CPA Loan Pro

If you hire a real estate lawyer before you sign a purchase contract, your home-buying experience is guaranteed to go as smoothly as possible because any potential legal problems are solved before closing. And as long as your real estate lawyer issues your title insurance, you won’t pay more by involving him or her early on.

What are the Fees?
Either a non-lawyer title agency or a real estate lawyer can handle your title insurance. Many falsely believe the attorney fees cost more, but actually they both cost about the same. The benefit to letting your real estate lawyer handle the title insurance is that he or she can also:

* Prepare the purchase contract
* Resolve any title or inspection issues
* Give you legal advice throughout the transaction

A title agency that isn’t affiliated with a real estate lawyer cannot do any of those things.

Whether or not separate attorney fees will be charged depends on the way the transaction is structured. Typically, if your attorney acts as the closing agent and provides your title insurance, there will be no other fees involved.

For example, in Florida, for more complex circumstances, fees could range from $350 to $600 for an average-priced home. If you hire a real estate lawyer to review the title commitment and other documents prepared by someone else, a moderate and reasonable fee will be charged, with the actual cost varying across the state.

Because your real estate lawyer is versed in real estate law, he can answer questions regarding very important issues, such as:

* Income tax and estate tax consequences
* Florida property taxes, zoning or special assessments
* Probate issues
* Simplifying a future sale
* Accuracy of property’s recorded legal description
* Rights for use of property
* Marketability of Title for future sale or refinance of property

A real estate attorney can also perform the following procedures::

* Review the contract and ensure that all provisions and contingencies are in your best interest
* Inform you of your legal rights and obligations
* Obtain a title search, evaluate the status of the title and require appropriate legal remedies to clear any defects
* Advise you on what the title policy does not protect against, emphasizing marketability of the title when you sell
* Prepare or review the closing statement and other closing documents, and let you know about seller contingencies that affect your interests
* Interpret and counsel you about all legal documents related to the title and transaction, including deeds, mortgages and closing statements
* Advise you on how you should take the title to the home, and how this affects your overall business and personal estate
* Check for unrecorded municipal liens, including sewer and special assessment liens
* Prepare a bill of sale to cover any personal property such as curtains and appliances that you and the seller agree shall remain in the home
* Inform you about the income, estate, and gift tax consequences to your estate

The best reason for hiring a real estate attorney? The attorney is the only member of your home-buying team who is qualified to give you legal advice. And the greatest benefit of using an attorney is that he or she has an ethical obligation to work on behalf of your best interest.

Everybody who owns a home should get insurance on their property, and everyone who has a mortgage on their home must get an insurance policy. The lender will force you to carry a policy that covers fire and hazard insurance in order to protect their investment.

In Florida, you are required to take out windstorm insurance (i.e. protection against hurricanes). If you don’t take out your own policy, the lender will take one out for you (which may be more expensive) and bill you for it. If you don’t pay it, the lender can foreclose on your home.

Homeowners insurance policies are broken into two parts, property protection and liability:
1. The property portion reimburses you for damage to the home and contents. (You are not required by lenders to get contents insurance. They are only concerned with your personal items inside the house if their damage somehow devalues the home.) The amount of insurance coverage is usually based on the estimated cost of replacing the entire home.
2. The liability portion of the policy covers medical bills that occur as a result of people being injured on the property. For example, if a neighbor trips on your property and breaks his leg, or is bitten by your dog, you could be held liable. Your liability coverage will protect you against this type of expense.

When shopping for homeowners insurance you should get price quotes from at least three companies. Some insurance companies may give you a price break if you use them for both your homeowners and auto insurance policies.

Flood Insurance
One of the most important risk items excluded from most homeowners insurance policies is damage caused by flooding. In some areas that are labeled as being flood zones, the lender will require you to take out an additional flood insurance policy. In some cases you can purchase insurance from the government as part of the National Flood Insurance Program (NFIP).

