Ever wonder what would happen if we combined a mortgage with a line of credit? Wonder no more, because the answer is here: we’d get a readvanceable mortgage.
What is it? It's a mortgage we can borrow money against once we’ve paid down some of the principal. It’s like having instant access to a home equity line of credit (called “HELOC” by the cool kids), and all we have to do to increase the amount we can borrow is pay our mortgage.
Let’s say we’ve got ourselves a sweet little house and a readvanceable mortgage. Our original home loan amount was $350,000, and we’ve paid down about $15,000 of the principal so far. Under the terms of our mortgage, that means we can go ahead and re-borrow up to $15k for other purposes. Pretty sweet, right?
But there are drawbacks. For one, the interest rate on that re-borrowed money is going to be hecka higher than the interest rate on the original home loan amount. Like, if we’re paying 4.85% interest on the original loan, we could be looking at an interest rate of 9.55% on the re-borrowed amount. That’s some intense interest. And two, as long as we’re re-borrowing money from the same initial loan, the amount we owe on that loan isn’t going to go down. It’s like putting a dollar in our cookie jar every day…but then taking out $5 once a week for coffee. Sure, we’re putting money into the cookie fund, but it’s not going to accumulate very fast if we keep taking it back out again.
Related or Semi-related Video
Finance: What is a Mortgage?345 Views
Finance allah shmoop shmoop What is a mortgage Well people
a mortgage is just dead it's alone but one with
special tax treatment For most people simply put Any interest
you pay on a mortgage to buy a home is
tax deductible Morty morton's inputs down a hundred thousand bucks
to buy a home that costs four hundred big ones
his mortgages three hundred grand at five percent interest per
year So that's fifteen thousand dollars a year he pays
to rent the money from the bank which he uses
to buy his dream home with the loop de loop
waterslide Morty earns one hundred grand a year and pays
tax on his last fifteen thousand of earnings soas faras
The irs is concerned since morty can deduct his fifteen
thousand dollars in interest against his earnings he does not
in fact earn taxable wages of one hundred grand annually
Instead he earns taxable wages of eighty five thousand dollars
a year Essentially with government is doing is sharing in
some of the cost of renting the money Taub i'm
ortiz home well why would the u s government be
so charitable Well because home ownership has been integral part
of the american dream since the u s of a
i po'ed in seventeen seventy six easy access to mortgages
and then home buying can be a hugely beneficial asset
In the vast majority of cases homes create family stability
a store of wealth and tax dollars for local schools
in the form of real estate taxes So don't feel
bad about splurging on that water slide there Morty Just 00:01:42.93 --> [endTime] remember you're doing it for the kids Hello
Up Next
What are the components of a mortgage payment? Mortgage payments generally consist of (4) components acronymed as PITI: Principal, Interest, Taxes,...
What is an Adjustable-Rate Mortgage (ARM)? An adjustable-rate mortgage is a mortgage that has a changing interest rate. Whatever it changes to is b...
An interest-only mortgage is a mortgage on which you only pay the rent on money borrowed, rather than on the principal.