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MSAs, IRAs, and Interest Only Mortgages

Interest only products and the mortgage market don’t seem like they would have anything to do with an MSA, SEP or an IRA; but they can, and sometimes it’s to your advantage if they do. First, let’s explain what an MRA and IRA are, and how you can use them to your benefit. While offering the explanation, we’ll look at how they can be used in conjunction with interest only mortgages as a benefit to the consumer.
An MSA, or medical savings account is a tax-deferred way to save money, especially if you are self-employed, and do not have a 401k or medical insurance. The medical savings account gives you a tool for taking a deduction straight off your bottom line, thereby reducing the amount of tax you owe. The mortgage interest portion of your mortgage only provides a tax deduction in the form of an itemized deduction, and it is limited to a certain percentage of your income. Refinancing, or first-time financing of your mortgage with an interest only mortgage, can be used to pull more of the equity out of your home, or save money on mortgage payments that can be used to fund an MSA account. The biggest drawback to this kind of savings is the penalty you pay if the money is not withdrawn for its intended purpose, paying for medical expense. If you find yourself in a situation where you must have the money, and it’s not for medical expenses, you can pay up to 10% in penalties.
The IRA or individual retirement account works on the same premise as an MSA. The IRA is intended to give the consumer a way to save for retirement, when there is not a retirement plan where they work or they’re self employed. The interest only mortgage can be used in the same way as was explained above, and with the same restrictions. The IRA account is supposed to be used by the consumer as a tool for retirement savings; if the money must be withdrawn prior to reaching a certain age, there is often a 10% penalty to be paid on early withdrawal.
The SEP is the equivalent of the 401(k) for the self-employed individual. How does the SEP work? Basically, you as a self-employed individual can allocate up to $20k each year to be put into an SEP, or self-employed pension. The money is treated as tax deferred income, and it comes directly off your AGI, just as if you participated in a 401(k).
As you can see, the MSA, IRA, or SEP offer the consumer direct one-to-one savings by reducing their AGI, or the amount of income for which they are going to incur a tax liability. The mortgage interest portion of their itemized deductions is not a dollar for dollar reduction; it is limited to a percentage of your AGI. But what if you could find a way to benefit from both deductions? Would that not create a more beneficial tax and savings situation for the homeowner? Quite possibly, and the only way to assess your real savings is to sit down with a financial analyst and look at your individual situation.

The only way to really benefit from this possible scenario, however, is to make sure that you have ample savings from the interest only mortgage payment versus the traditional payment, to justify making such a move, and that the money will actually make it to a tax-deferred savings account.
What is the potential savings for the consumer? Well, imagine the following situation: self-employed taxpayer wants to buy a home. He has $10,000 available in cash to either put down on the house, or put into an SEP; his tax liability without the SEP will be $8,000. With the $10,000 SEP, he would receive a refund of $600.00. He can only afford to make mortgage payments of $600; the house he’s chosen financed with a fixed rate mortgage would be $826 each month. Using the interest only mortgage option, his monthly payment for the next 5 years is only $488 and the mortgage product does not require a down payment. It frees up the $10k to be put into the SEP and the taxpayer benefit will also include deductible mortgage interest. As you can see, with this illustration, financial planning and fully utilizing your options can make a tremendous amount of difference in your life.

