Missed Fortune 101 by Douglas R. Andrew

Author:Douglas R. Andrew [ANDREW, DOUGLAS R.]
Language: eng
Format: epub
Tags: BUS000000
ISBN: 9780446539623
Publisher: Grand Central Publishing
Published: 2008-06-03T00:00:00+00:00

UNDERSTANDING YOUR MORTGAGE AND FINANCE OPTIONS

You should now understand that equity in your home does not enhance your net worth, but separated from your home, it has the ability to enhance your net worth over time. I am often asked, “What kind of a mortgage should I use?”

If you own your home free and clear or have a substantial amount of equity, you may consider obtaining a conventional mortgage or home equity loan. An amortized loan provides for repayment of the debt over a specified time period (term) by means of regular payments at specified intervals. A portion of each payment is applied toward principal reduction and the remainder to interest. On the other hand, interest-only loans require that over a certain time period, only the interest that accrues on the loan is payable until the original principal becomes due, which requires either a balloon payment, a refinance, or conversion to an amortized loan. To maximize the results of successfully managing equity to increase liquidity, safety, rate of return, and tax deductions, I recommend using interest-only mortgages and have a plan to follow that can help provide the discipline to set aside the difference in mortgage payments to accumulate the cash required to cover the mortgage liability.

The mortgage, or deed of trust, is the written instrument that provides security for payment of a specified debt. A deed of trust transfers title of the property to a third party who holds it until the loan is repaid. The lender has the right to request the property be sold should the borrower default. When the debt is secured by a mortgage, the borrower signs a document that provides the lender a lien against the property. The mortgage note is the borrower’s contract with the lender to repay the loan. This promissory note sets the terms and conditions of repayment.

A senior mortgage is the first mortgage recorded, providing the holder with a lien against the property. The senior mortgage has priority over all other liens against the property. The liens held by junior mortgages are subordinate (of a lesser priority) to those that have been filed ahead of them. The lender’s risk is directly related to the priority of the mortgage. With greater risk, the lender will demand a higher interest rate.

Mortgage insurance protects the lender against loss should the borrower default and foreclosure become necessary. With conventional loans, the lender will require private mortgage insurance (PMI) on most loans with a loan-to-value ratio greater than 80 percent. FHA loans require mortgage insurance premiums (MIP) on all loans. The VA charges a funding fee on all VA loans rather than mortgage insurance. The insurance is generally purchased by the homeowner at closing. The premium may be paid at closing, over a scheduled time period, or added into the loan amount.

Mortgage companies (mortgage bankers and brokers) include individual investors, banks, insurance companies, and other institutional sources of capital. The mortgage companies generate mortgages and are paid a fee for their services. Historically, commercial banks have been in the business of making short-term loans.

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