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What a Mortgage Loan is Not

The opinions expressed by columnists are their own and do not necessarily represent the views of

It isn't anything more than a loan, period. Unfortunately, our society tends to make this particular financial instrument many other things that tend to blur its prescribed purpose and gives borrowers a false sense of superiority, comfort and prestige or, on the other hand, angst, uneasiness, and sometimes irrationality. It is just a loan! It helps millions of people buy a house to live in and it gives thousands of people an opportunity to have a very comfortable retirement. I wish I could have used the same numbers for home ownership and retirement, but unfortunately, the majority of borrowers do not understand how to make the transition.

With mortgage rates at record lows, I fear that most of those who are opting to refinance to lower rates are going to miss a golden opportunity to make the transition from homeowner to active participant in their own retirement program.

Decades ago, when I placed a mortgage loan, I always asked what the strategy was to eliminate the loan, and it was almost unanimous: sell the house. I stopped asking, but instead, I started suggesting shorter amortizations which would unconsciously have the borrower working to pay off the mortgage loan. Some got the significance, others felt that it would give them more equity to borrow in future years. I put the latter in the "didn't get it camp".

I will divert the article for a moment to state that after several years of real estate prices falling, most, but obviously not all who had 15 year loans still have equity in their houses. Even the majority of those with 20 year loans have houses with equity. The fact that there is equity is an unexpected benefit for those who realized a loan must be paid back. Those who didn't are now trying to figure out what to do because they owe more than their house is worth.

Lets look at the false conceptions about mortgage loans, specifically those which are designed for homeowners. A loan does not provide security for the borrower because it is a liability, a debt, and reduces your equity in the property. Therefore, when borrowers tell me they only feel safe with a 30 year loan, I don't think they realize that the majority of their adult life, more or less, will be spent paying back this liability. The real safety is when there is no loan and the entire house belongs to you.

Those who are refinancing to a 30 year fixed in the 4% range should feel that the gift they are being given, a low interest rate, is best used by allowing more of the payment to go to the principal (reducing it) and allowing you to pay additional monies to speed the process. Unfortunately, too many look at the new loan payment and see more disposable income and we have seen what that has done for most borrowers with this thought in the last few years. Not much!

There are a few who take great pleasure in "strutting their stuff" with a loan in the 4% range. The problem is that no two borrowers look at, or need, the same type of loan. Telling someone that you just landed a 4.25%, 30 year fixed, won't be well received especially if the listener just took a 10 year fully amortized loan. Bragging about your new 15 year loan at 4.125% will fall on deaf ears when speaking to people who just entered into a reverse mortgage. Most important is the truly sophisticated homeowner who has found a way to pay off his loan and looks cross-eyed at anyone bragging about any type of loan as they don't have one on their house at all!

Whatever loan you choose, make sure you have an exit strategy other than selling the house. Whether your loan is $4.4 million or $240,000, it needs to be paid back. If you get it done while you are working, your life will be easier and your retirement will be even better. Entering the "golden years" without that yellow commodity will find it less fulfilling, more stressful and not exactly what you had in mind.

While devising your plan, remember that a $300,000 loan, regardless of the amortization, takes $300,000 to pay it back. All of the extra money you will spend on your loan is interest, which grows ever larger the longer the loan. The few extra dollars you will need a day, a week or a month, can save a lot more than you will be spending if you can budget yourself to be able to take a shorter amortization. The low interest rates today should make the future much brighter if you use them correctly. Best of all, you can surprise the government and actually pay something back!

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