No. of Recommendations: 4
Hi gus,

My mortgage broker is telling me that the 30-year fixed rate is 7.375% but the 7-year balloon rate is 6.875%, for a savings of about $69 per month, or $5796 over the 7 year period. According to him, if I move out before 7 years, I am better off with the 7-year. Even if I don't move before then, I can always get another mortgage, before 7 years, to pay off the balloon payment.

Harrumph! I'm doing 7/1 ARMS for 6 1/2%... but that's not the point...

Why do a Balloon which is do-or-die when you can do an ARM that at least leaves you with choices?

To my mind, the disadvantage would be that, assuming I want to stay in my house forever (unlikely, as I am only 30-years old), taking out an additional 30-year mortgage in 7-years just means making 7 additional years of payments.

The key is NOT to actually payoff the principal on your mortgage, but to SAVE ENOUGH SO YOU COULD!

Here's the strategic key, take an ARM that's cheap enough that during it's fixed duration it saves you enough money over and above the payments of a 30 or 15 year fixed (during the same time) that the savings are more than the refi closing costs.

Then, budget the same amount of monthly housing expense as though you WERE paying the 15 year fixed... except instead of paying it to principal (which grows slowly,) deposit it into your "Home Freedom Investment Account." As this account grows, it will continue to earn compounded returns at an increasingly greater rate than the costs of your mortgage interest (especially after tax treatments.)

Within plus or minus 2 years of the end of your fixed-rate period on the ARM, start strategically watching for the best time to refi the maximum equity backout of your bricks and mortar... according to when rates are lowest (thus the plus or minus timeframe... allows for typical interest rate cycles.)

This plan will have you with an investment pool of capital equal or greater than your mortgage within 15-20 years, at which point you can have a "Symbolic Mortgage Burning Party"... except that you'll never ever burn your mortgage in your lifetime... the source of subsidized investment capital is just too great!

Also, refinancing costs may total close to $5700 and who knows where rates will be in 7-years.

The key is to plan relative savings against relative business costs (such as refinance costs.) Also keep in mind relative returns on invested liquid assets versus after-tax liquidatable appreciation on your real estate.

Need more clarity on this... post on back! I think it's one of the most exciting strategies I've ever been able to offer!

Dave Donhoff
Lic. Mortgage Broker
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