More and more loan officers are presenting themselves as “trusted mortgage advisor” and “mortgage planners.” Unfortunately, there are no standards in the industry for these terms. Disregarding titles, it is important for anyone making this important decision to make it with the best advice possible. To do this, an individual needs an understanding of the facts surrounding the concepts of mortgage planning.
Concept Number One
Your home should be part of your long-term financial plan. This is why we chose to write on this topic. Working with a Mortgage Advisor you can expect to discuss these topics. The purpose of this two-part report is to explain the basic concepts of mortgage planning–including facts that are true and those that are more likely to be misunderstood.
Fallacy Number One
Everyone has a long term financial plan. If you look at a real estate investment by itself, it is a difficult task to fit the transaction into a long-term plan. If there is no long-term plan in existence, then the task is impossible. The problem is, most American’s do not have a long-term financial plan. For example, if their goal is retirement, they don’t know what will help them get there and how fast.
Fallacy Number Two
Real estate is a great short-term investment. We know it was difficult to convince people of this during the years when buyers were flipping homes for profit. But the truth is–real estate can go for several years without significant appreciation. In other words, don’t buy real estate you can’t afford. A true Mortgage Advisor would never advise you to purchase real estate with the goal of short term gains.
Concept Number Two
Real estate is a great long-term investment. Even though homes may not go up in value every year, appreciation over the past fifty years has shown us that real estate is a winner in the long-run. Not only because of the appreciation–but because of the ability to leverage the asset. You can purchase a $300,000 home with $15,000 or less. A conservative rate of gain of 5% will cause the home to go up approximately 65% in ten years after you figure in the effects of compounding. That is a gain of approximately $195,000. Where else can you turn $15,000 into $195,000?
Fallacy Number Three
If a home was not such a great investment, it would not be the American Dream. A home is more than an investment. It represents security, safety and pride. When immigrants come to this country, they often come from other countries in which it is impossible to purchase a home. You don’t have to convince them that homeownership is worthwhile.
Concept Number Three
Home ownership is one of the two most important tax strategies in American. After years of simplification of the tax code, home ownership and retirement plans are the two major strategies left. A home can help you take advantage of both strategies as many have great equity in their homes but underfunded retirement plans. It may make sense to pull money out of the home, borrowing tax deductible money to fund the tax-deductible retirement plan. Make sure to speak to your mortgage advisor about the tax savings available when you purchase a home.
Fallacy Number Four
You should borrow as much money as possible to maximum tax deductions. A tax deduction in itself is not a reason to borrow money. If you are going to borrow, it makes sense that you use a tax-deductible loan. But you must have good use for the money such as funding a retirement plan or making other investments. Talk to your mortgage advisor about your assets and howuch money you would be comfortable putting down. No Mortgage Advisor would ever advise you to borrow money from retirement to purchase a home. Our goal is to put you in the best possible financial position, not earn a quick commission.
Concept Number Four
Americans do not like debt. Sometimes while planners are advising their clients to increase their leverage so that they can use the money for investing, they don’t understand that the average American hates debt. If they could pay off their mortgage tomorrow, they would. This does not mean that the investment concept is not valid. It does mean that we need to take into consideration people’s feelings. And let’s add another concept to this–Americans have too much debt. Granted long-term leverage may help, but the immediate need for most Americans is less debt, not more. Your Mortgage Advisor will discuss the best use of your assets and ask for an introduction to your accountant to make sure we are guiding you to the best possible decision.
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