Windstorm Insurance
Another exclusion in the standard insurance policy is "windstorm" damage. Pay careful attention to the "Hurricane" deductible. This may be a special deductible, different than your other deductibles in your policy.

Earthquake Insurance
Earthquakes are another risk not covered be the standard insurance policy. There have been problems with the availability of Earthquake policies. If you have trouble finding an earthquake policy, contact your state insurance commission.

Life insurance
Your family will be left with a financial burden if something happens to the primary (or secondary) wage-earner. Although we prefer not to think about this issue, it is the responsible thing to do. You should consider taking out a life insurance policy to protect survivors from this burden.

Things that can lower your premiums:
* The higher the deductible, the lower your monthly premium will be. It doesn’t make sense to have any deductible below $500 or $1000 because you won’t want to put in claims for low-cost items, anyway.
* Bundle auto and homeowners insurance
* Smoke detector
* Burglar Alarm system
* Fire alarm: Centrally monitored, local (rings only at home).
* Alarm System: Centrally monitored vs. rings only at home (local).
* Distance to Fire Hydrants
* Distance to Fire Station
* Inside or Outside City Limits
* Storm Shutters
* New Home Discount (the age of your home matters)

How much insurance do you need? You should take out enough insurance to cover the cost of rebuilding your entire home if necessary. Take into consideration that construction costs have probably risen since the house was built, and cover any inflation. Although complete destruction of your home is rare, protect yourself as much as you can.

Always read the fine print of your policy. Check your policy carefully for limitations, exclusions and deductibles, such as landscaping, personal property, etc., so you cannot be taken advantage of by unscrupulous insurance companies.

Check the rating of any potential insurance company. Many second-rate insurance companies went out of business when hurricane Andrew hit South Florida, which caused delays in insurance payouts, leaving many people homeless with no way to pay for temporary living expenses. You should periodically review your policy to insure that you have the coverage you need and discounts you may be entitled to. Furthermore, take note of anything you may have added to your home, since the policy was initiated, that can reduce your premium.

More than 1.6 million American families filed for bankruptcy between 2002 and 2003; a rise of nearly 150,000 nationwide. If you have recently declared bankruptcy, you are probably having difficulties getting credit approval, especially for a home loan.
And if you find a lender to work with you, you are unlikely to get a competitive interest rate. Your bankruptcy status stays on your credit bureau file for ten years following the date that you are declared insolvent. While many mortgage companies will not touch any applicants with negative reports on their credit file, there are some lenders out there who specialize in bad credit and bankruptcy home loans.

Interestingly, it can sometimes be easier to get a mortgage after a bankruptcy than to get other types of installment loans.

Even with the latest developments in the Subprime industry, there are still lenders who continue to offer high Loan-To-Value programs to people who have recently declared bankruptcy.

Make sure you have copies of your Bankruptcy discharge papers to present when applying for a New Mortgage.

Unless your bankruptcy is very recent, do not hesitate to look for a mortgage. While it may be more difficult to qualify, there are some companies that specialize in mortgages for those who have had credit challenges. You may be pleasantly surprised with the options out there for you. Of course, you will need to spend more time finding the right mortgage broker who can assist you, so it will pay to be patient and persevering.

Following a bankruptcy, it’s important to begin reestablishing good credit. One option is a secured credit card. With these, you open a depository account with a financial institution and use your own funds as a line of credit. These credit cards are a great tool for helping your credit profile recover from a bankruptcy.

After your bankruptcy you should review a copy of your credit report to make sure all negative accounts that were included in the bankruptcy are correctly reported. Some creditors may not report accounts as listed in bankruptcy and those accounts will still show open and derogatory.

There is absolutely a mortgage after bankruptcy for you, provided that you avoid making late payments on your mortgage or any other loans or credit cards following the bankrupcty, whether it is a Chapter 13 Bankruptcy or a Chapter 7 Bankruptcy. LAte payments on a mortgage after a bankruptcy can seriosuly hurt your chances of qualifying for a mortgage.

