THE INTELLIGENT MORTGAGE

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This was originally posted June 30th, 2008. After this text I’ve added an update to Ted and Alice’s situation.

 What would you do if I offered to lend you money and charged 4% interest rate?

What if I could also show you a cast iron secure investment that would pay you a minimum 25% per year if you re-invested the money you borrowed from me?

Here is a true story.

Ted and Alice had bought their house in 1999 with 10% down, getting a 90% 3 year fixed loan, which required Private Mortgage Insurance.  ($219/m). By 2003 the value had gone up to where they could get an 80% loan with no PMI.

 When we met to discuss a possible refi I found out that during those 3 years Ted had not been able to pay in to his company 401-K program. This plan had the company match his contribution by adding 25% to whatever he put in (up to 6% of his salary). In addition, neither of them had made any contribution toward the ROTH IRA’s they were entitled to.

By refinancing into an 80% Negative Amortizing Loan with *World Savings they were able to fully fund Ted’s 401-K, AND make the maximum allowed contribution to ROTH IRA’s for both of them. They were paying $800/m less than the interest on the new loan.

What was actually happening was they were borrowing $800/month from themselves (The equity in their house) at an after tax rate of 4%, and investing most of it in Ted’s 401-K at a guaranteed 25% return. The IRA contributions were just icing on the cake.

This is not magic. It is simply making sure that your mortgage is designed to best fit your current situation, AND long term plans.

At the end of 1 year they owed $9,600 more on their mortgage BUT had accumulated $9,760 in Ted’s retirement plan, PLUS $6,000 in their IRA’s. I make that a net gain of 30% in the first year from nothing more than some intelligent Mortgage and investment planning.

This example is just the tip of the iceberg showing what can be done with a little knowledge and an open mind.

Now here’s the answer I got from Ted when I recently asked how they were doing.

 “I love my loan. Two months ago I was at 3.18% fully indexed. This month it jumped up to about 3.68%. After having this loan since March/April 2002 I have paid off about $80K in principal and well over 50% of my bi-weekly payment is going to principal reduction. I can understand how this kind of loan could be abused by people who didn’t understand it but that is the problem with THEM, NOT the Loan. For us it’s been a Blessing. Thanks a million Bill.”

The moral here is that your Mortgage is a financial planning tool. As with all tools it can be used correctly to your benefit, or incorrectly to your detriment.

* World Savings had the only intelligent Negative Amortization Mortgage. All others were ticking bombs and have been exploding all around us for the past year or so.

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