1% Mortgage Refinance - How?
finance loans, you’ve probably seen 100 different
advertisements, but how is it possible? There is really only one
big secret to 1% mortgages: 1% minimum payments are below the
interest payable on the loan. Once we’ve addressed this
feature, most of the other facets of 1% mortgages are
relatively logical. 1% mortgages, which now come in dozens of
varieties with start rates from below 1% (some even starting at
0% for a few months after refinance) up to 4% or more, offer
astonishingly low payments. Some of them offer fixed rates for
30 or even 40 years, some of them are adjustable from the day
you take them out, all of these are basically =EC1% mortgages=EE
and are extremely popular amongst homeowners today. 1%
mortgages and their offspring are being used for debt
consolidation, cash flow management, investments, and for tax
purposes, and they are being used a lot.
A full 40% of home loans originated in 2005 and 2006 are
estimated to be from the 1% mortgage family, with multiple
payment options. By its proponents, the success of the 1%
mortgage has been hailed as a new era of affordability and
flexibility, of an extremely sharp financial tool once
available only to the very rich now available to every family
in the country. Its opponents tend to think that the 1%
mortgage is a bit too sharp for the average homeowner to
handle, they fear =ECAverage Joes=EE could conceivably cut
themselves. Despite their division, one thing is certain, the
popularity of the 1% mortgage is driven by the relentless
pursuit of the American dream. There are more homeowners in the
United States today than in any other period in history, and
many of those who own homes have only been able to accomplish
home ownership, which was once a lifelong achievement, in their
early 20’s and 30’s, largely because of the extended
availability of these 1% mortgages to normal borrowers.
How much less expensive is a 1% mortgage payment option versus
the comparable 30 Year Fixed traditional principal and interest
payment?
For a $500,000.00 Mortgage:
1% Minimum Payment: $1200.00
Normal Loan Payment: $3000.00
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Cash Flow / Savings: $1800.00
It’s easy to see why the 1% mortgage refinance is so heavily
marketed as a way to cut your mortgage payment in half. In the
above example, the 1% mortgage minimum payment option is 60%
less than a typical, traditional principal & interest loan
payment. 1% mortgage minimum payments are usually 50% lower
than even the highly lauded Interest Only payment mortgages,
and most loans in the 1% mortgage family include the ability to
pay more than just 1% if need be.
So How Does it Work?
In fact, 1% mortgages are more than just the 1% start rate.
They have a fully indexed rate as well, which is the true
amount of interest due each month. When making a 1% mortgage
minimum payment, the borrower is not paying all of the interest
due, which is seen by some as a good thing and some as a bad
thing. Let’s examine some of the commonly perceived benefits
and caveats of 1% mortgages:
Commonly Perceived Benefits of the 1% Mortgage Family:
1. Extremely Low Monthly Minimum Payment: As we’ve seen in our
example, the minimum payment option is less than half of the
typical traditional mortgage payment.
2. Flexibility to Control Your Own Money: Unlike a traditional
mortgage, which requires a payment to principal each month, 1%
mortgages allow borrowers to take the power into their own
hands to make principal payments when they want to, e.g after a
bonus or a particularly good year.
3. Separate Cash Flow from Equity: While many personal finance
pundits laud the benefits of building home equity, the reality
is that investing home equity yields a 0% return on investment
on a month to month basis. In the above example, paying the
traditional principal and interest payment forces the borrower
to invest $1800 more each month in their home, money which is
locked up entirely in the equity of the home. Home Equity is
illiquid, meaning all this money locked in equity cannot be
accessed unless the home is sold or refinanced. The bank won’t
cut a check each month for the borrower’s home equity in a
traditional loan. With a 1% mortgage minimum payment, that
$1800 difference in payments is money in the borrower’s pocket,
to invest or spend at their discretion. By deferring interest
using a 1% mortgage, the borrower has full access to money that
normally would be locked up until they sold the property. That
$1800 per month adds up to over $100,000.00 in cash over 5
years on a 1% mortgage, and it’s available every time your
paycheck does not get used up paying a huge traditional
mortgage payment each month.
4. Maximize Debt Consolidation: Using a 1% mortgage refinance
to pay off all of your other creditors, such as credit card
companies and high interest rate lenders, means that you can
save even more money than with a 1% mortgage refinance alone.
Since you aren’t throwing high interest money at your creditors
each month, the cash which you save by making the 1% mortgage
payment actually goes into your pocket, your savings, your
investments, or wherever you need it most. That’s ultimate
control. Let’s say that in our $500,000 1% mortgage example
above, we rolled in $30,000 of credit card and other high
interest debt that have a monthly minimum payment requirement
of $1,000. By using a 1% mortgage refinance to pay off those
debts, total monthly savings using the earlier example would be
over $2800 per month, $1000 from the debt consolidation plus
$1800 from the difference between the traditional loan payment
at 6% and the 1% mortgage minimum payment.
5. Turn Equity into a Tax Deduction: First, the 1% mortgage
payment is 100% interest and therefore should be 100% tax
deductible in most cases. Secondly, One of the most attractive
benefits of 1% mortgages is the additional tax deduction
available on deferred interest. What this means is that
borrowers can realize a tax deduction on interest they did not
have to lay out the cash for, and choose the time at which this
deduction is realized, which can be a huge savings upon
liquidity or refinance. For real estate investors, this is a
huge advantage as it can often wash out the capital gains
consequences of selling a property. Disclaimer: We do not
dispense tax advice, and you should consider consulting a CPA.
