Author: Cheryl Kanekar
Source: articleage.com
So you've heard of the latest magic pill in the home financing world - the interest-only mortgage. And you love the idea of making a lower monthly payment, getting a bigger tax deduction and having all that extra cash now. Not to mention actually being able to buy your dream home.
Interest-only mortgages accounted for less than 2 % of all U.S. home loans as recently as 2001, but by 2005 had shot up to 23% nationwide and as much as 47% in the major cities. (Coy 2005, Downey 2005) And if aggressive marketing is any indicator, the trend is not going away anytime soon.
But remember all those television commercials of happy people running through meadows in spring, thanks to the latest wonder drug for acid reflux or arthritis? There's always the rapid voiceover at the end, "Possible, but rare side effects include death, blindness, permanent brain damage, limbs falling off…"
You don't want to be those rare statistics. So let's take a look at the good and bad side effects of this particular magic pill and who really needs to take it.
Firstly, like the cure for the common cold, the interest-only mortgage does not exist. What does exist is the interest-only-for-some-years mortgage.
"The mechanics of an interest-only mortgage loan are simple. For a set period (generally in the early years of a mortgage when most of the payment goes toward interest anyway), you pay only the interest portion of your monthly payment, freeing up for other purposes the amount that would normally go toward paying off the principal. At the end of the interest-only period, your loan reverts back to its original terms, with the monthly payments adjusted upward to reflect full amortization over the remaining years of the loan…" (MacDonald 2004)
So with an "interest-only" loan, you would be making lower monthly payments than those for a standard fully amortized loan of the same amount and duration, during the initial interest-only period. When the interest-only period ends, your monthly payments will rise to be higher than those for the standard loan. This is because you have the same balance you started out with, but now have only, say, 25 years to pay it off, as against 30 years for the fully amortized loan.
This is not a new idea. The heyday for interest-only mortgages was the 1920s flapper era.
"…Back in the Roaring Twenties, interest-only mortgages were commonplace. At the end of the term, homeowners typically refinanced. The system worked great unless your home lost value or you lost your job." (MacDonald 2004)
So what are the pros to this approach?
1. You have more immediate money at hand, which can be invested for higher returns or used to re-model the home and increase its value. "For this to succeed, their return on investment must exceed the mortgage interest rate, since that rate is what they earn when they repay their mortgage." (Guttentag 2006)
2. You can reduce your cash outflow temporarily, if a financial crisis strikes. For example, a person who's been laid off might find this useful.
3. Interest-only loans often have more flexible payment options than standard loans. Every month, you could opt to pay interest only, or pay towards the principal, or even pay off the principal quicker than the typical 30 years. If you have fluctuating income and are disciplined enough to voluntarily make higher payments when you can, these options might help you pay off your loan quicker and with less pain.
4. You can borrow more money at the same initial monthly payment as that for a smaller standard loan, allowing you to buy a more expensive home than you would have been able to with the standard loan.
And the cons?
1. You can borrow more money at the same initial monthly payment as that for a smaller standard loan, allowing you to buy a more expensive home than you would have been able to with the standard loan.
You are more in debt and might own a home you can't afford. This is the grasshopper philosophy of not saving up for a rainy day, on the assumption that your home price and/or income will rise. And summer will never end.
History, that harsh teacher, has a different lesson. Remember what ended the glory days of the1920s? The Great Depression with its stockmarket crash and massive job losses. No prizes for guessing what happened to all those interest-only homes. Foreclosure.
In more normal times, while nationwide average home prices have been rising, home prices in any given market go up and down. If your plan were to re-finance or sell your house after the interest-only period, your home price would have to rise enough to cover the sales costs, since not paying off the principal gives you little equity. Even in the most desirable home markets, that does not always happen.
2. You pay more in interest as compared to a standard loan. For a $120,000 loan, an interest-only payer would pay about $8000 more than a fully amortized payer over 30 years, because the interest-only balance tends to remain higher. (Hsh.com 2005)
3. Lenders also usually charge higher rates for interest-only loans, since these loans, with their larger balances, are considered riskier.
"…fixed-rate interest-only mortgages typically carry a rate that is one-eighth to three-eighths of a percentage point higher than the rate on a traditional 30-year fixed-rate mortgage." (Simon 2006)
4. While interest-only payments are 100% tax deductible, the money saved will still be taxed, whether it's put in the bank or invested.
"Suppose you are in the 39.1% tax bracket. Then your 6.25% mortgage costs only 3.81% after taxes, but a 4% CD yields only 2.44% after taxes." (Guttentag 2002)
To sum up, interest-only loans save you money temporarily, but are more expensive and more risky long-term. If you desperately need those temporary savings, or are wealthy enough to bear the risks, or are financially disciplined enough to pay off the balance when you can, then these loans might be for you. But if losing the gamble might mean losing all your savings, then it's probably a game you don't want to play.
