A Home Mortgage Can be More than Just a Liability

   With the recent decline in interest rates, now may be a good time to secure a mortgage loan or to refinance your existing loan.  The Federal Reserve’s rate cuts have brought down the cost of many types of loans.
   If you’re in the market for a mortgage or thinking about refinancing, however, interest rates are just one factor to consider.  Financing a home often can be done in a way that makes a mortgage more than just a liability on your personal balance sheet.  Some mortgage programs may actually help you increase your net worth.  Let’s take a look at some of the prevailing myths about mortgages and how making different choices can work to your advantage.

Myth #1:  Paying off Principal is the Best Strategy.
   Traditional mortgage payments consist of both principal and interest amounts.  You may believe that making principal or extra principal payments to pay down the loan faster is the best financial decision.  But first, you should consider the alternative of investing the funds you would otherwise pay towards principal.
   Say that you want to buy a home, but are also interested in saving for retirement or funding a college education.  Although you could choose a traditional 30-year fixed-rate mortgage, you might consider a mortgage that allows you to make interest-only payments.  By making interest-only payments, you can reduce your monthly payments and invest the money you would have otherwise paid toward principal to help reach any of your financial goals.
   If your financial goal is to pay down principal, an interest-only mortgage loan with no prepayment penalty allows you to control whether or when principal reductions are made.  You can even choose to liquidate all or a portion of what you have invested over the years to pay down your mortgage loan balance or even pay off the entire mortgage amount. 
   To decide whether this is a good strategy for you, compare the potential investment returns from your redirected funds to the interest savings you would realize by paying down principal.  The difference is the potential increase in your net worth.  If the difference is significant, an interest only mortgage may be an effective choice for you.

Myth #2:  You Have to Choose Between Fixed and Adjustable Rate Loans.
  Choosing between a fixed-rate and an adjustable rate loan can be a difficult decision.  Adjustable rate loans may offer lower initial payments, but the uncertainty of a potential rise in interest rates can be unsettling for some people. 
   For these people, a good alternative may be a fixed-to-adjustable-rate mortgage, which offers an initial fixed-rate period of five, seven, or 10 years, then converts to an adjustable rate. If you plan to own your home for only five or seven years, locking into a 15-or 30-year fixed rate mortgage may be the most expensive option for you.

Myth #3: Making a Down Payment is Always Best.
   The old rule that homeowners should put down 20 percent of a home’s purchase price may not be right for you.  Your smartest financial choice may be no down payment at all.
  Before you liquidate carefully invested assets for a down payment, compare the expected return on your investments with the cost of financing your down payment during the time you plan to live in your home.  If you expect your investment return to exceed your financing costs, 100 percent financing may be right for you.
    With a 100 percent financing program, you or a qualified sponsor pledge eligible securities as additional collateral.  Normal trading activity can continue in the pledge account (subject to certain restrictions) so that interest, capital appreciation and dividends can continue to grow.  By preventing the liquidation of assets, 100 percent financing also can defer potential capital gains tax exposure.  In addition, by pledging securities in lieu of a down payment, you may not have to pay expensive mortgage insurance premiums.
   If you’re concerned that 100 percent financing might be overleveraging yourself, consider this:  You may not have the savings for a down payment (or may not want to liquidate all of your assets for a down payment), but your cash flow from earnings may be sufficient for handle your mortgage payments.  A 100 percent financing program allows you or your sponsor to pledge collateral for you, if you’re in this situation. The same underwriting criteria that apply to other mortgages also apply to this type of mortgage, which helps ensure that you are qualified and able to meet your financial obligations.

Build your Net Worth
   It’s difficult to build your net worth and financial security without employing strategies for managing your entire balance sheet, both assets and liabilities.  Talk with your financial advisor about how financing your home can complement your overall financial plan and help you build your net worth.

For more information, contact Merrill Lynch Financial Advisor Perry Downing or Ron Downing of the Downing Group, at the Roanoke office at 540-985-5443 or toll free 888-317-1456.
Kevin O’Hanlon is Chairman and Chief Executive Officer of Merrill Lynch Credit Corporation