There are lenders who can provide bankruptcy buyouts to help satisfying your payments to your trustee. These are typically short-term loans to help you get back on your feet, rebuild your credit that qualifies you for a better lower payment program.

There are many lenders that will provide a loan after you have filed for bankruptcy. Contact a mortgage broker to determine what is available for your situation.

An FHA loan can be used to "buy out" a Chapter 13 Bankruptcy if it has been open at least one year. You must have made all payments on time and developed no other bad credit during that time.

By Robert Rosefsky, Personal Finance 8th edition, John Wiley & Sons, NY, 2002.

An adjustable rate loan, most simply stated, means that your interest rate can be adjusted up or down over the months and years. By adjusting the interest rate your monthly payments might also change.

In order to make an intelligent choice between a fixed rate and an adjustable rate loan, you have to understand the jargon of the adjustable loan and how it works.

For example: Your initial rate will be 8 percent. The base rate will be 9 percent, with semiannual adjustments. The index will be the floating Treasury Bill rate, and there will be a margin of 3 points over that. You will have an annual cap of 1 percentage point, a lifetime cap of 5 percentage points.
Initial Rate. The initial rate might be an attractive rate. The initial rate will last until the first adjustment occurs, which is usually after six months.
Base Rate. The Base rate is the interest rate on which the lifetime cap is calculated. If you have a lifetime cap of 5 percent, that means that your interest rate over the life of the loan cannot be greater than 5 points above the base rate. In the above example, the base rate is 9 percent, and the lifetime cap is 5 percent. That means that your interest rate over the life of the loan cannot exceed 14 percent.
Index: The index is an arbitrary number, beyond the control of the lender, which is used to determine interest adjustments. The common indices are the so-called cost of funds for certain savings institutions or an interest rate that the U.S. government pays when it borrows money. In the example above, the index is based on the interest rate the U.S. government pays on its very short-term borrowings (Treasury Bills). All indices will move up and down as interest rate trends change.
Margin: The index plus the margin equals the interest you’ll be required to begin paying at the start of each adjustment period. For example, if, after the first six months of your loan, the index has increased from 6.8 percent to 7.2 percent, the interest rate you will have to pay on your loan from that time on will be 10.2 percent: the index of 7.2 percent plus the margin of 3 percentage points. Similarly, if the index goes down, so will the rate you pay.
Lifetime cap: This fixes the maximum interest rate you will pay during the life of the loan. The lifetime cap is added to the base rate to get the ultimate maximum.
Annual Cap: The annual cap puts a limit on how much your payments can increase during the course of a year. (In some loans , this cap may be based on a shorter period of time, such as six months.)

FREQUENTLY ASKED QUESTIONS

1 What types of documentation do I need for the application?
Based on the loan program you choose, the exact documents required will vary. In general, you should bring the following:

• Federal income tax statements and verification of any additional income
• Your two most recent W2’s.
• Current paycheck stubs
• Recent bank statements
• Asset and liability information (stocks, bonds, other real estate, etc.)

2 How do I know which type of mortgage is best for me?
There is no simple answer to this question. The right type of mortgage for you depends on many different factors:

• Your current financial situation
• How much you expect your finances to change
• How long you intend to stay in your house
• Your tolerance for having your mortgage payment changing from time to time.

We can help you decide which loan program is best for you. Give us a call and we’ll review your situation with you and show you what programs you might like.

3 How much of a down payment will I need?
Quite probably, less than you think. Many first-time buyers are surprised to learn there is no fixed answer to this question. Usually, down payments range anywhere from three to twenty percent of the property’s value.

4 What is escrow?
In addition to the principal and interest portion of your monthly payment, the terms of your loan agreement allow the lender to collect funds from you for the payment of your real estate taxes, insurance bills, and sometimes other items. These additional funds are referred to as the escrow portion of your payment. They are collected throughout the year and paid on your behalf.

