Q: We have a 15 year mortgage and are making
extra principal payments to pay the house off
as fast as possible. Are we doing the right thing? |
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A: Making
the right move must be discovered by understanding
your investment strategies and financial
goals. Most of my clients want to know how
to pay their home off the fastest and safest
way possible. We usually discover that we
can pay a home off faster and safer than
conventional means by using an interest only
loan product and instead of
making extra principal payments to the
bank, the client would save the money in a
compounding interest account. As the side
account grows in value and becomes larger than
what is owed on the mortgage, you have in essence
paid your home off. This is what we call the "freedom
point" and in most cases, we can reach
this sooner than standard 15 and 30 year mortgages.
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Q: We are looking to retire in the next
10-15 years and are concerned about having
enough savings to carry us through into retirement.
We own our home free and clear and are debt
free. What type of strategies do you have that
can help us in retirement.
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A: We
have multiple strategies for our client's in
your position. One strategy we could employ
is to get the money out of your home and get
it to work in a vehicle that creates income
for you in retirement. We have many vehicles
that can produce income in the future by funding the
vehicle with home equity. Safety, Liquidity
and Rate of Return are the main criteria we
look for in any prudent investment. Please
look at our Wealth Building Program for seminar
dates where we teach these strategies in detail.
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Q: I have another mortgage broker who
told me my payment on a $500,000 dollar loan
would be $1,264. The last loan I had was for
$480,000 and the payment was $2,400. The broker
stated it was an option arm and it was the
best loan out there.
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A: Option Arms are great loans if you
know all the rules of the loan and are able
to afford the 30 year amortized payment that
the loan carries.
Here is the rest of the story...:
With the option arm you have 4 payment options.
1st
Payment Option: Minimum
payment (usually based
on a 1% amortized payment
over 30 or 40 yrs)
2nd Payment
Option: Interest Only
Payment based upon the
fully indexed rate (FIR) The
fully indexed rate is the
index (MTA, COFI) + a
margin determined by the
bank.
3rd
Payment Option: 30
year amortized payment
based on the fully indexed
rate.
4th
Payment Option: 15
year amortized payment
based on the fully indexed
rate.
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If you make the minimum payment,
you will defer the interest that is due and
that amount you do not pay will be added
to the principal balance. Each bank will
only allow so much accrued interest to be
added to the principal balance
and then they will require you to make principal
payments to reduce the principal balance.
This is usually 110% of the original principal
balance. This is the dangerous part of the
loan, because once you hit this point in
the loan, your payment could double or triple
from the minimum payment you were making.
We show our clients how to
use these loans correctly and save any interest
they defer into a side account that pays
interest in a compounding environment. If
the client saves the deferred interest in
a side account,
they are effectively saving their equity
on the outside of the home and getting paid
interest.
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