Short-Term Homeowners and Interest Only Loans

Let’s assume that you’re one of the new age consumers, who fit into the fastest growing segment of the mortgage market today, the interest only mortgage. It is time to you to secure a mortgage, and there are several loan options that can be tied to the features you desire; you're particularly interested in the interest only feature that seems so appealing to many consumers today. But have you stopped to question why the interest only feature has become so popular with consumers today? Are you aware that it is a re-born feature laid to rest in the great depression of the 20s?
Have you stopped to examine the purpose of the interest only loan and what purpose it will serve in your particular situation? The original intent of the interest only mortgage was to make home ownership more appealing to young couple; not every prospective buyer, however, is a young person looking to buy home. Careful evaluation of your situation and the interest only mortgage must be performed in order to secure the best mortgage possible.
Let's take a look at the original intent of the interest only mortgage, and the greatest benefactor in the interest only mortgage segment: the short term homeowner. The idea behind the interest only mortgage product was to give the short-term homeowner a race in the buy home, with or down payment requirements associated with the standard mortgage. This idea worked so well, that now almost every kind of homeowner is exercising their interest only mortgage option. As it was only ever really intended to benefit the short term homeowner, the interest only mortgage product is currently used as a means to buy “more home for less money”.
The appeal to the short term homeowner segment of the market was a way to grow the housing industry, since this particular type of buyer, normally only rented. In most short-term home ownership, situations, the buyers are young professionals in the beginning years of their career, who have tremendous potential, and almost always a guarantee of purchase from their company should their home remain unsold after one year on the open market. As you can see, the consumer who was initially targeted for this type of loan would truly see a benefit from the interest only mortgage product. Today, however, the consumer actually applying for the interest only mortgage product is a consumer who seems to be spending beyond their income means.
What we have discovered, with today's consumer there is an overwhelming tendency to purchase more home than can possibly be afforded; the reasoning behind such a purchase? Since the term of the interest only segment of the loan will normally run three to five years, many homeowners are borrowing based on “anticipated earnings”. Quite often, the anticipated earnings never materialize, and at the end of a five year interest only term, the homeowner is left with a much higher mortgage payment minus the increased earnings.
As with many other modern-day products packaged and sold to the consumer, it sometimes is not always the wisest choice, the best buy, or the greatest benefit to simply follow suit; sometimes, educating yourself as a consumer is a much better, and a much more affordable choice.
The long-term, homeowner purchasing to procure a safe haven from which he or she can retire and be assured of a decent home, is not a benefactor, nor suggested candidate for the interest only mortgage product; however, in the attempt to grow this product into a larger share of the mortgage market, many interest only loans have been advertised as ways to pay off credit card debt, avoid a down payment, and create greater tax savings at the end of the year. None of these reasons, within itself would be a “good” reason to purchase an interest only mortgage product.
Many of the local lending institutions, especially the banking industry, have shied away from the open arms welcome that the interest only product received in the mortgage company circle, simply because the loans are a riskier prospect, and many times consumers aren’t as educated about the choices they are making. When you misuse a product, you begin to run into problems, and create a potentially dangerous market situation.

What is a Home Mortgage?

Although this is a pretty straightforward question, how many individuals do you know that ever take the time to ask, and receive an answer? Not very many. More often than not, the question of a home mortgage isn't pondered until there is a desire to purchase a home. For the purpose of this article, we're simply going to examine the home mortgage, and the variations that exist in the mortgage market today.
A home mortgage is a loan furnished by lending institution to a buyer for the purpose of procuring residential property, are a home of which to live. It's that simple, the definition is that simple; the actual process is anything but simple. How do you approach mortgage lenders and what information what you need to furnish?
Mortgage lenders today, thanks to all the federal regulation, default rates, and identity theft in existence require more information than ever before. The mortgage application is sometimes a 10 to 15 page application that will ask questions pertaining to your life years prior. Why does the mortgage company want history? The lender simply needs previous addresses, previous jobs, and previous education to gain greater insight and opportunity to know the borrower. It is not entirely impossible to steal someone's identity, gain access to their current information, even from three to five years prior. What is impossible is to enter the mind of the individual and gain access to relevant work history or education history.
Generally, when you complete a mortgage application there's also a mortgage application fee charged at the time you submit the application; why do the mortgage lending institutions charge an application fee? Mortgage companies charge a fee because it cost money to process application, and only serious applicant’s warrant the time and expense.
What other information will be necessary to furnish when completing the mortgage application? Generally a personal financial statement, the proposed mortgage amount, and any legal judgments against you such as bankruptcies, tax liens, or federal student loans will be requested at the time of application submission.
Now, what have the mortgage products are available to the mortgage borrower? The most often used mortgage product is the fixed rate mortgage; the next in line would be the adjustable rate mortgage, and the newest member of mortgage products would be the interest only loan. The interest only loan is gaining in popularity at an ever increasing and phenomenal rate of growth. The fixed rate mortgage provides the borrower with a fixed interest rate for a specified number of years, generally 10, 15, or 20 years as a set monthly payment. The adjustable rate mortgage is exactly as it sounds; the interest rate for this type of mortgage is adjusted at set intervals generally no less than six months no more than 12 and the amount of the monthly payment will vary according to the adjusted interest rate. The interest only loan is quite frankly, the least consumer friendly of the three and today the most popular of the three. When you take at an interest only loan, you may payment of only interest for a specified number of months or years on a loan that has been amortized for a greater number of years, usually 20, and at the end of the interest only term, your payments will reflect interest and principal payment. It's at this juncture that many homeowners cannot afford the interest and principal payment. That's why this mortgage product is the least consumer friendly; it does however make the most profitable lending institution.
I believe you should now have a much clearer picture as to what a mortgage is, why you complete a mortgage application, and the basic mortgage products available. If you are considering the purchase of a home, please take a moment to visit a local lending institution, a local realtor, and the web site of the Housing and Urban Development Department. You, as a potential homeowner can never obtain too much information.
What are other resources that can be accessed to learn about the mortgage process and your available options? Get online, check out the advertised lending companies there; look at the information they ask for, the products they offer, and then do some comparison shopping. Often, you will learn as much about what you don’t want, as what you do want.

