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Mortgage Refinancing
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Home Financing Wealth-Management Tools | |
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Compare and Save!   Home Equity Loan
 Mortgage
 Home Refinance
Whether you're just starting out in your career or are nearing retirement, your home-financing strategy can play an important role in the creation and protection of your wealth. According to Charles A. Gueli, mortgage and credit specialist at Merrill Lynch Credit Corporation, a mortgage of the right size and structure can help you manage your cash flow and tax liabilities.1
Certainly, Americans recognize that mortgages can be a powerful wealth- and liquidity-management tool. Consumers refinanced more than $2 trillion in home loans last year as the Federal Reserve slashed interest rates. But refinancing is just one of many strategies involving mortgages that can help you manage your cash flow. For example, by borrowing funds for your personal financing needs instead of liquidating assets, you may defer potential capital gains taxes and can continue to participate in any portfolio growth.
There are a broad range of mortgage products and services — as well as strategies — for minimizing costs and leveraging credit to integrate home financing into a focused wealth-management strategy. A few of the more popular mortgage options are those with fixed-to-adjustable rates, longer-term adjustable rates or 100% financing.
Fixed-to-Adjustable-Rate Mortgages - Fixed-to-adjustable-rate mortgages, in which the fixed-rate term lasts from five to 10 years, may be a good option for anyone expecting to move from the newly purchased home within the time that the mortgage remains fixed. Why? The interest for the fixed-rate period can be substantially lower than the rate for an equivalent 30-year fixed mortgage, leaving you with more money for other purposes. Though you are taking the risk that interest rates will be higher when the fixed-rate expires, you will probably never pay the adjustable rate if you sell the home as planned.
Longer-Term Adjustable-Rate Mortgages - If your main concern is maintaining liquidity and preserving capital, you may choose a very different home-financing strategy. A 25-year adjustable-rate mortgage, for example, could allow you to make interest-only payments for the first 10 years. Because interest expenses are generally tax-deductible, such a strategy could reduce your annual tax payments, increasing the amount of money that remains in your pocket. In some cases, you may be able to combine a first mortgage with a home-equity credit line, further increasing your liquidity.
Financing the Entire Cost - A third strategy, 100% financing, may benefit you if you prefer not to make a down payment. Instead of possibly cashing out of a significant percentage of your portfolio to fund the down payment, using 100% financing will allow you to keep your investment portfolio intact and your assets liquid. This can allow you to defer the capital gains taxes associated with selling appreciated securities and maximize your mortgage deduction.
It isn't always wise to liquidate assets to pay for purchases, particularly when interest rates are historically low, as they are now. In this environment, your monthly payments may be manageable and could be offset by the performance of your investments. After factoring in the tax deduction often available for mortgage interest expenses, borrowing could be more cost-effective than paying cash for a home.
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Plenty of Interest in Refinancing | |
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The Federal Reserve's series of interest rate cuts, including a recent half-point decrease, has spurred a torrent of refinancing activity that has benefited lenders and remodelers alike.
Economists, financial analysts, businesses, politicians and other pundits have been unanimous in touting the refinancing surge as a bright spot in the dim economic recovery.
Those within the industry wondered how many homeowners were left who hadn't refinanced their mortgages.
However, many people who refinanced their loans last year are refinancing again to take advantage of this year's even lower rates.
There are a number of methods for refinancing mortgages, some more creative than others.
Here are some examples:
A simple refinancing of the mortgage - The homeowner converts the equity into cash, perhaps to use in remodeling the house.
If the owner has no equity, some lenders will approve loans that are 25 percent more than the home's appraised value, so the owners can come away with some cash, said Brodsky, a GMAC Mortgage loan officer.
Because these loans carry more risk for the lender, the interest rates are higher.
Taking out a second mortgage - The owner can receive the cash upfront and begin paying off the loan in fixed monthly installments.
Or the borrower can create what's known as a home equity line. It's like having a credit card without the high interest rates.
The monthly payments shrink as the loan principal is whittled down. And it offers revolving credit. So if a homeowner borrows $30,000 and pays off $10,000, he or she can borrow another $10,000.
