Many of us have a natural inclination to be debt-free. We put down as much money as we can when buying our homes and then we work to pay off the mortgage. Like our parents’ generation, we take comfort in seeing the proverbial light at the end of the tunnel, where we burn our mortgages and the monthly payment no longer hangs over our heads. But times have changed and these attitudes although comforting, may not be advancing our financial standing. Exploring the real value of borrowed money will give us a better understanding of how to improve our economic outlook.
The most effective way to run your household finances is to consider your family as a corporation and ensure that you have safeguards for fluctuations in an unpredictable economy.
Just a few short years ago who could have envisioned the demise of Bear Stearns and the dissolution of Lehman Brothers? Or that barring a government bailout, Fanny Mae a $50 billion corporation, would have been but a memory? The determining factor on who was able to weather the last economic storm was liquidity. When the market collapsed and creditors came after their collateral, those who were able to access their funds kept their heads above water and those that had no cash on-hand ultimately failed and folded.
Similarly, when economic times are good and rates are low, people don’t think about a possible downturn in the market. Once that recession comes and pink slips are handed out, it is usually too late. Some of those who thought they were being conservative and responsible by limiting the size of their mortgage, start having trouble meeting their monthly payments. If they had taken a larger loan and put the extra cash into savings or developed a growth portfolio, they would have had the cash to make their payments and would have run less risk of losing their home.
Disparately, people struggle with high expenses and the growing concerns of paying their kids college tuition, financing their retirement and meeting other incidentals that come up along the road of life such as someone falling ill or caring for an elderly parent. It is important to plan for these challenges. But how do you do so when money seems so tight? Refinancing, or investing less equity when you purchase a home may give you that opportunity.
Distinguishing between irresponsible debt and sound financial planning is an important factor in determining how to get your finances on track. We can agree that credit card debt, where borrowers pay (on average) 17 percent, is bad debt—the kind of liability that can leave people buried in bills for years. In contrast, mortgage rates are currently in the 4 percent range, a number that is locked in for 30 years. After taking into account the fact that the interest on your home loan is tax deductible—using a conservative federal rate of 2percent— a borrower will essentially receive a credit of 1 point on his/her annual mortgage payments, making the effective rate only three percent. This is the lowest cost, long-term, fixed rate loan you are going to find.
To determine the size of a mortgage and monthly payments, one must take into account several factors including cash flow and regular expenses. If you are in fact able to take out a considerable amount and invest it conservatively with the advice of a seasoned financial planner, you may be able to create a growth account and start saving for your future while at the same time providing yourself with the liquidity that can keep your family economically stable should your financial position change suddenly.
No other loan provides you with this type of stability at a low price. Locking in now while rates are still low, gives you the opportunity to hold on to your money and access it if you need to.
Mark Rokowsky, is the Managing Director of MR Capital Group and a 16-year veteran of the mortage industry. Mark has become a renowned expert in structuring loans for optimum efficiency and savings.
By Mark Rokowsky