Interest Only and Credit Card Debt

Well, here is an example of the system that isn’t functioning as intended: a mortgage loan that encourages paying off one debt, in order to overspend ourselves with another debt. The interest only mortgage and the credit card debt. As a borrowing nation, I believe we’ve reached new levels.
It would seem that in this century we’ve managed to take every form of credit possible, extend it to the limit, and then look at them as if to say, “You mean you can’t pay?” What do these loan and credit companies think they’re going to be facing, when the amount of credit and mortgage they’re willing to extend, reaches beyond the acceptable debt to income ratio? Why do they think these limits were established in the first place?
More consumers than ever before owe massive credit card debt. It’s the way to go, many college campus’ are overrun with representatives from the major credit card companies, eager to extend credit to the young hands of the college student. Are they as ready to work with them when they can’t pay? No. What about the rest of the crazed, spending public? How do they handle their credit cards? Well, thanks to the interest only mortgage, we can now pay off credit card debt we can’t afford, with a mortgage we can’t afford. Now, that’s progressive thinking.
The interest only mortgage is now a tool for replacing non-deductible over extended debt, with tax deductible over extended debt, and consumers continue to be the ones to pay. This is not a wise option, if you’re already spending more than your budget will allow, how about cutting back? Did that ever occur to the mortgage company? No, because they don’t make any money if you learn to spend less.
As a fellow consumer, each of us should take the time to question our spending habits. Is it wise or necessary? If the answer to either question is no, then don’t spend. You don’t want to have to make the decision between over the limit spending, and a nice, warm bed, do you?
Okay, now here’s an interesting spin on an already risky product, let’s give the bad credit crowd a chance to make an even worse decision, and finance a home they can’t really afford and obviously will have trouble making on time or dependable payments so they can payoff credit card debt, only to charge it up again!
Sometimes, the products and situations that you see in the everyday world of researching these loans, is truly amazing and this is one of those situations. There are actually mortgage companies that advertise these interest only mortgage options for the consumer with the bad credit record to pay off any outstanding credit card debt!
Now, what I’d like to know is why the mortgage company, in all good faith, would want to take a risk such as this. It’s risky financing for consumers with bad credit, when you’re financing with good solid collateral, well within their means to pay. You take the consumer and the mortgage loan outside those realms of operation, and you’re just simply asking for a problem.
Maybe we should have an agency that’s known as the “mortgage police” and when there’s a clear and evident violation of just good sound common sense, a whistle blows, the computer locks up, and in walks the mortgage police. I truly believe the consumer, if not the mortgage company would be a lot better off; especially when the consumer has time to really absorb the basic facts about interest only mortgage, and the mess they can make of their finances; in the case of the bad credit consumer, the further mess they can make of their finances.
With all the government control that regulates the mortgage loan industry, and all the statistics that are published about the consumer with a bad credit rating, who do you suppose thought it would be a good idea to give them an interest only mortgage, that they more than likely will have further trouble paying? You wonder if Alan Greenspan is aware of this situation, and if he takes it into consideration when raising the prime interest rate? Do you suppose there’s a number factor for the “really going to default on these loans” segment of his equation that determines our prime lending rate?
Let’s hope Alan uses more foresight and plain good business sense than our mortgage loan brokers, especially the ones that came up with this genius idea!

