Mortgage leads loans Rates

For the average consumer who has managed to acquire credit card debt, automobile loans, and various other small debts, is the second mortgage loan an answer for the consolidation of debt and a tax reduction? Quite often the answer to this question is yes. Second mortgages that have traditionally been used in areas of home improvement, funding college educations or business startups are now being considered as a means to eliminate or consolidate high-interest credit card debt and create a tax deduction at the same time.

For the average consumer, using second mortgage loan money to pay off credit card debt or to consolidate individual personal loans does not eliminate the possibility of a tax reduction; especially if that average consumer does not already own a second home. The only problem here seems to be that we’re replacing credit card debt for second mortgage debt; what do we then do with the credit card we’ve paid off? The smart consumer cuts them up.

How does a second mortgage affect your tax liability at the end of the year? A lot of that will depend on your income levels, your medical expense, and your other interest deductions. Mortgage interest expense is deductible on the Schedule A “Itemized Deductions” form of your individual or personal tax return. The Schedule A, however is not a straight tax reduction tool. Tax reductions, or deductions, carried forward from the Schedule A are a percentage of your AGI, or your adjusted gross income. Your adjusted gross income is based upon your income less certain expenses and deductions from Schedule Cs, Schedule Es etc. etc. Can you now see where this might be a little complicated?

Let’s throw something else into the mix: if you’re an investor, especially in the real estate market, your mortgage interest may not be deductible, period. Mortgage interest on your first home and on your second home is a tax deductible interest; if however, you happen to be an investor in the real estate market the ability to make it clear distinction between first and second homes versus investment property becomes much harder to prove. Is the home a second home with deductible mortgage interest expense, or is it an investment? Of course, for investors interest expense on a loan for investment purposes is fully tax deductible; no percentages to work with at all.

Now let’s ask another question, if you decide to take out a second mortgage could you better invest your money? What a 401(k), an IRA, or an MSA be a better benefit when it comes tax time versus leading the money in your home as equity? This has been a question long debated by financial analysts, tax attorneys, and fairly tax proficient homeowners. How does the equity better serve the homeowner? As a savings account, which is really what the equity in your home turns out be, or as an investment tool that can be used to increase your retirement savings? There are other factors to be considered here: such as penalties for early withdrawal, risk ratio versus profitability ratios, and which programs reduce tax on a one-to-one ratio? Unless you already have some general knowledge of the tax system, it can be more expensive to determine tax savings than you would actually save.

As you can see there are many, many ways to affect your tax liability, your tax deductions, or affect a tax reduction; the correct answers are highly dependent upon the individual situation and the individual objectives. The only way to accurately determine the better benefit is to sit down with a financial advisor, your tax information, and evaluate your long-term objectives.

Does the average consumer ever take the time to accomplish this? As a general rule the answer is no. Most consumers never take the time to look past next month. Over the course of a stressful and busy work week retirement planning, tax deductions, and income producing benefits never cross the consumer’s mind. For those individuals who truly anticipate and receive benefit from tax planning in relation to their mortgage interest, there are many more individuals who never even contemplate that there might be a savings. Maybe, we should just skip this question.

Let’s assume that you’re one of the new age consumers, who fit into the fastest growing segment of the mortgage market today, the interest only mortgage. It is time to you to secure a mortgage, and there are several loan options that can be tied to the features you desire; you’re particularly interested in the interest only feature that seems so appealing to many consumers today. But have you stopped to question why the interest only feature has become so popular with consumers today? Are you aware that it is a re-born feature laid to rest in the great depression of the 20s?

Have you stopped to examine the purpose of the interest only loan and what purpose it will serve in your particular situation? The original intent of the interest only mortgage was to make home ownership more appealing to young couple; not every prospective buyer, however, is a young person looking to buy home. Careful evaluation of your situation and the interest only mortgage must be performed in order to secure the best mortgage possible.

Let’s take a look at the original intent of the interest only mortgage, and the greatest benefactor in the interest only mortgage segment: the short term homeowner. The idea behind the interest only mortgage product was to give the short-term homeowner a race in the buy home, with or down payment requirements associated with the standard mortgage. This idea worked so well, that now almost every kind of homeowner is exercising their interest only mortgage option. As it was only ever really intended to benefit the short term homeowner, the interest only mortgage product is currently used as a means to buy “more home for less money”.

The appeal to the short term homeowner segment of the market was a way to grow the housing industry, since this particular type of buyer, normally only rented. In most short-term home ownership, situations, the buyers are young professionals in the beginning years of their career, who have tremendous potential, and almost always a guarantee of purchase from their company should their home remain unsold after one year on the open market. As you can see, the consumer who was initially targeted for this type of loan would truly see a benefit from the interest only mortgage product. Today, however, the consumer actually applying for the interest only mortgage product is a consumer who seems to be spending beyond their income means.

