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Problems With 15 Year And 30 Year Mortgage Rates
If only the mainstream advocates that every home owner should learn how to use strategies to turn their home equity into cash. And using that cash to build up their own personal cash thereafter.
More people can enjoy the fruits of their hard work currently used to pay off a mortgage little by little.
Instead, what has been promoted in the mainstream is to take up 15-year or 30-year loan with fixed rates as the safest form of financial responsibility.
The only safe thing here is that interest rates will remain the same.
People have different risk profiles, and most people have a very low tolerant for risk.
For those who are risk adverse, you should really stick with 15-year or 30-year loans with fixed rates.
For those that can handle a little more risk, let me show you more of the options available to you.
The traditional fixed rate mortgage loan is probably the most well known around. In fact, most people only know a mortgage as a 15-year or 30-year financial liability.
This is very popular because the interest rates and the monthly payments remain fixed throughout the tenure. So this provides a certain level of certainty for those that are risk adverse.
From your initial application for the loan, you know exactly how much your payments will be for the entire repayment schedule of the proposed loan.
You will know what you can look forward to with certainty.
But what borrowers often turn a blind eye to is that the longer a mortgage stretches out, the more interest they will pay in totality.
Let me give you a very simplified example.
If you borrow $200,000 at a flat rate of 4%, you will pay a total interest of $8,000 a year. In 10 years, you will be paying $80,000 of interest. In 30 years, you will have paid $240,000 of interest.
That is even more than the amount you have borrowed from the lender! In total, you will have paid $200,000 + $240,000 = $440,000! More than twice the original amount.
Banks charges a higher rate of interest for fixed rate loans so as to offset the risk that interest rates will rise.
In the event that interest rates rise, banks will lose out when they cannot raise your interest rates because you have signed on a fixed rates structure. So they lower their risk of losing out by charging you a higher interest rate from the start.
Forgive me if I’m wrong.
But isn’t it a practice that you will reward your customers when they stick with you for a longer period? Just like cable television. If you signed on for 3 years instead of 2 years, you will get a good discount…
So if you see it this way, the only party that benefits from a mortgage deal with fixed 30 years interest rates is the lender.
You run into people who have got their feet stuck in these mortgages all the time.
You meet that guy who owns a $2,000,000 house when his mortgage that he is still paying off was for $500,000 which he took up 16 years ago. But he is struggling financially because he has to pay off that mortgage for another 14 years.
And because he has been late on payments because of his financial predicament, he cannot get a refinance at the current valuation because of his defaults on the high monthly repayments. He may even be too old now to qualify for a good deal.
This is a classic example of being house rich and cash poor.
When he was younger, he could have refinanced the mortgage at a much higher valuation while he also had a higher earning power. And put that cash he squeezed out from the home equity to harvest more returns on other cash instruments.
He didn’t. And he is stuck with a house that cannot pay him.
Real estate is now a popular vehicle for someone planning for retirement. They want to build up their very own little property empire and purchase as much real estate as possible.
But be careful of what you are doing with loan facilities. Because if you go about it wrongly without good advice, you are going to pay for it in the later years when you cannot keep up your personal earning power.
Adjustable Rates Mortgage?
You may have heard of the concept of good debt and bad debt.
Good debt is the kind of debt that helps you create assets. It gives you financial leverage to acquire assets that you will normally not be able to acquire. Capitalizing on financial leverage is not for the risk adverse.
So decide for yourself whether using leverage to acquire assets is at your comfort level.
If you are buying a house without leverage, you might as well put your money in a time deposit.
Buying a house is about using leverage. It is the leverage that allows you to acquire the asset and increase you returns.
Capitalizing on financial leverage is not for the risk adverse. So decide for yourself whether using leverage to acquire assets is at your comfort level.
A very popular mortgage loan program is the adjustable rate mortgages (ARMs).
It allows you the options to choose what payments to make on the monthly payments.
There are many fancy names used by lenders for ARMs for branding purposes. But the concept is the same. The interest rate can change with the market during the life of the loan.
Most often an ARM offer will initially give you a rate lower than that of a fixed rate. It is a carrot that is put in front of you to take up the loan. After an initial period where interest rates are fixed, the interest rates start to move with the direction of the market.
It can very well go up.
This is the risk you are taking if you choose to take up an ARM.
What Is An ARM?
An adjustable rate mortgage does not have fixed rates. It has rates that change over time with the direction of the market.
For those who are only planning to live in a particular house for just a few years, it makes good sense to take up an ARM to enjoy lower interest rates during the initial years.
Do anticipate that interest rates will rise at some point during the life of the loan.
Interest rates for ARM take into account a particular index specified at the time of application plus a margin that the lender has determined.
If you have a choice of an index to peg your mortgage to, choose one that is less volatile so that you are less likely to receive a shocking letter in your mailbox.