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Monday, August 18, 2014

How to Avoid the Most Common and Costly Mortgage Mistakes

When getting a mortgage, most borrowers only think about what their payment is which is a function of loan amount, loan term, and interest rate.  Many borrowers are sucked in by low quotes from unscrupulous loan officers who don't disclose what it would cost to get such a rate and by the time the borrower finds this out, it's usually too late, but that is a topic for another discussion.  This post is about the very costly mistake that borrowers make when their main focus is on getting the lowest payment.

Getting the lowest payment possible means either buying the rate down (which may or may not be cost effective - proper analysis needs to be performed) or putting a large down payment, or both.  In my YouTube video series under the same title ( I discuss the concept of opportunity cost and the kind of wealth that can be created if money is invested instead of put into the house to lower the loan amount and, thus, the mortgage payment.  As part of this discussion, I also talk about the Rule of 72 and the time-value of money.  The example I use in the video is a couple who is purchasing a $300,000 home and wants to put $150,000 down in order to get the lowest payment.  As far as creating wealth is concerned (which is a big need when it comes to preparing for retirement), this couple could put down $60,000, avoid mortgage insurance because they would be putting 20% down, and invest the other $90,000 NOW - which is key for TVM (time-value of money).  One other benefit that they will have is that they will have a liquid asset by doing it this way instead of transferring that money into an illiquid asset (the home).

Depending on what people invest in, there could be some great tax advantages as well (Roth IRA and IULs provide tax benefits vs. other investments).  Additionally, a well diversified portfolio will help this couple grow their wealth and reach their retirement goals without incredible amounts of risk.  Please watch the video for all of the details and remember that each situation is different.  It's important for every client to know their specific numbers which is why I, as a Certified Mortgage Planner, have developed spreadsheets to help clients understand how the numbers would play out for their specific situation.  What are your thoughts on the subject?  Please comment and share.  I'm happy to discuss any and all of the content of the video.

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