1% Mortgage Loans... What's The Catch?
Written by: Hartley Pinn
While there are several different types of 1% mortgage loans,
there are really only two major keys to winning with a 1%
The first key is to make sure the loan is set up correctly from
And the second is to make sure you are using the loan correctly
to gain the most benefit.
First, let's talk about how the loan works. Then we'll get into
how to set the loan up correctly so you can reap the financial
rewards these mortgage loans have to offer.
To start with, 1% mortgage loans have payment options. Each
month when you get your mortgage statement you will have the
option to make a 30 year fixed payment, a 15 year fixed payment,
an interest only payment and a minimum payment at 1%.
Although you are given several payment options, you should only
select the 1% minimum payment.
Because if you wanted to make a 30 year fixed, 15 year fixed, or
interest only payment, you would be better off getting that type
of loan. Typically, these payments are higher with a payment
option mortgage loan.
If you select the 1% minimum payment your first benefit will be
a significant monthly payment reduction. Your mortgage payment
will likely be cut in half. Of course, this is a pretty
attractive first benefit for most home owners.
To compound the effectiveness of selecting the 1% minimum
payment you should save what you save. For instance, let's say
you refinanced your home with a 1% mortgage loan, paid off all
your credit cards, and reduced your monthly payment by $1,000 a
Now, if you save that $1,000 a month for yourself instead of
giving it to your creditors, you will have $60,000 in cash at
the end of five years - And that's with a zero percent return.
Here's the second benefit to selecting the 1% minimum payment
If you make an interest only payment your mortgage balance will
stay the same. If you make a 1% minimum payment you are actually
paying less than interest only. Therefore, you are creating
deferred interest which makes your mortgage balance increase
each month. Before you freak out, keep in mind that deferred
interest is mortgage interest and is therefore tax deductible.
Let's say your home is going up in value $2,000 a month. The 1%
mortgage loan will allow you to take a small piece of that
appreciation, say $500 a month, and turn it into a tax deduction.
So you are taking a small piece of your equity each month and
turning it into a tax deduction. If you did not do this, all of
your appreciation would be locked up in equity.
Equity is terrific and is certainly one of the many benefits to
home ownership. But investing in equity will get you a zero
No one is going to cut you a check each month for the equity in
your home. As a matter of fact, if you wanted to get the equity
out of your home you would have to sell your home or get a loan.
And you better qualify or you will not be able to get a loan.
So why not take a small piece of your equity each month, turn it
into a tax deduction, and at the same time save $1,000 a month
for your self? You will still have plenty of equity but with a
1% mortgage loan you will have cash AND equity.
If you do this for any length of time you will come out way
further ahead financially than if you did a regular 30 year
fixed or an interest only mortgage loan.
By the way, if the deferred interest is a concern, try making
bi-weekly payments. Making a bi-weekly payment will reduce, and
in some cases eliminate the deferred interest all together.
Which means your mortgage balance would not increase.
How to set the loan up correctly:
1) The 1% payment option on these loans is only available for
the first five years. But you could actually keep one of these
loans for 30 or 40 years. If you select a 40 year loan your
monthly payment will be lower but the payment options will not
last for five years. The name of the game is to keep the 1%
payment for as long as possible. So get a 30 year amortization.
2) The 30 year, 15 year and interest only payments are tied to
an index. Select a slower moving index like the MTA (Monthly
Treasury Average) instead of a faster moving index like the
Libor (London Inter-Bank Offered Rate).
So how can you lose with a 1% mortgage loan?
If homes in your area are rapidly going down in value, deferred
interest could cause you to become upside down in the home.
But if your area is experiencing a 3% to 5% rate of appreciation
and you save what you save by making the minimum payment, a 1%
mortgage loan can have an incredibly positive impact on your
For more information about 1% mortgage loans and other mortgage
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Hartley Pinn has recently created the Mortgage
Leads Generator Training Course to teach people how to make
over $50,000 a month working part-time (10 to 15 hrs per week)
as a mortgage loan officer.
About the author:
As a top producing mortgage loan officer, Hartley Pinn has been
actively testing, researching, and evaluating lead generation
strategies since 1995.
Mr. Pinn has written several articles on the subject and has
recently created the "Mortgage Leads Generator" Training Course
to teach new and experienced mortgage loan officers how to
generate a five to six figure monthly income while cutting their
work schedule down to only 10 hours a week.
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