With our unique approach to mortgage management, we consider the borrower’s individual needs and their life’s circumstances to identify the optimal mortgage product, which might include—due to a lack of personal resources—a loan with a low down payment or a loan with features that accommodate a short-term lack of cash flow. It may also be feasible to leverage a mortgage to accumulate assets. This is accomplished by either taking a short-term mortgage or minimizing the down payment.
On a more sophisticated level, you should consider the benefits—for tax purposes—of keeping control of your principal for as long as you can so you can at some point refinance for a new interest rate with the associated tax benefits of not reducing principal. The Four-Step Mortgage Process fits in because it is a proven mechanism to accumulate sufficient assets, achieve positive lifestyle changes, and enjoy more flexible retirement options.
Now let’s consider 2 scenarios that work.
Scenario 1: Adequate Asset Position
If you are purchasing a home and your asset position is more than adequate, you may elect to minimize the down payment and redirect those funds to investment alternatives. You can accomplish this by investing the unused funds in safe, liquid assets that provide a good return. These assets are readily available and can in some cases provide returns greater than the interest being paid for the mortgage. I have referred to this as the “means to the pension you will need to retire,” because if you are able to put the asset to work for you, in essence the additional resources are funding the pension fund accumulation. It is a viable method to accumulate the money you will need in the future to retire.
In addition, tax benefits are associated with this scenario since the payments for the larger loan will have a tax element associated with it, which will reduce the average cost of the loan. Specifically, if you are in the 40% tax bracket, an interest rate of 4% will cost 2.4% after the tax benefit. Your investment may be earning money at a higher rate and this spread may be substantial. Such tax-advantaged investment mechanisms include tax-free bonds, annuities, and life insurance. You will need a competent financial planner to explain these investments to you, but they do work. And consider this: if you were buying a home for $1,000,000 and were originally planning to put down $750,000, you could instead put down $250,000. This gives you $500,000 to grow with investments that provide far richer returns. Consider the advantage of compounding this investment over time. $500,000 invested at 6% over 15 years will be worth $1,227,046.
Scenario 2: First-time Homebuyer
If you are purchasing a home for the first time, and (1) you can afford a down payment, and (2) your monthly income is challenged, but (3) you know it will improve in time, then you may want to use a less expensive mortgage product. You could accomplish this by obtaining an adjustable rate mortgage with either a fixed period of 3, 5, 7 or 10 years and either a 30-year amortization or interest-only loan. With these individual life circumstances, we would also consider an interest-only loan, which would not require amortization, thus reducing the cost of the monthly payment. This does not mean that you totally ignore the principal of your loan; you may just defer it to a time when your cash flow can accommodate amortization of the principal or can be invested in a safe investment.