1% Mortgage Refinance loans, you’ve probably seen 100 different advertisements, but how is it possible? There is really only one big secret to 1% mortgages: 1% minimum payments are below the interest payable on the loan. Once we’ve addressed this feature, most of the other facets of 1% mortgages are relatively logical. 1% mortgages, which now come in dozens of varieties with start rates from below 1% (some even starting at 0% for a few months after refinance) up to 4% or more, offer astonishingly low payments. Some of them offer fixed rates for 30 or even 40 years, some of them are adjustable from the day you take them out, all of these are basically “1% mortgages” and are extremely popular amongst homeowners today. 1% mortgages and their offspring are being used for debt consolidation, cash flow management, investments, and for tax purposes, and they are being used a lot.
A full 40% of home loans originated in 2005 and 2006 are estimated to be from the 1% mortgage family, with multiple payment options. By its proponents, the success of the 1% mortgage has been hailed as a new era of affordability and flexibility, of an extremely sharp financial tool once available only to the very rich now available to every family in the country. Its opponents tend to think that the 1% mortgage is a bit too sharp for the average homeowner to handle, they fear “Average Joes” could conceivably cut themselves. Despite their division, one thing is certain, the popularity of the 1% mortgage is driven by the relentless pursuit of the American dream. There are more homeowners in the United States today than in any other period in history, and many of those who own homes have only been able to accomplish home ownership, which was once a lifelong achievement, in their early 20’s and 30’s, largely because of the extended availability of these 1% mortgages to normal borrowers.
How much less expensive is a 1% mortgage payment option versus the comparable 30 Year Fixed traditional principal and interest payment?
For a $500,000.00 Mortgage:
1% Minimum Payment: $1200.00
Normal Loan Payment: $3000.00
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Cash Flow / Savings: $1800.00
It’s easy to see why the 1% mortgage refinance is so heavily marketed as a way to cut your mortgage payment in half. In the above example, the 1% mortgage minimum payment option is 60% less than a typical, traditional principal & interest loan payment. 1% mortgage minimum payments are usually 50% lower than even the highly lauded Interest Only payment mortgages, and most loans in the 1% mortgage family include the ability to pay more than just 1% if need be.
So How Does it Work?
In fact, 1% mortgages are more than just the 1% start rate. They have a fully indexed rate as well, which is the true amount of interest due each month. When making a 1% mortgage minimum payment, the borrower is not paying all of the interest due, which is seen by some as a good thing and some as a bad thing. Let’s examine some of the commonly perceived benefits and caveats of 1% mortgages:
Commonly Perceived Benefits of the 1% Mortgage Family:
1. Extremely Low Monthly Minimum Payment: As we’ve seen in our example, the minimum payment option is less than half of the typical traditional mortgage payment.
2. Flexibility to Control Your Own Money: Unlike a traditional mortgage, which requires a payment to principal each month, 1% mortgages allow borrowers to take the power into their own hands to make principal payments when they want to, e.g after a bonus or a particularly good year.
3. Separate Cash Flow from Equity: While many personal finance pundits laud the benefits of building home equity, the reality is that investing home equity yields a 0% return on investment on a month to month basis. In the above example, paying the traditional principal and interest payment forces the borrower to invest $1800 more each month in their home, money which is locked up entirely in the equity of the home. Home Equity is illiquid, meaning all this money locked in equity cannot be accessed unless the home is sold or refinanced. The bank won’t cut a check each month for the borrower’s home equity in a traditional loan. With a 1% mortgage minimum payment, that $1800 difference in payments is money in the borrower’s pocket, to invest or spend at their discretion. By deferring interest using a 1% mortgage, the borrower has full access to money that normally would be locked up until they sold the property. That $1800 per month adds up to over $100,000.00 in cash over 5 years on a 1% mortgage, and it’s available every time your paycheck does not get used up paying a huge traditional mortgage payment each month.
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