6. Easy Qualification: Normally, to qualify for low payment
mortgages, borrowers are required to have exceptional credit.
However, 1% mortgage refinance loans are routinely available to
borrowers with credit scores as low as 620, and if they are
borrowing less than 80% of the value of their home, scores can
even be in the 500s provided there are no late mortgage
payments reported on their credit file. The borrower’s income
can be stated, and sometimes no income or employment
documentation is required at all.
7. Enhanced Protection from Foreclosure: Because the minimum
payment option is so low, the cash savings each month so high,
and the loan is so flexible, the 1% mortgage family offers
homeowners a low minimum payment option which they have a much
higher likelihood of paying should they suffer an interruption
of income or become disabled.
8. Biweekly Payments: A popular way to maximize the benefits of
the 1% mortgage refinance is to elect to make biweekly payments
(which are available on select 1% mortgages). This optimizes
the loan to coincide with most borrower’s payment cycles and
reduces any possible negative effects of deferring interest.
Commonly Perceived Caveats of the 1% Mortgage Family:
1. Artificially Low Payments: Because the minimum payments are
so low compared to traditional mortgages, many pundits fear
that people who would normally not qualify for home ownership
can now own a home. The fear is that new or =EClow income=EE
homeowners could =ECget in over their heads=EE by buying more house
than they can truly afford. Ultimately, it is up to the borrower
to decide how much they can afford.
2. Deferred Interest: Often referred to as negative
amortization, this concern is commonly cited by journalists as
a =ECnegative=EE because the loan balance may increase over time if
the minimum payment is always selected. However, this
perspective does ignore the advantages of dramatically
increased cash flow in the borrower’s pocket each month and the
tax benefits of deferring interest. Of course, the borrower can
choose for themselves whether they want to spend their money
paying interest to the bank or if they would rather put the
difference into their own pockets.
3. Depreciation: If the value of the borrower’s home falls
dramatically, and other factors force the borrower to sell the
home while the value is low, the borrower may wind up owing
more than the home is worth. This is a valid risk over short
periods of time for all types of mortgages, not just 1%
mortgages. Even a traditional principal and interest mortgage
does not pay off enough principal over the first 5 years of its
life to offset a dramatic short term decline in home values. The
risk of property values declining is a real risk of owning
property, period. However, history tells us that residential
real estate appreciates consistently over any given ten year
period in the past 50 years.
4. Too Easy To Qualify: This may not seem to be a disadvantage
to most borrowers looking to purchase or refinance a home, but
there are those who believe that borrowers should be forced to
document significantly more income and assets to qualify for
these types of loans. A lot of this sentiment is an outgrowth
of antiquated conceptions of 1% mortgages as a =ECRich Man’s
Mortgage=EE, which used to require significant net worth to
obtain, and some of it is attributable to equally antiquated
=ECone size fits all=EE notions about mortgages. Your perspective
will likely depend on whether or not you are in a position to
provide extensive documentation of your income and assets in
support of your loan application.
Many of the criticisms of 1% mortgages revolve around the
adjustable rate variety of these mortgages, which like all
adjustable rate mortgages go up and down with the rest of the
market. However, in most 1% mortgages, the minimum payment
stays fixed and can go up or down only 7.5% per year. So if
your payment in Year 1 is $1000.00 , in Year 2 it can go no
higher than $1075.00. Because the rate on the loan can change
more or less than the minimum payment, which is extremely low,
the loan can result in the deferral of interest if only the
minimum payment is made. Many of the amortization issues which
are seen by critics of 1% Mortgages as their key detractor have
been recently resolved by the introduction of fixed rate minimum
payment loans to the 1% mortgage family.
Fixed rate 1% mortgage variations, the latest additions to the
1% mortgage family, have fixed interest rates from 3 to 30
years or more. The minimum payment option is generally
available for the first 5, 10, 15 or in some cases 20 years of
the mortgage, at which point the 1% mortgage payment recasts or
readjusts to the interest only payment or the full principal &
interest payment. During the fixed period, the loan payment and
interest rates of fixed 1% mortgages are utterly predictable and
can be defined down to the penny. Many borrowers who would
prefer a fixed rate can benefit significantly from the 30 year
fixed 1% mortgage, which actually carries a minimum payment of
1.95% and a fixed rates in the 6% to 7% range for 30 years.
While there are those in the journalism community who believe
that 1% mortgages have too much power for your average
homeowner, ultimately the decision is in the homeowner’s hands.
Make a high payment to the bank each month, or put the money in
their pockets. And homeowners seem evenly divided, as
refinances into loans from the 1% mortgage category are
projected to represent over 50% of all refinances in 2007.
Traditional mortgages are not a one size fits all solution, and
neither are 1% mortgages, but with low minimum payment options,
excellent debt consolidation capabilities, significant cash
flow and tax advantages made possible by deferring interest,
and flexibility to control your finances or insulate yourself
from interruptions in income or disability, 1% mortgages
continue to post significant growth across the country. Whether
or not a 1% mortgage refinance is right for you should be
determined by performing a detailed analysis of your personal
financial situation with a home loan professional who has
extensive experience with 1% mortgage products. As always, we
welcome your calls and emails.
About The Author: Tristan Hunt is a seasoned financial
professional with a wealth of experience in the mortgage
industry, advising clients on debt consolidation, refinancing &
investor loans. Phone: 800-515-8443 Website:
http://www.RefinanceOne.net
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