5 What is amortization?
This is the lifetime of your loan. For example, most mortgages have an amortization of 30 years, meaning your mortgage will be paid off after 30 years.

6 Will my monthly payment always stay the same.
No, your monthly payment can change for the following reasons:
· Escrow Analysis – At least once a year, your lender will analyze your escrow account, and adjust the portion of your monthly payment collected for real estate taxes, insurance, and other escrow items. Your new monthly payment amount shown on the analysis will typically be effective on the anniversary of your first payment due date.
· ARM Adjustments – If you have an adjustable rate loan, the interest rate and principal and interest (P & I) portion of your payment will change on a scheduled basis based on its index. To determine when your new payment will become effective, please refer to your loan agreement. If you have an escrow account, the escrow portion of your payment may change as well.

7 How does the lender decide the maximum loan amount that I can afford?
The lender considers your debt-to-income ratio, which is a comparison of your gross (pre-tax) income to housing and non-housing debts. Non-housing expenses include such long-term debts as car or student loan payments, alimony, or child support. Typically, mortgage payments should be no more than 29% of gross income, while the mortgage payment, combined with non-housing expenses, should be no more than 41% of income. The lender also considers your cash available for a down payment and closing costs, credit history, and employment history when determining your maximum loan amount.

8 Do I really need homeowners insurance?
Yes. Proof of a paid homeowner’s insurance policy is required at closing, so arrangements will have to be made before then. Plus, involving the insurance agent early on in the home buying process can save you money. Insurance agents are a great for tips on how to keep insurance premiums low and information on home safety.

9 What is loan-to-value and how does it determine the size of the loan?
The loan to value ratio is the amount of money you borrow compared with the appraised value of the home you are purchasing. Each loan has a specific LTV limit. For example: With a 95% LTV loan on a home priced at $100,000, you could borrow up to $95,000. The higher the LTV, the less cash homebuyers are required to pay out of their own funds. So, to protect lenders against potential loss in case of default, the higher LTV loans (over 80%) usually require a mortgage insurance policy.

10 What are discount points?
Discount points enable you to lower your loan’s interest rate. They are basically prepaid interest, with each point equaling 1% of the total loan amount. By and large, when you pay a point on a 30 year mortgage, you can lower your interest rate by 1/8 (or.125) of a percentage point. When comparing loan rates, ask lenders for an interest rate with 0 points and then see how much the rate decreases with each point paid. Discount points are a good idea if you plan to stay in your home for some time since they will lower your monthly loan payment. Points are tax deductible when purchasing a home and sometimes you can negotiate with the seller to pay for some of them.

11 What is the difference between discount points and loan origination points?
You purchase discount points to lower your interest rate. Origination points are a fee paid to the originating lender which are part of the profit margin for the services that they provide. Both are measured as percentage of the loan amount and both are factored into the loan’s APR. Generally, points are deductible as long as the seller didn’t pay for them and origination fees are tax deductible provided they are expressed as a percentage.

12 What is the difference between the mortgage rate and the APR?
The APR (Annual Percentage Rate) of a loan is supposed to be an overall interest rate with all the applicable closing costs factored in. Unfortunately, not all lenders include the same costs so not all APRs are created equally. Use the APR as a general guide to the overall cost of the loan but keep in mind that you have to look at the details of what’s included to be sure.

Mortgage rates are rising and it’s becoming more difficult for a prospective buyer to save up for the necessary down payment. Fortunately, there are ways around this hurdle.

Although homebuyers were once required to put down 20% of the purchase price, those times are long gone. Generally, lenders now require 3 to 5 percent down. The problem then becomes how to save up for that 3 percent.

What many don’t know is that they have several options for coming up with the money.

RETIREMENT SAVINGS
Most 401 (k) or Individual Retirement Accounts will allow people to borrow or withdraw money early. Doing so can be a good strategy for the home buyer. With a 401 (K), one can borrow up to $50,000 or 50 percent of the balance, whichever is less, and then repay a loan over five or more years, with interest. The added advantage is that this type of borrowing won’t count as debt when a lender is assessing a person’s qualifications for a loan. And there is also the possibility of getting better appreciation on money invested in real estate.