Splitting up the mortgage - An owner can refinance the house at 80 percent of its value, then apply for a second mortgage based on 15 percent of the home's value.
The second mortgage would be a 15-year loan.
By doing this, the owner no longer has to pay mortgage insurance. Typically, owners must have insurance on loans that are more than 80 percent of the appraised value of the house.
The 15-year second loan allows owners to pay off a chunk of the mortgage sooner than they would have if they left it all under one 30-year loan. And it's tax deductible.
Homeowners itching to remodel will often begin the work before they receive the loan money.
One caveat: While remodeling, contractors might uncover hidden problems that must be fixed, resulting in higher-than-expected costs.
Make sure the loan is large enough to cover such contingencies.
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Turning a House into a Bank | |
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What may be the most significant innovation in the American home-mortgage field in more than two decades officially hit the market recently.
It's called the "home asset management account." It grafts a growing equity line of credit onto a standard home mortgage, and it essentially makes tax-deductible home equity the centerpiece of a borrower's personal financial affairs. It turns your house into a bank that's always open -- if you choose to use it.
Here's how it works. You apply for a home asset management account instead of a traditional mortgage. The account consists of:
- A first mortgage up to $750,000. The rate on the loan is the same as the prevailing rate in the traditional mortgage marketplace.
- An initial home equity line of credit equal to all or most of your initial equity or down payment. The credit line comes automatically and need not be applied for separately. To activate the credit line, you have multiple options, including a set of checks, a debit card usable at most ATMs, a toll-free access phone number or a special Web site. You can also walk into a retail branch office of the lender and get cash on the spot. There is no requirement that the credit line ever be activated or drawn on.
- Every quarter you receive an "account review" statement that tells you how much your available equity line has increased because of principal payments on your primary mortgage, plus a summary of credit-line funds you've already drawn down.
- Once a year, the quarterly statement also reports the estimated growth in your home's market value. The estimate is based on a proprietary statistical model that analyzes resale pricing patterns in your area. The growth in your real estate equity is automatically added onto your available credit line, unless you request that it not be.
If your estimated home resale value jumped by $20,000 during the past 12 months, for instance, that amount would be added to your credit line.
- Credit-line balances carry a variable interest rate, competitive with prevailing rates for home equity loans. But the credit line can be switched to a fixed-rate equity loan, whenever you think rates are favorable to lock in.
- In most cases, payments on all the combined first- and second-mortgage debts in the account are expected to be tax-deductible.
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Home Asset Management Account | |
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Consider this hypothetical example of how a home asset management account might work. For example: You buy a house for $200,000. You put down $20,000 and sign up for a home asset management account. The $180,000 30-year first mortgage in the account carries a fixed rate of 6 percent. The initial equity line available to you, thanks to your solid credit history and high credit scores, is equal to your $20,000 equity investment.
Each quarter after closing, you receive account reviews showing the principal paid down on the first mortgage and the status of your equity credit line. Say you don't activate the credit line during the first year. Then you get your annual statement showing total principal paid off during the year, plus the result of the estimated revaluation of the house and the land. Your home is now valued at $215,000, says your lender, and your available credit line rises by $15,000 plus whatever principal amounts you've paid down on the first mortgage.
You can tap into that line by writing a check or driving to an ATM. That, in turn, activates the interest charges on whatever balances you draw on. You can pay off whatever you choose in either loan account you want, or pay off the combined accounts when you sell the property.
Is this the home financing concept of the future? Peter Wissinger, president and chief executive of Wells Fargo Home Mortgage, which introduced it nationwide, certainly hopes so. Other major lenders, including Countrywide Home Loans, are known to be working on their own versions of the plan for introduction within months.
The home asset management account unquestionably is the most important concept in the mortgage market since the introduction of adjustable-rate loans in the late 1970s and early 1980s. It has the potential to transform the way American homeowners pay for everything they buy with credit, and to lower their costs of borrowing to boot.
The idea has some troubling aspects as well. It allows you to hock your home to the hilt, putting at risk the largest wealth-producing asset owned by most households. And by making it easier than ever to liquefy home equity, it could encourage some homeowners to binge on spending, and lose their debt-laden properties if their incomes no longer support their credit appetites.
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