Managing a mortgage
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Managing a mortgage

A loan should accommodate your greater financial plan ...

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In years past, mortgages were thought of as a means to an end. It was simple – secure a mortgage, make payments for 30 years, and own your home free and clear. At the time, 30-year fixed mortgages were the only option available to homeowners. But as the times have changed, so have options for financing a home. Today, homeowners have a host of financing options available to them, all tailored to meet their needs.

Interest rates. These two words can move mountains in the mortgage industry. People – as a whole – like comfort. And nothing is more comforting (in the mortgage industry) than 30 years of fixed payments. This type of financing allows the borrower to know exactly how much they must pay each month. In some instances, this type of mortgage suits the needs of its respective clients. But is it right for everyone? The simple answer is no. For homeowners who plan to sell their home– or move – in five years or less, their needs could be suited by other loan types. Adjustable Rate Mortgages (ARM's) and Interest-Only loans exist to accommodate new homeowners and those with unique situations.

But why is it important to analyze these loans now and in the future? The answer is that the loan should accommodate your greater financial plan. An ARM allows for lower initial payments than a fixed mortgage, with a rate that fluctuates with the indexes. This can allow a homeowner to save money for the term of the adjustable period. This money can be used to invest in other ventures that can offer high yields (stocks, bonds, property, etc). Compare this situation to one in which the individual secures a fixed mortgage with higher monthly payments. True, they are paying a greater part of the principal, but how much do they benefit from this if they sell the home in three years? Not much.

Instead of viewing a mortgage as a means to an end, it should be considered a vehicle for financial stability. You can use a mortgage to lower monthly expenses, pay more towards principal, or have steady payments. Most homeowners understand this, but where they fall short is in continually analyzing their financing. Instead, they simply pay the bill and throw the stub in the desk and forget about it. But if you find yourself struggling to make mortgage payments – or want to maximize your money – consider refinancing. If you anticipate an increase in your income, consider an ARM which will maximize your purchase, but also allow you to pay principal later. If you are buying a home to “flip it” an interest-only loan can help you maintain equity while the market appreciates.

Evaluating your financing options is not easy. There are a host of products on the market that are designed for multiple situations. Consulting a professional can help you see the short and long-term benefits and challenges of each program. Before meeting with a professional, ask yourself the following:

  • What are my short and long-term goals?
  • Do I anticipate a change in my household income (increase or decrease) within the next three years?
  • Will this house be my primary residence or an investment property?

Answering these questions will help you and your financial advisor determine the best product for you. Remember, a mortgage is not a fixed requirement you are stuck with for years on end. Constantly evaluating it – along with market conditions – can allow you to build equity, accommodate life changes, and create a stronger financial position. (don)
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