By Janette Woodruff- Whitlock, Sr. Mortgage Banker

United Capital Lending

Norfolk, VA  – There is a great debate within the inner-mortgage circles these days. Should we, as loan professionals, encourage clients to borrow as much money as possible? Or would consumers benefit more if we helped them to understand the advantages of 15-year amortization schedules and pre-paying principal? Let’s examine the pros and cons of both strategies.

Leveraging Your Property. In order to understand why you’d want to borrow as much as possible for your home purchase, you must first grasp the concept that equity has a zero rate of return. Here’s an example:
 
If Consumer “A” buys a home for $300,000, and puts 20% down, then they have $60,000 in equity. Over the next 5 years, the property appreciates $100,000 in value. Consumer “A” now has $160,000 in equity.
 
Consumer “B” buys a home for $300,000, and puts no money down. At the end of 5 years, that same home is now worth $400,000. Consumer “B” has $100,000 in equity, which is the same appreciation as Consumer “A”, a net $100,000.

 
As you can see, your down payment has nothing to do with your rate of return. What becomes important is how you choose to manage the $60,000 you didn’t use as a down payment. If you use it for frivolous activities, such as buying toys or going to Las Vegas, it would be more prudent for you to use that money as a down payment. Especially since this will enable you to obtain a lower interest rate.

However, if you were to invest the $60,000 in a vehicle that can out-earn the cost of that debt, then this could be a formula for success. This is why some lending professionals suggest putting as little down as you possibly can, maximizing your tax write-off, and investing the rest. This principle has been applied for many years in the life insurance game. The old saying goes, “Buy term and invest the rest.” The key component is taking the money you would have used as a down payment and creating an asset accumulation account. This account should earn a significant enough rate of return to enable you to pay your mortgage off entirely and achieve the ultimate goal of being debt-free.

Paying Your Home Down Rapidly. There are very few times over the course of my career that I have seen a client with zero debt and no financial difficulties. Choosing to pay off all of your debt can reduce stress and help you to gain freedom of cash flow for investment opportunities. A 15-year mortgage or a bi-weekly payment strategy provides structure. It can also put you on track to have your mortgage paid off within a set timeframe. Simply put, it contains built-in discipline.

It’s important, however, to understand that regardless of how rapidly you pay your home off, you’re not getting any greater rate of return on your investment than if you paid it off slowly.

Conclusion. So how does one determine which scenario is best? The choice depends entirely upon the individual. Savvy consumers who are disciplined, and are comfortable taking chances from an investment perspective, would do well with the first scenario. Over the course of time, it’s been proven that your rate of return over the long-haul will be far greater than the rate you’d pay for a mortgage in today’s rate environment. It’s important to seek the advice of a skilled investment advisor to ensure success with this strategy.

The second scenario is best for those who have a difficult time managing their money or who’ll sleep easier at night knowing they have a plan in place to pay their loan off more rapidly. Be sure that your budget can handle accelerated payments. When consumers “bite off more than they can chew” with a 15-year mortgage, they frequently end up having to refinance back into a 30-year schedule.

If you find this subject intriguing and would like to know more, I recommend that you read a book titled, Missed Fortune 101, by Douglas Andrew. It’s an outstanding read that is very simplistic and goes into far greater detail than I can cover in this column. Douglas is a financial planner who advises safe-structured investments such as whole life policies and tax-free fixed income instruments.

Are you facing a foreclosure or pending default? If you are heading towards the foreclosure route, you need to stop it before it affects every part of your life. You are already under stress enough because you have fallen behind on your payments. Foreclosure create even more stress, can destroy whatever is left of your credit rating, and leave you wondering where you are going to live.

The only guaranteed way to stop a foreclosure process is to pay off your mortgage debt. In simple terms, if you are behind by three payments, you’ll need to pay them plus any other applicable fees immediately. Sounds simple enough but if you have had difficulties keeping the payments up to begin with this simple task is almost unreachable.

Approaching the bank or lender after foreclosure proceedings have started is one way to try to stop foreclosure. However remember they are more than likely to want the amount you are already behind before they will continue any sort of amicable conversation with you. So since you are facing the worst case scenario, what should you do?

If you are unable to bring your monthly payments up to date, the only solution may be to sell your home quickly to avoid foreclosure. If you have other assets that you can sell, that may be an option as well. Attempting to pay it up using credit cards is really not advised as you will find yourself in a bigger financial mess than what you are already in.

Selling your home to a professional real estate investor, is the quickest and most economical thing you can do to stop a foreclosure. You can salvage what is left of your credit rating and stop the legal process against you. It is a difficult decision but one that you cannot put off at this critical time.

If you can find a way to make up your back payments quickly without getting into further financial difficulty, that should be a priority at this time. When looking at things realistically, and seeing that the only way to resolve this is to sell your home you must act quickly. Many real estate investors can close on your house in as little as seven days in some cases.

Foreclosure is a scary thing and difficult situation to deal with alone. Take action and talk with a real estate investor today and begin to take steps to stop the legal proceedings and start getting your financial life back on track