But, are there drawbacks from borrowing from a 401 K? There can be. For one thing, if the borrower quits or gets laid off from the job, he must repay the loan within 90 days or be subjected to penalties and taxes on the early disbursement.

GIFT MONEY
While borrowing against retirement savings is possible for people who were able to set money aside, there are many people who have little or no savings.

What many don’t know is that some loan programs allow borrowers to use gift money to make down payments. This gift money must generally come from family members, spouses, domestic partners, or even nonprofits.

NONPROFITS
There are many nonprofit organizations, such as the Home Solution program, that help first-time borrowers. Sometimes the seller will pay 3 percent of the sale of the home, plus a fee, to the nonprofit. The organization then loans the buyer that 3 percent at closing time for use as the down payment. And the Federal Housing Administration generally insures both Gift and Non Profit Loans.

There are also programs run by nonprofits to help low-to-moderate-income people purchase homes. One such program is the Habitat for Humanity, which requires buyers to contribute by working on their own home as well as the homes of others.

Additionally, housing finance agencies in many states offer special loan programs for low- to moderate-income buyers. Fannie Mae, the biggest buyer of mortgages, offers loans through housing finance agencies that require down payments of as little as 1 percent or $500, whichever is less.

NO-DOWN and LOW-DOWN
Another option available is the no- and low-down payment loans. These types of loans, however, have the disadvantage of requiring costly mortgage insurance. Mortgage insurance benefits the lender in cases where a borrower defaults on the loan.

But, there are ways around this hurdle. A person can avoid mortgage insurance by getting a "piggyback loan." A piggyback is a home equity loan borrowed on top of a primary mortgage. For example, one could put 5 percent down, get a primary mortgage for 80 percent of the home’s price, and a higher-interest home equity loan for 15 percent of the price.

In one example, a couple made a 5 percent down payment from the proceeds of a previous home, got a 20-year home equity loan for 15 percent of the purchase price, and a 30-year mortgage for 80 percent of the price. The piggyback loan allowed them to avoid buying the mortgage insurance. While the payments on the second mortgage are roughly the same as what they would have been paying toward mortgage insurance, they can deduct the interest expense on their income taxes. And so there’s the added benefit that the piggyback loan is working for them, not the lender.

THE UNORTHODOX
Some African and Caribbean cultures use the unorthodox method of forced savings known as the susu. In the susu plan, a group of people use peer pressure to compel each other to save. They pool their money and then distribute it among themselves, periodically, such as on a monthly basis.

For example, a dozen people might contribute $500 each into the pool every month for a year. In the first month, one person gets $6,000. The next month, the next person gets $6,000, and so on. At the end of the year, each person has both contributed, and received, $6,000.

There are many options out there for getting around the down payment hurdle. Ultimately, the borrower must decide what method is most suitable to his needs.

The Loan Process

1. Get your documents & finances in order.
2. Get pre-approved to determine how much you can borrow.
3. Work with our loan officers to find the best mortgage for you.
4. Close your loan and settle

1) Get your documents & finances in order.

You should start with reviewing your credit report. Your credit report will be used by your prospective lender as a measure of how you manage your finances. Good credit gets you better rates and a stronger negotiating position for terms. Most people are surprised at their report’s contents because errors in reporting are common. Now is the time to clean them up.

