?

The Problem? Cash Flow!

            Current Situation for many Borrowers
                    earnings unlikely to significantly increase
                    monthly expenses on the rise
                    savings rate is zero or negative
                    insufficient retirement funds

            Solution is Reallocating Debt
                      wealth building starts with cash flow    
                      use mortgage as a financial tool to build wealth
                      let time and compounding generate growth
                      future value of one-time $10,000 @ 10%, compounded annually: 
                                                        after 15 years = $41,772
                                                        after 25 years = $108,347

Certain mortgages can immediately generate significant cash flow savings, which can then be invested to pursue specific financial goals. In the above $100,000 illustration, nothing was available for investment due to a combination of taxes, mortgage and essential living expenses; with a lower mortgage payment, either with or without cash out, it would be possible to invest for retirement. If a 401k with a company match was available, the borrowers could not only invest their cash flow, they would also generate tax savings and receive "free money" from the company match (most matches are 50% of the first 6% of participation). 

The important key for this type of mortgage use is to have a specific destination for the cash flow. Borrowers should have a specific investment strategy along with the discipline to implement this action for at least 1-2 years. If you don't have a workable plan for the cash flow savings, you will more than likely blow the money and be disappointed.