1% Mortgage Loans this year … What’s the catch ?Although there are different types of 1% mortgages, there are really only two main keys to winning with a 1% mortgage.
The first key is to make sure the loan is set up correctly from the start.
And the second is to make sure you are using the loan correctly to get the maximum benefit.
Let’s first talk about how the loan works. Next, we’ll look at how to properly set up the loan so you can reap the financial benefits that these mortgages have to offer.
For starters, 1% mortgages offer payment options. Each month when you receive your mortgage statement, you will have the option of making a 30 year fixed payment, a 15 year fixed payment, an interest only payment and a minimum payment of 1%.
Although you are offered several payment options, you should only select the minimum payment of 1%.
Because if you want to make a 30 year fixed, 15 year fixed or interest only payment, it would be better to get this type of loan.
Typically, these payments are higher with a payout mortgage.
If you select the minimum payment of 1%, the first benefit will be a significant reduction in the monthly payment.
The mortgage payment is likely to be halved.Of course, that’s a pretty cool first perk for most owners.
To increase the effectiveness of the minimum payout selection by 1%, you need to save what you save. For example, suppose you refinance your home with a 1% mortgage, pay off all your credit cards, and reduce your monthly payment by $1,000 per month.
Now if you save $1,000 a month for yourself instead of giving it to your creditors, after five years you’ll have $60,000 in cash and that’s a zero percent return.
Here is the second benefit of selecting the 1% minimum payment option:
If you pay interest only, your mortgage balance will remain the same. If you make a minimum payment of 1%, you are actually paying less than just interest. Therefore, you create deferred interest which increases your mortgage balance each month.
Before you go crazy, keep in mind that deferred interest is mortgage interest and therefore tax deductible.
Let’s say your house goes up in value by $2,000 a month. The 1% mortgage will allow you to take a small portion of that appreciation, say $500 per month, and turn it into a tax deduction.
So you take a small part of your capital each month and turn it into a tax deduction.If you didn’t, all of your appreciation would be locked up in equity.
Equity is outstanding and is certainly one of the many benefits of home ownership. But investing in stocks will give you a return of zero percent.
No one will write you a check every month for the equity in your home. In fact, if you wanted to take equity out of your home, you would have to sell your home or take out a loan. And you better qualify or you can’t get a loan.
So why not take a small portion of your capital each month, turn it into a tax deduction, and at the same time save $1,000 a month for yourself? You’ll still have plenty of equity, but with a 1% mortgage, you’ll have cash AND equity.
If you do this for a while, you’ll come out far more financially advanced than a normal 30-year fixed or interest-only mortgage.
By the way, if deferred interest is a problem, try to make payments every two weeks.Making a payment every two weeks will reduce and in some cases eliminate all deferred interest. This means that your mortgage balance will not increase.
How to set up the loan correctly:
1) The 1% repayment option on these loans is only available for the first five years. But you can actually hold one of these loans for 30 or 40 years. If you select a 40-year loan, your monthly payment will be lower, but your payment options won’t last for five years. The name of the game is to keep the 1% payout as long as possible.Then get a 30-year amortization.
2) 30-year, 15-year and interest-only payments are index-linked. Select a slower moving index like the MTA (Monthly Treasury Average)
So how do you lose with a 1% mortgage?
If homes in your area are rapidly losing value, the deferred interest could entice you to buy the home.
But if your area is experiencing a 3% to 5% appreciation rate and you save what you save by making the minimum payment, a 1% mortgage can have an incredibly positive impact on your financial future.