Does Mortgage Interest Rate Really Matter

Dated: 09/03/2017

Views: 122


Does Mortgage Interest Rate really Matter?  Not Always - Let's be serious ...

For Self Employed borrows - I say NO, the rate is not a Big Deal. .. there are other factors to consider. Read this and you will see why!

Most self-employed people take every imaginable tax deduction to reduce their taxable income – and the amount they owe to the IRS. This is great – until it is time to qualify for a home loan … then they wish the taxable income was bigger. That’s crazy talk!

They still qualify for a Non-Prime home loan – and generally, have a higher interest rate. Yes, rates are higher – but who cares!

Imagine a person who owns a restaurant. They deposit $3,500.00 per day in the bank from sales – which equals $105,000 per month or $1,800,000 per year in gross sales. Their average monthly bank statement deposit is $105,000 per month. Note - A profitable restaurant typically generates a 28%-35% food cost. Coupled with labor costs, these expenses consume 50-75% of total sales.

So for example sake – if actual expenses are 75% of $1,800,000 it would leave them with $450,000 of taxable income. The tax rate for them would be 39.60% and they would owe the IRS $178,200.00 - OUCH! But they would qualify for a home loan using tax returns.

This is when self-employed people get creative with expenses and find “extra” deductions and reduce their taxable income down to about $200K ... and now they only owe $50K to Uncle Sam.

Everyone sighs in relief – until they need a home loan ... because now they do not show enough income to qualify. in some cases, they have not paid the $50k in full to the IRS.

Now they do not qualify for a traditional home loan ... but they DO QUALIFY for a Non-Prime Loan.

Actually, they do qualify for a Non-prime home loan. The rates are generally about 2% higher because the lender has more risk. Non-Prime loans do offer more flexibility and do not require federal tax returns. Most important – they allow the person to get the home they want and deserve!

The other option would have been to not take the “extra deductions” resulting in them paying $178,000 to the IRS instead of $45,000 – which saved them $133,000 in taxes which equals $11,083.33 EVERY MONTH.

Now they are approved with a Luxury Non-Prime loan for $1.2 million and the rate is 6.5%. They scream bloody murder over the rate – but why? The difference in rate is 2% or $1500.00 per month … but they saved $11,083 per month in taxes! Additionally, the mortgage interest is usually tax deductible! The loan is more flexible, easier to close and closes faster.

Would it have been better to pay $133K per year for the past 4 years so they could get a 4.5% rate? I think NOT - That’s crazy talk.

Just my perspective.

Who do you know that wants to buy a home??  Call/Text 512-630-7122 to be put in touch with the lender that can get you this mortgage home loan.

Wayne Turner

Bringing extensive knowledge of the real estate market and finance background to his position as an accomplished and respected REALTOR®. Wayne offers his clients an outstanding level of service. His....

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