Also provide the following:
Copy of two recent pay stubs the two most recent W2s
(If you are self employed, you need two years of tax returns and a YTD profit and loss statement)
Provide a copy of your current mortgage statement
Verification of any additional income
A copy of your homeowner’s insurance policy
A copy of your deed
Current loan provider
For a home equity loan, provide a copy of the note on your first mortgage.
Title information
Tax verification information
Previous property assessments, if applicable
If you own any rental property, provide copies of the rental agreements and two years of tax returns
Letter from employer stating date of hire, position, salary and year-to-date earnings
Current value of your house
Outstanding loan amounts
Three months bank statements for each bank, IRA/401K, stock and mutual fund account.
Co-borrower information
Provide a copy of divorce decree if applicable.
If you are not a US citizen, provide a copy of your green card (both sides)
If you are not a permanent resident provide a copy of your H1 or L1 visa.

2) Get pre-approved to determine how much you can borrow.

Once you get qualified you will have a good idea of how much you can afford. A pre-qualification gives you a no obligation quick and easy idea of what you can borrow. It is a helpful and painless first step. Pre-approval verifies your income, credit and debts. This involves more time and expense but is very useful when making an offer on a property. Sellers will obviously consider an offer more seriously that is pre-approved over one that is of unknown backing.

3) Work with our loan officers to find the best mortgage for you.

Your loan officer will help you find the mortgage that fits you best. There are a lot of factors to be considered. How long do you plan to keep the loan? Would a fixed or adjustable rate mortgage be best for you? How many points should you pay? What other costs are involved? When should lock in your rate? Based on your needs and situation, your loan officer will show you which mortgage products work best for you. During the whole process, we are there for you to answer your questions with our years of experience.

We will review your loan application and supporting materials with you to make sure that your loan package is correct and as strong as possible. Then we will shop your loan application package to several lenders to find you the best deal possible.

4) Close your loan and settle

As your closing date nears, your mortgage broker and real estate agent should check its progress on a daily basis, because staying on top of things means you’ll know immediately if there’s a problem that must be dealt with.

For your closing you should bring all of your documentation that you’ve used during the whole mortgage shopping process. At the closing itself, everyone involved in your transaction will be present (buyer, seller, closing agents and attorneys). You will sign the necessary legal documents, pay your closing costs and escrow items and receive your closing documents.

Now you receive your key, move in and celebrate!

Remember, you should never hesitate to ask questions. Ask what ever you need to so that you understand the entire process.

Uncle Sam has a gift for the men and women who serve our country. It is the VA loan. The VA loan, short for Department of Veterans Affairs home loans, is available to veterans, active service members, reservists, and members of the Public Health Service. These loans are so popular, that in the past fiscal year alone, Uncle Sam has guaranteed 300,000 VA loans totaling more than $38 billion.

Why are these loans considered a gift to our servicemen and women? Because VA loans require no down payment and are available from most lenders. Additionally, the government limits the amount of closing costs, origination fees, and appraisal fees. Because VA loan rates generally run the same as conventional rates, skipping the down payment is a big advantage. Not surprisingly, about 91 percent of VA buyers do just that.

Best of all, there is no private mortgage insurance (PMI) because the government prohibits lenders from requiring it. Not having PMI is a considerable cash savings for a borrower. For example, on a $126,000 loan, PMI would run approximately $40 to $64 a month for the first three to five years of a 30-year loan. The total savings? $1,440 to $3,840.

However, there is a downside:

* FUNDING FEES – In 1982 Congress levied a one-time funding fee on VA loans. And these fees can range anywhere from 1 1/4 percent to 3 percent, depending on the veteran’s service and whether it’s a first or subsequent loan. Although the VA will lower the fee if the borrower makes a down payment of at least 5 percent, and a buyer can finance the fee along with the home, there is a hidden cost. For example, on a $126,000 mortgage, a 2-percent fee can bloom into $14,474 over the 30-year life of a 6-percent loan.

* LOAN LIMITS – The maximum guaranteed is $240,000, yet buyers in high-priced markets such as California or Manhattan may have to evaluate other options for their financing. And while the eligibility certificate indicates how large a loan the government will guarantee, the vet may not be eligible. Just like a conventional loan, the actual mortgage amount will be based on income, assets, debts and credit history.

