Mortgage: Affordability, Tax Benefits, Payoff Strategies

Updated: April 1, 2021 by FinPins

MORTGAGE

What is mortgage? You want to buy a house worth $250,000 but have just saved $50,000 in your bank account? You can get an easy financing for the remaining $200,000 to buy your dream home. A loan for a house is popularly called a mortgage loan. It’s a popular method of buying real estate, while providing the real estate itself as a collateral against the loan.

Mortgage is basically a very reliable investment which can be specifically used by the property owner. Investors use the mortgage loan so that they can make large estate purchases without paying the entire amount.

Over many years, the receiver pays the mortgage which the lender has assured him or her until he/she does not own the property free and clear. The process of paying off chunks of loan bit by bit enables the property owner to build ‘equity’ in the property. In simple terms, the percentage ownership shifts from the lender in favor of the homeowner. For example, if you buy a house worth $100,000 and pay down payment of $20,000, you own the home 20% and the bank owns the home 80%. As you start paying off the loan, your ownership % increases (by how much – it also depends on the rise in market value of the home).

If the loanee (person who takes the loan) fails to pay the loan in time assigned by the lender, then the lender has full rights to recover the remaining balance, even if it requires to auction the property.

Mortgage loans are used internationally and have helped a lot of people to fulfill their dream of homeownership. Generally, mortgage loans are the most affordable and it is reasonable for everyone with a predictable income.

mortgage loans

TRADITIONAL MORTGAGE

There are many types of mortgage, but some of the most commonly used mortgage are

  • 30 years fixed
  • 15 years fixed
  • 10 years fixed

Some of the mortgages are as short as 5 year some can be 30 years. It depends upon the lender and the receiver’s deal. Some of the mortgage loan deals have even lasted a lifetime depending upon how stable the relationships are between the lender and the buyer. This can be used as a source of income without breaking the laws.

HOW TO PAYOFF MORTGAGE FAST?

Sometimes, it becomes very difficult to pay the mortgage on time . Every business has  downfall and loss . If a person is facing crises and loss in the business then it becomes very difficult to pay mortgages . There are few ways which can help the receiver to pay off the mortgage fast .

SWITCH TO FORTNIGHTLY PAYMENTS

This can help the receiver very much . If you are currently paying monthly payments then switch to fortnightly payments. It will become easy for you to pay the whole amount (26 fortnights in a year).With the help of fortnightly payments you can easily get rid of mortgages and it will help you to reduce your loan in one year .

MAKE EXTRA PAYMENTS

 If we make extra payments then we can reduce our loan by years . If we put our bonus payments and saving the mortgage we can save thousands in interest .

So the extra amount in your mortgage can also shorten the lifespan of your loan and reduce  the amount of interest you pay. So you should put your savings and bonus which you have earned in your offices in your mortgages so that you do not have to worry about the loan .

FIND A LOWER INTEREST RATE

Comparison websites can be used to find a lower interest rate . Firstly, find the features of  the current loan you want to keep and then compare it with the interest rate of your loan . If you find  a better rate then ask your lender to offer you a cheaper alternative .

How to convert your loan ?

It is a very simple and easy way to convert your loan . There are many websites which offer some tips and steps to convert loan

Converting a home loan can help you in this matter .

If you want to switch to another loan , make sure that its benefits outweigh the fees that you will pay for closing your current loan .

MAKE EXTRA REPAYMENTS .

If you want to get rid of the mortgage quickly then make extra payments . With the help of these payments you can decrease the lifespan of your loan and you can enjoy your life debt-free. By how much do extra payments help? Use the calculator below to calculate your savings!

CONSIDER AN OFFSET ACCOUNT .

“An offset account is a transaction account which is linked with your mortgage . It reduces the amount you owe on your mortgage”

This reduces the amount of interest you pay and helps to pay off the mortgage faster and easier.

PAYOFF MORTGAGE OR INVEST?

