By Tammy Engel
Mortgage Advisor
Pay Attention to What Matters Most
Mortgage Matters
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My client was adamant that she wanted to buy her next home with 20% down on a 20-year loan. After an hour’s consultation, we didn’t end up anywhere near that. Why? She told me what was important to her, so we arranged her financing to match what matters most.
For context, she’ll be buying a home for $140,000 and may move in the next three years. With 20% down on a 20-year loan, she’d be spending about $32,000 cash to acquire the property with a monthly expense of around $913. When I ran an amortization of the 20-year plan, at the end of year three she would owe around $101,000.
We talked about her deep mistrust of the financial markets, and about how much she hates that her 401k has to be invested there. She’s been buying and stockpiling gold, and keeps a substantial amount of cash hidden in her home. She has owned a home before, so she has seen how market values can be way up or way down – something she has no control over.
As part of any consultation, we look at different ways to use money to be certain we have all the data needed to make a sound decision. One of the contrasting plans was to put just 5% down and take a loan without paying mortgage insurance. Under this scenario, the client would spend total cash of about $12,000 to have a monthly payment of about $916. In three year’s time, the loan balance would be around $126,000.
Are you catching this?! For the same monthly payment, she’s spending $20,000 less cash at close … and the difference in her equity three years out is $25,000. Given her distrust of the financial markets, she much prefers keeping personal control of her $20,000 (and keeping it liquid in case of emergency). The difference in her upfront down payment and her eventual equity were close enough for her comfort level and not having to tie up so much cash during that period.
To boot, there is far greater tax write-off on the larger loan with a slower amortization.
In this case, we had eight loan scenarios to choose from. Some were very obviously do-able but not financially sound. In taking the time to know what really matters to this client, the better financial plan became evident.
When you are ready to talk about financing, be sure you are working with a local professional who has the tools, experience, and knowledge to help guide you to the plan that fits you best.
