Alan Van Zee
President | NMLS #: 297154
Hawaii Mortgage Company, Inc.
Company NMLS #: 232582
alan • www.hawaiimortgage.net
Debt is Debt
For most, a mortgage is a way to achieve home ownership and nothing else. But in reality, a mortgage is a financial tool. The better you know how to use this tool, the better off you will be financially.
You may be wondering how you can use a mortgage as a tool. Let’s spend some time on some various examples. One may be right for you.
If you own more than one property: Often I will get a call from someone who owns two or more properties. They are inquiring about refinancing a higher rate investment property. After some discussion it turns out their primary residence has significant equity, enough to wipe clean the debt on the investment property. Too many times people like this think linearly that the debt of the property must be attached to that property. But if you can get a better rate by shifting that debt to another property such as your primary residence, why not do it? Debt is debt. It shouldn’t matter where that debt is placed. The main concern should be how you can get the best interest rate for that debt. Too many times, especially with our older community, they were taught that our home is sacred, and not to touch it. If you were to look at a balance sheet, the bottom line shows your assets in one column, and liabilities in the other. You look the same, no matter where that debt is placed.
If you wish to buy an investment property: Another example of linear thinking is when one wants to buy an investment property but lacks sufficient down payment. Countless opportunities have passed those by without realizing that the equity in their primary residence is an untapped source of their own assets. Accessing some of the equity in one’s primary residence to provide that required down payment is a great way to enable you to buy that investment property.
Shifting debt to maximize liquidity: If you own multiple properties, and have owned some of them for a while, you have most likely seen your equity increase disproportionally within your portfolio. Some areas have increased in value faster than others. That results in some properties having larger equity positions than others despite you paying the debt down at the same rate. It would be a good idea to evaluate all of your holdings to see if an increase of equity in certain properties could help you get a better rate on others. Remember, debt is debt. If you can shift debt from one property to another to get a better mortgage rate, do it.
Take a shorter amortization: If all you have is your primary residence, could you pay more every month to pay the debt off faster? Amazingly, many people do this already. By taking a shorter term loan you could save a lot of money. Depending on your mortgage balance switching from a 30-Year to a 15-Year loan could save you hundreds of thousands of dollars over the life of your loan. Even if you can’t make the jump from a 30 to a 15, a 20-Year mortgage will still save you a lot in interest expense over the life of your loan. Something can be said for being debt free when you hit retirement.