* QUALIFIYING – VA loans are available for active and former members of the armed forces who have a specific length and time of service and discharge conditions. Reservists and National Guard members may be eligible if they served at least six years and received an honorable discharge. Veterans discharged for a service-related disability are potentially eligible, as are some members of the Public Health Service and foreign veterans who served with the Allied forces during World War II. Additionally, a widow or widower may also apply for a loan, provided the spouse’s death was service related. MIA and POW spouses may also qualify.

Applying for a VA loan is no different than applying for a conventional loan, except that one needs to obtain a certificate of eligibility from the VA. Not only are VA loans easy to get, Uncle Sam has made it even easier this year. The actual loan process takes about two to six weeks, the same time as a conventional loan. And just about every lender that handles FHA or conventional loans also makes VA loans.

Yet the greatest gift of all remains the fact that VA loans allow a buyer to purchase a home without investing a down payment. And that is a very good gift indeed.

Proof to putting away the old way of thinking about your mortgage.

In this article, I will compare two brothers with different thinking when it comes to borrowing money for a home.

Brothers A and B each earn about $70,000 per year. They each have $40,000 in personal savings and have each purchased a $200,000 home.

Brother A spent more time with Grandpa and was taught that he should get the shortest and smallest mortgage loan possible and then pay it off as soon as possible.

So, Brother A demanded the following of his mortgage professional:

• 15 year mortgage loan at 5.25% (5.56% APR).
• $40,000 down payment
• $0 left to invest as he put in all into the house
• $1,286 monthly payment (which is 56% deductible in year 1 and about 28% deductible over the term of the loan). We know that the amount of interest expense is higher as a percentage of the payment in the early years.
• So, his average monthly net after-tax cost of the loan is $1,159.
• In order to pre-pay the loan, he sends an additional $100 to the lender each month.

Brother B, respects his Grandpa but just attended a seminar on how to “Harness the Power of His Mortgage”, decided to do the following:

• 30 year INTEREST ONLY mortgage loan at 6.125% (6.32% APR).
• $10,000 down payment leaving him $30,000 to invest
• $970 monthly payment (which is 100% deductible for the first 15 years and 59% over the life of the loan).
• His average net after-tax cost of the loan is $660 per month.
• He decides to save an additional $100 in his investment account each month plus the $499 he is saving from his lower interest-only mortgage payment.
• His investment account earns an average of 8% each year.

Who made the right decision? Well, let’s review the results after just 5 years.

While Brother A did receive $7,620 in tax savings over the 5 years, he has $0 in his savings and investment accounts.

Brother B received $18,600 in tax savings and now has $89,299 in his investment accounts after just 5 years.

What happens if they both happen to lose their jobs at this point?

Brother A:

• Has no savings to get him through the crisis.
• Can’t get a loan – even though he has $86, 951 more in equity than his brother – because he has no job.
• Must sell his home or face foreclosure because he can’t make the payments
• At this point, it’s a fire sale and he must sell his home at a discount and then pay an agent 6-7% commissions.

Brother B:

• Has $89,299 in savings to get him through the crisis.
• Doesn’t need a loan.
• Can easily make his mortgage payments even if he’s unemployed for years.
• He has no reason to panic since he is still in control. Cash is King!!

This is after just 5 years. What happens at the end of 15 years?

Brother A:

• Received $20,650 in tax savings,
• has $27,996 in savings and investments and
• Owns his home outright.

Brother B:

• Received $55,800 in tax savings
• has $305,886 in savings and investments and
• his remaining mortgage balance is $190,000
• he has enough savings and investment to pay it off still leaving him $115,886 in savings plus the value of his home.

So, you see? Brother B’s loan was no riskier than Brother A’s loan. In fact they were both fixed rate loans. One simply used the interest only feature to accumulate wealth. A mortgage is not the unwieldy beast we have been led all these years to believe it is. On the contrary, it is a tool that, when its power is harnessed and properly used, can generate substantial wealth in the lives of the holder.