Interest Only Mortgages and the LIBOR, What is it?

What is LIBOR and why would we want to use a LIBOR? How does LIBOR tie into interest only mortgages? These are really good questions. I myself until recently had no idea what a LIBOR was or is, or if I wanted to use one. I am a little more educated now, and still don’t know if I want to use LIBOR.
LIBOR is the London Inter Bank Offered Rate. In a more useful definition, it is the interest rate offered by a specific group of London Banks for U.S. deposits with a stated maturity date. It compares to the CD rate that your local bank would offer to you.
The important connection to make here is the role the LIBOR plays in interest only mortgages. As more and more of our mortgage loan market turns to this type of loan product, we will begin to hear more about LIBOR and the many uses and influences in our day to day life.
The LIBOR has traditionally been a tool for the commercial lender and affected more of the commercial market than the private sector. As the private market moves into a bigger risk sector than ever before, the LIBOR will loom as a larger figure in the ratio used to determine the interest to risk factor that your local banker, mortgage company, or finance company will assume. The interest only mortgage option is a bit riskier than the traditional mortgage products, in that it requires little or no down payment, and over the course of the mortgage, the interest is the only initial monies collected. That means at the end of the term, say 5 years for most, the buyer still owes the same amount of principal. Risky business, this interest only loan. This is where LIBOR begins to play a bigger picture. Commercial loans, primarily an investment tool, have traditionally been considered the bigger risk, since these loans weren’t providing housing for the borrower. But today, the private borrower is investing no more than a commercial borrower; in fact many times, even less. These new age borrowers aren’t really that committed to these homes, either. Most are using the interest only option as an investment tool, or a way to buy bigger than traditionally possible, or as a way to fund a professional lifestyle with a starting salary and an expected temporary stay. Either option means a bigger risk for the lender; LIBOR helps to set risk percentages and provide stable financing options for the lender.
The commercial interest only LIBOR mortgages are for commercial borrowers. These borrowers are investing in residential unit complexes. In other words, they’re borrowing to buy apartment complexes, not individual homes; nonetheless, they too are being offered the interest only options and the interest rate for these commercial interest mortgages is set by the LIBOR rate plus a certain percentage above.
It is for these commercial investors that the interest only loan options should be used. The borrowers are business people, with business plans, and enough knowledge about the workings of commercial and mortgage loans, to understand a good investment versus an impossible dream. The commercial mortgage industry is a huge market, and since most of the monies borrowed exceed the $100,000.00 limit, LIBOR rates are used for determining the commercial loan rates.
I still am not an advocate of the interest only mortgages; but for some situations they are the best option. In a business setting, when many factors have been thoroughly discussed and the interest only option has proven itself to be the best choice, I think it should be used. This option, however, should remain as the knowledge of LIBOR is among the masses, virtually unknown.
So, as you begin your trek into the mortgage market, be prepared to hear more and more about the interest only loan options, and more and more about the role LIBOR plays in this expanding market.

