San Ramon, CA -- Federal Reserve Board Chairman, Alan Greenspan, commented best when he stated "Homeowners might have saved tens of thousands of dollars had they held Adjustable-Rate mortgages rather than Fixed rate mortgages during the past decade". If you own a 30year fixed mortgage, the first 10years of your payments will be applied towards paying down your mortgage interest; on average only 15% of your original principle balance will have been reduced. Considering the fact that most people will live in their homes approximately 5 to 7years, it makes since to plan what your goals will be before deciding on a loan program; your decision could affect your financial planning for the next 10years.
Statistically speaking, if you have a family of four (2 adults and 2 kids), a loan balance of $400K with an interest rate of 4.5% (4.642% APR), you'll need a Combined Yearly Income of $140,000 just to Almost Break Even each month; actually you could have a loss of approximately $478 per month.
Here's the breakdown: Income $140K per year x 35% (tax bracket) = $91K per year ($7,583 mo.) Monthly Expenses: $2,027 (Principle + Interest) + $417 (taxes) + $117 (home insurance) + $1K (2 car payments) + $800 (food) + $500 (health insurance) + $2K (family of 4 living expenses) + $300 (student loans) + $300 (credit cards) + $600 (childcare services) = $8,061 Total Expenses. These figures don't include any increases from your local county assessor's office, car repair bills, cost of living increases, cable or satellite services, utilities, etc.
Rather than considering shorter termed loans (with more favorable rates and payment options), the customer will keep their existing loan (they like the current low rate) and take out a Home Equity Line of Credit.
Currently our economy is prospering; this good news creates a rising Prime Rate, which increases the payment rate on your Equity Line of Credit. Some people are using their Equity Line of Credit accounts in order to maintain their current standard of living. One of two things will eventually happen: a) The client will have to prematurely sell their home because they can't afford the payments or b) The client will maximize their existing equity and be forced to make higher payments; this scenario has the possibility of a foreclosure waiting to happen.
In addition to establishing your goals and determining the right loan program, you should also understand the character of a real estate investor. Treat your property as an Investment and NOT a Retirement! Learn to use your equity as leverage in order to obtain greater wealth! Ask yourself what are you trying to accomplish with this transaction? In our opinion, "rate shopping" is the old process for selecting a mortgage loan and it should be replaced with "payment shopping". Did you know there's a loan program available that may have a higher interest rate than you currently have, but provides you with a lower monthly payment (plus extra monthly cash-flow), and no negative amortization? Also, don't view negative amortization as a dark cloud in terms of loan programs; depending on how long you plan on staying in your home, this lower payment option could be a blessing in disguise for the true Real Estate Investor.
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About the Author
Brisco & Associates is a growing company that offers services in the following categories: Mortgage Consultation, Contract Mortgage Processing, and Mortgage Education. Dwight Brisco can also assist your mortgage financing needs in 46 states. Visit our web site at http://www.freemortgage-info.com, select FREE Reports, and sign up to receive more information. Dwight Brisco is licensed (01380942) by the California Department of Real Estate.