Cheryl Kanekar is an experienced free-lance writer who focuses on mortgage refinance and equity credit lines. You can read more refinance related loan articles at http://www.mortgageloanoutlet.com/ and get more information about, income tax bracket, home equity loans and mortgage refinancing.
Guttentag, Jack Interest-Only Mortgage Tutorial. Mortgage Professor's Web Site from http://www.mtgprofessor.com/Tutorials2/Interest_Only.htm
HSHฎ Associates The Principal Facts of Interest-Only Mortgages from http://library.hsh.com/?row_id=58
Max, Sarah Mortgages: Beating Higher Rates from money.cnn.com Moyer, Liz. Beware The Interest-Only Mortgage from forbes.com Downey, Kirstin Many Buyers Opt for Risky Mortgages. Washington Post
2006 Copyright MortgageLoanOutlet.com
Showing posts with label mortgages. Show all posts
Showing posts with label mortgages. Show all posts
Thursday, October 15, 2009
Tuesday, October 13, 2009
Donate a Car to Benefit Charities and Yourself
Author: Jeff Lakie
Source: download
The Internal Revenue Service allows for abounding altered types of accommodating deductions including cash, clothes, goods, and some services. One of the "goods" accustomed by the IRS that taxpayers may accord is their car. Although the IRS has anchored things up over the accomplished few years, altruistic a car can account a advantaged alms and advice yourself appear tax day. Let's yield a attending at how your car donation can advice you and a accustomed charity.
Your six year old Buick LeSabre Custom has stood the analysis of time, but you accept absitively to buy a 2007 Buick La Crosse Limited to accord yourself a car that is new, up to date, and thoroughly reliable. Your LeSabre saw you through continued commutes to work, vacations at the shore, and it was the aforementioned car your babe acclimated to apprentice how to drive. With 140,000 afar on the odometer you apperceive that the barter in bulk isn't traveling to be that great, so you accede altruistic the Buick to a alms such as the branch foundation or to the affiliation of the blind.
The IRS will accolade your generosity if you chase assertive arena rules:
--The alms accept to be accustomed by the IRS and accept 501(c) 3 status.
--You can alone abstract the auction bulk of the car, not what you anticipate anyone ability pay for it. Indeed, even admitting the Buick could possibly back added than $5000 if awash privately, you accept to account the "gross proceeds" of the resale of the car by the charity. So, if the alms sells your LeSabre for $3700, which is the bulk you are accustomed to abstract on your assets taxes. Your alms of best will accommodate accounting affidavit of the auction bulk to you for your annal already the auction has been made.
Just bethink if you get to abstract $3700 that doesn't beggarly your taxes will bead by that amount. Depending on your tax bracket and what you owe the Internal Revenue Service and added deductions, you apparently will save yourself a few hundred dollars per year. Of course, your motive for giving should be based in allotment on allowance a alms, income tax bracket, not just accepting a appropriate deduction.
So, although the IRS has anchored up the rules apropos altruistic a car it can still be an important armamentarium adopting apparatus for charities while acceptance you to accept a tax answer and the joy of allowance anyone out in their time of need.
Jeff is the buyer of Uk Lenders one of the Uk's arch anchored accommodation adduce providers. If you are analytic for that low amount on a anchored accommodation again appointment our website today for a chargeless no obligation quote.
Source: download
The Internal Revenue Service allows for abounding altered types of accommodating deductions including cash, clothes, goods, and some services. One of the "goods" accustomed by the IRS that taxpayers may accord is their car. Although the IRS has anchored things up over the accomplished few years, altruistic a car can account a advantaged alms and advice yourself appear tax day. Let's yield a attending at how your car donation can advice you and a accustomed charity.
Your six year old Buick LeSabre Custom has stood the analysis of time, but you accept absitively to buy a 2007 Buick La Crosse Limited to accord yourself a car that is new, up to date, and thoroughly reliable. Your LeSabre saw you through continued commutes to work, vacations at the shore, and it was the aforementioned car your babe acclimated to apprentice how to drive. With 140,000 afar on the odometer you apperceive that the barter in bulk isn't traveling to be that great, so you accede altruistic the Buick to a alms such as the branch foundation or to the affiliation of the blind.
The IRS will accolade your generosity if you chase assertive arena rules:
--The alms accept to be accustomed by the IRS and accept 501(c) 3 status.
--You can alone abstract the auction bulk of the car, not what you anticipate anyone ability pay for it. Indeed, even admitting the Buick could possibly back added than $5000 if awash privately, you accept to account the "gross proceeds" of the resale of the car by the charity. So, if the alms sells your LeSabre for $3700, which is the bulk you are accustomed to abstract on your assets taxes. Your alms of best will accommodate accounting affidavit of the auction bulk to you for your annal already the auction has been made.
