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Long Term Financial Planning Requires Careful Consideration |
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Submitted by Wilhelmina Mungera
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The old adage says Haste makes Waste, and caution is your only friend. How true such a proverb is when it comes to the world of personal financial planning. Caution means that you stop and look at all options before making any decisions in order to ensure that more often than not the result is a sound decision with a positive outcome. This step is almost mandatory when dealing with issues of financial planning, 401(k)s, and future money needs like retirement funds, etc. Poor financial decisions can result in catastrophic consequences like late payment, a deteriorating credit rating and even bankruptcy.
When investing in real estate for short term purchases, one of the options you may be considering is an interest only mortgage. These can be a tricky investment and so you may want to consult with your financial advisor, before entering into a mortgage of this type. And, since it really can’t be considered a piece of your investment portfolio, a will more than likely be part of a business venture or investment. This is where the looking at all the options really comes into play. An interest only mortgage is not a good financing option when you are looking at purchasing a piece of property for a long-term investment purpose or are going to claim capital gains on the property. Interest-only mortgages are for quick profit transactions. You get in, and you get out. No hanging around in the middle. In. Out. Fast. Easy. Why do I say that? Because interest only mortgages do not allow for an increase in value to you, there isn’t an equity growing measure included so you can’t get more out of the transaction, really; and, your investment debt never decreases.
Short-term implications and considerations of interest only mortgages have one main point. The payments are pretty low during the term of the payment, but that is simply because the overall liability is never going down. Other than that, this mortgage product really shouldn’t be a regular item of consideration in your financial planning portfolio.
The interest only mortgage offers little in the way of tax deferred savings when compared to the bigger products like IRAs, MSAs, and even 401(k)s. Sure the interest is tax deductible, but not at a one-to-one ratio. Even SEPs for the self-employed individual can have a one-to-one ratio of tax savings.
Over the long-term financial planning picture, if you were to consider an interest only mortgage in comparison to a regularly amortized mortgage you would see that when the regularly amortized loan is paid out, there is still a long line of payments to be made on the interest only loan. The amount of savings could be quite substantial if you consider the time value of money. Time value is easy to understand once you learn it. The basic concept is that the dollar is worth more today than it will be worth tomorrow (history seems to confirm this). So money put in savings today, will ultimately be worth more than money you start saving in ten or fifteen years. This is why financial planners urge folks to plan for retirement at such an early age instead of waiting until age 35 or 40 to start saving for the future.
While an interest only mortgage may seem like a viable option to you, be wary and consider all the other possibilities. Chances are a reputable financial planner will have other options that benefit you more in the long run.
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