Both of the strategies are correct. It depends upon the savings and interest rate. If the mortgage interest is high then we should not invest. But, if you expect to have a higher rate of return then your mortgage interest rate then you should invest.There is a famous saying.

“If you project your mortgage’s interest rate to outperform your investments, then you should pay the mortgage off aggressively”

IS HOME MORTGAGE INTEREST TAX DEDUCTIBLE ??

The taxpayer (owner of the home) can deduct the interest paid on first and second mortgages debt. But there’s a limit of deduction ($750,000 for the married filing jointly, and $375,000 if married and filing separately). Check the IRS site for latest info and details on deduction limits

Most of the countries do not allow the tax deduction on personal loans, but many countries allow the Home Mortgage Interest Tax Deduction and they have set their own rules and regulations . The popular countries which allow the mortgage interest tax deduction are the following:

  • United States
  • Netherlands
  • Switzerland
  • Ireland
  • Denmark
  • India

MORTGAGE TO INCOME RATIO

Debt to income ratio helps you to find whether you are qualified to get a mortgage loan. DTI or debt to income ratio is the percentage of your monthly income. Higher DTI means that you will pay more interest and may be the loan is denied for you. It helps the lender to decide about how much loan he can lend to you. DTI is equal to your credit score and job stability.

DTI calculators help us to find mortgage value.

FORMULA : Monthly debt payments divided by the gross monthly income.

$1,800 monthly payment on gross salary of $10,000 per month, is a mortgage to income ratio of 18% or 0.18. Typically a mortgage to income ratio of 28% or lower is considered good by the banks and lenders.

HOW MUCH MORTGAGE CAN I AFFORD?

Mortgage payments are made up of four things .

  • Principal
  • Interest
  • Taxes
  • Insurance (PMI – Prime Mortgage Insurance – in case you’re not making the minimum required down payment)

Normally, most homeowners can afford the mortgage to finance the property that cost between the general formula of mortgage .

“Two and two and a half times their gross income”

For annual household income (gross) of $120,000, using the thumb rule above, the mortgage should not exceed $300,000. Everyone is free to make decisions, but experts say there’s no point in buying more than what one can afford and one needs. This will help keep financial stress levels down.

GROSS INCOME

“The amount of money which a person (or household) earns in one year before the taxes and it includes the income from all the sources which is received in cash”

When you want to afford a property then you should consider some factors which are important.

First : Lenders should know how much you can afford, then it will help you to get a property with a reasonable mortgage. And then you will be able to afford the property easily.

Second: You should determine some criteria by evaluating not only your finance but also your priorities .

CRITERIA :

Each lender determines its own criteria which is reasonable to the lender, and your ability to purchase a property.

WHY DO MORTGAGE RATES GO UP AND DOWN?

Mortgage rates go up and down because the lender only has a limited amount to lend, that is why they have to charge a high mortgage interest rate so that they can lend more mortgages in future. It depends on supply and demand and also on the competition available in the market. In advanced economies, the rates are pretty much the same across all lenders. If the economy of the country is not doing well and if there is a greater supply than the demand, the mortgage rates tend go down. But , if the demand is greater than the supply, rates tend to increase.

The federal reserve controls the fed funds rate, which is the rate at which banks can borrow and lend money to each other. This also influences the mortgage rates (to some extent), along with other short term loan interest rates such as for personal loan and auto loans.

CONCLUSION

Not every person in this world can afford a home for himself or herself with cash out of pocket. Mortgages make homeownership possible for a large section of population. It is the most reliable and easy way to buy the property of your choice.

It is the biggest investment of life for the homebuyers. Mortgages can either be funded through the banking system or through the capital market, a process called securitization.

In the countries where the demand is high for home ownership, strong domestic markets for mortgages have developed. With growing population and expanding economy, the need for mortgages will increase in the foreseeable future.

Similar to all other investments, it makes sense to use mortgage responsibly, and not get over-leveraged.

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