What we have discovered, with today’s consumer there is an overwhelming tendency to purchase more home than can possibly be afforded; the reasoning behind such a purchase? Since the term of the interest only segment of the loan will normally run three to five years, many homeowners are borrowing based on “anticipated earnings”. Quite often, the anticipated earnings never materialize, and at the end of a five year interest only term, the homeowner is left with a much higher mortgage payment minus the increased earnings.

As with many other modern-day products packaged and sold to the consumer, it sometimes is not always the wisest choice, the best buy, or the greatest benefit to simply follow suit; sometimes, educating yourself as a consumer is a much better, and a much more affordable choice.

The long-term, homeowner purchasing to procure a safe haven from which he or she can retire and be assured of a decent home, is not a benefactor, nor suggested candidate for the interest only mortgage product; however, in the attempt to grow this product into a larger share of the mortgage market, many interest only loans have been advertised as ways to pay off credit card debt, avoid a down payment, and create greater tax savings at the end of the year. None of these reasons, within itself would be a “good” reason to purchase an interest only mortgage product.

Many of the local lending institutions, especially the banking industry, have shied away from the open arms welcome that the interest only product received in the mortgage company circle, simply because the loans are a riskier prospect, and many times consumers aren’t as educated about the choices they are making. When you misuse a product, you begin to run into problems, and create a potentially dangerous market situation.

Great news! You qualify for a second mortgage. Now what would you like to do with the second mortgage? It will be your answer to this question that determines whether or not your second mortgage is your friend, or your foe. That seems to be an awfully strange way to look in a second mortgage; however that’s exactly what the mortgage will be. Your friend or your foe.

How do you even qualify for a second mortgage, what is a second mortgage, and why would you want a second mortgage? Well, the answers here are as varied as the consumers who apply for such mortgages. Many times consumers need a second mortgage to make improvements on their home. Many times consumers need a second mortgage to put their child to college. And sometimes, consumers need a second mortgage to start a business. The reasons given here for obtaining a second mortgage increase the value of the home, provide opportunity as an investment in your child’s future, or provide the opportunity to increase income. These are the original and most beneficial reasons for obtaining a second mortgage.

Are they the only reasons consumers obtain second mortgages? No. Today’s market has been a great influx of second mortgages to pay off credit card debt, to buy new car, or to simply take a vacation. Should consumers receive a second mortgage for those reasons? Absolutely. Should consumers actually ask for a second mortgage for those reasons? Absolutely not.

An educated consumer understands the consequence of a second mortgage. The educated consumer understands the price of the second mortgage. What is the price of the second mortgage? The equity in your home. When you apply for a second mortgage, you’re trading the equity in your home for cash. You’re giving up your savings.

If you’re trading your savings, in order take a step up, you’ve made the right decision. If you’re trading your savings for a frivolous expense, you’ve made the wrong decision. That’s how you determine if your second mortgage is your friend or your foe.

Today’s consumer is acquiring second mortgages that for many will prove to be their foe. They’re not increasing the value of the home; they’re not educating their children. Nor are they increasing their income earning potential, they’re simply spending their savings. Rising real estate prices, increasing availability of mortgage products, and the decline of savings for the public as a whole is creating the “bubble” effect. The bubble effect occurs when prices rise, spending rises, at a rate greater than can be supported on a long-term basis. At some point, the bubble bursts.

Your second mortgage, if used to increase the value of your home, will have insulated you against the drop in price. Your home is actually worth more; therefore, if prices drop you’re protected. This was the original intent of the second mortgage; to provide the consumer with easy access to the savings accumulated in their home for home improvements, emergency events, or in order to better their homes or lives. You know for the most part consumers do not save money in a savings account; consumers only save money when they aren’t aware that they’re saving money. Home equity was one of the last hidden ways consumers were saving. Second mortgages and other loan mortgage products have managed to eliminate those savings as well. Has the consumer stop to contemplate the consequence of negative saving? Absolutely not, and our current system of mortgage lending encourages negative savings.

Second mortgages are a great way to access your savings and increase your income tax deductions; they are one of the greatest tools available for financial planning and beneficial consumer spending. They are also the fastest way to spend yourself in to debt under socially acceptable circumstances. Many consumers receive offers for credit card debt consolidation and financial analysis. There are never any offers to counsel the consumer concerning their choice in mortgage products, the option of second mortgages, or the consequence of those choices. Your decision to and a second mortgage can be one of the best decisions you’ve ever made or your decision can be one based on folly and frivolous spending. Now, your second mortgage, is it your friend or your foe?