Just bethink if you get to abstract $3700 that doesn't beggarly your taxes will bead by that amount. Depending on your tax bracket and what you owe the Internal Revenue Service and added deductions, you apparently will save yourself a few hundred dollars per year. Of course, your motive for giving should be based in allotment on allowance a alms, income tax bracket, not just accepting a appropriate deduction.
So, although the IRS has anchored up the rules apropos altruistic a car it can still be an important armamentarium adopting apparatus for charities while acceptance you to accept a tax answer and the joy of allowance anyone out in their time of need.
Jeff is the buyer of Uk Lenders one of the Uk's arch anchored accommodation adduce providers. If you are analytic for that low amount on a anchored accommodation again appointment our website today for a chargeless no obligation quote.
Saturday, October 3, 2009
Donate A Car To Benefit Charities And Yourself
Author: Bob Benson
Source: articledashboard.com
The Internal Revenue Service allows for abounding altered types of accommodating deductions including cash, clothes, goods, and some services. One of the "goods" accustomed by the IRS that taxpayers may accord is their car. Although the IRS has anchored things up over the accomplished few years, altruistic a car can account a advantaged alms and advice yourself appear tax day. Let's yield a attending at how your car donation can advice you and a accustomed charity. Your six year old Buick LeSabre Custom has stood the analysis of time, but you accept absitively to buy a 2007 Buick La Crosse Limited to accord yourself a car that is new, up to date, and thoroughly reliable. Your LeSabre saw you through continued commutes to work, vacations at the shore, and it was the aforementioned car your babe acclimated to apprentice how to drive. With 140,000 afar on the odometer you apperceive that the barter in bulk isn't traveling to be that great, so you accede altruistic the Buick to a alms such as the branch foundation or to the affiliation of the blind.The IRS will accolade your generosity if you chase assertive arena rules:--The alms accept to be accustomed by the IRS and accept 501(c) 3 status.--You can alone abstract the auction bulk of the car, not what you anticipate anyone ability pay for it. Indeed, even admitting the Buick could possibly back added than $5000 if awash privately, you accept to account the "gross proceeds" of the resale of the car by the charity. So, if the alms sells your LeSabre for $3700, which is the bulk you are accustomed to abstract on your assets taxes. Your alms of best will accommodate accounting affidavit of the auction bulk to you for your annal already the auction has been made.Just bethink if you get to abstract $3700 that doesn't beggarly your taxes will bead by that amount. Depending on your tax bracket and what you owe the Internal Revenue Service and added deductions, you apparently will save yourself a few hundred dollars per year. Of course, your motive for giving should be based in allotment on allowance a alms not just accepting a appropriate deduction. So, although the IRS has anchored up the rules apropos altruistic a car it can still be an important armamentarium adopting apparatus for charities while acceptance you to accept a tax answer and the joy of allowance anyone out in their time of need.
Source: articledashboard.com
The Internal Revenue Service allows for abounding altered types of accommodating deductions including cash, clothes, goods, and some services. One of the "goods" accustomed by the IRS that taxpayers may accord is their car. Although the IRS has anchored things up over the accomplished few years, altruistic a car can account a advantaged alms and advice yourself appear tax day. Let's yield a attending at how your car donation can advice you and a accustomed charity. Your six year old Buick LeSabre Custom has stood the analysis of time, but you accept absitively to buy a 2007 Buick La Crosse Limited to accord yourself a car that is new, up to date, and thoroughly reliable. Your LeSabre saw you through continued commutes to work, vacations at the shore, and it was the aforementioned car your babe acclimated to apprentice how to drive. With 140,000 afar on the odometer you apperceive that the barter in bulk isn't traveling to be that great, so you accede altruistic the Buick to a alms such as the branch foundation or to the affiliation of the blind.The IRS will accolade your generosity if you chase assertive arena rules:--The alms accept to be accustomed by the IRS and accept 501(c) 3 status.--You can alone abstract the auction bulk of the car, not what you anticipate anyone ability pay for it. Indeed, even admitting the Buick could possibly back added than $5000 if awash privately, you accept to account the "gross proceeds" of the resale of the car by the charity. So, if the alms sells your LeSabre for $3700, which is the bulk you are accustomed to abstract on your assets taxes. Your alms of best will accommodate accounting affidavit of the auction bulk to you for your annal already the auction has been made.Just bethink if you get to abstract $3700 that doesn't beggarly your taxes will bead by that amount. Depending on your tax bracket and what you owe the Internal Revenue Service and added deductions, you apparently will save yourself a few hundred dollars per year. Of course, your motive for giving should be based in allotment on allowance a alms not just accepting a appropriate deduction. So, although the IRS has anchored up the rules apropos altruistic a car it can still be an important armamentarium adopting apparatus for charities while acceptance you to accept a tax answer and the joy of allowance anyone out in their time of need.
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