Interest Only Mortgages and the Young Professional

Here is one of the successful candidates for the interest only mortgage. The young professional that is eager to get out into the home ownership market. He or she is equipped with some level of mortgage product comprehension, and a guarantee of increasing income.
Today’s mortgage market has seen a tremendous growth in mortgage packages, variety and borrowing levels. The interest only mortgage option, once thought to have gone the way of the Edsel automobile, is back today and in use by the masses; in fact the mortgage market has seen an increase in the interest only mortgages from just a mere sliver of the market a few years ago, to around 23% of the market share currently. That’s huge growth, especially in the mortgage industry in less than 5 years.
Who will benefit most from this type of mortgage loan product? What type of consumer is it that would want an interest only mortgage? Well, you will get several answers, but only one or two will be correct. The really smart and savvy borrower, with clearly established goals and objectives that include the interest only option, the young couple that are moving up the corporate ladder and won’t be in the area over three years, and then there’s the most often sited consumer: This consumer is buying a home with a fairly limited budget and wants as much home as they can possibly buy. They generally fit into the category of the couple with children, who need room and who plan to be homeowners at that location for a while. The other particularly successful candidate for these types of loans are the young real estate investors, who are profit creators, and won’t retain the property long enough to warrant making a large capital investment.
As you examine the young professional, his or her situation is conducive to minimal investment requirement. He or she won’t be in this job position or this home over 5 years, and the most likely, the company is willing to include a buy back clause in the employment contract; how can you lose? All the right elements are in place for this to be a great marriage of needs and wants being satisfied with one package. In cases such as this, the interest only mortgage option is a great route to take.
What about the young couple with the growing family? Are they the right candidates for such a purchase? Most often, the answer would be yes. They’re budgets are limited, for the present, and their family is outgrowing the present home. Especially if one of the spouses holds a professional degree, they should have no trouble growing into a larger mortgage payment within a few years. The interest only option gives individuals 3 to 5 years to achieve an income increase, then the principal and interest payment level kicks in, but their income will then support a higher payment.
The real estate investors, commercial developers, land brokers, and any other investor that operates within this realm of business, is a potentially successful candidate for the interest only option. This person, or business group, doesn’t intend to retain the property long enough for there to be a need for capital investment. They need the capital free to make the changes, required planned construction, or to advertise the property for sale.
These are the potentially successfully and beneficial relationships that exist with the interest only option. Are these the only individuals who secure interest only mortgages? Definitely not. Regardless of the pros or cons to the interest only mortgage, and regardless of the original intent, many of the consumers securing these interest only mortgages are doing so in order to lower monthly payments, to buy more house for less money, and even to divert income to tax-deferred savings. Some will be successful some will simply wind up paying on their home for most of their life.

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Interest Only Mortgages for the Wealthy Investor

It is for these types of investors that the interest only mortgage options should be used. The borrowers are business people, with business plans, and enough knowledge about the workings of commercial and mortgage loans, to understand a good investment from a bad. The commercial mortgage industry is a huge market, and since most of the monies borrowed exceed the $100,000.00 amount, the international bank rates, or LIBOR, are used for determining the commercial mortgage rates.
Wealthy investor usually means successful investor. These investors are very educated in the investment process, be it real estate or stocks, they understand the risks they’re taking, and how to maximize the risk for the profit. The real estate investor and the interest only mortgage are a perfect pairing. The real estate investor looking to retain an investment for short term can really benefit from the lowered capital investment of the principal payment. Especially in a situation where the investor is improving the property and the value is certain to increase.
Many of the consumers, who are being offered these interest only loans, are not business people; they’re not wealthy investors looking for a way to invest excess capital. They’re simply consumers looking for a place to live.
The investor normally has an investment analyst at his or her disposal, with tools and resources that can determine a good investment, the risk involved, and measure it against the amount of risk the investor is willing to take. All these factors go into determining if an investment is a buy or sell. This particular borrower fully understands the risks involved in an interest only mortgage, and has spent the time needed to determine if the product is right for his investment needs. The real estate investor is a business person, not a consumer borrowing to pay for a place to live
When you compare this with the consumer buy or sell, you’re not even comparing apples to apples.
Some investment opportunities for the wealth-building investor will at some point require an additional amount of monies to turn the investment into a profitable situation; do you suppose the average consumer has another ten or fifteen thousand dollars at their disposal, in case the interest only option should become a problem, or they’re home should need unexpected repairs, in order to remain at the purchase value? Most likely, the answer here would be no.
The short-term real estate investor or developer wants to keep his or her expenditures at a minimum during this investment period, saving as much of the expendable cash as possible for the actual renovation or preparation for sale of the property itself.
The less money spent on mortgage payments, or in the investor’s eyes, investment expense, the more money there is to actively and aggressively pursue potential buyers and increase the value of the property. This is good business, and good business is based on sound business decisions.
It is here that every consumer needs to stop and reevaluate their borrowing situation against that of the investor. The wealth-building investor is a business person. Their livelihood depends on their knowledge of the product they market, in this case real estate. Normally, a business person is not going to take a risk with their personal investments; not like the risks they will take with a business investment. Why? Because the home they share with their family is much more important than a business deal, most are not willing to risk losing their home.
I still am not an advocate of the interest only mortgages, but for some situations they are the best option. In a business setting, when many factors have been thoroughly discussed, and the interest only option has proven itself to be the best choice, I think the interest only mortgage should be used. But this option should remain as the knowledge of LIBOR is among the masses, virtually unknown.