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ARE THESE LOANS WORTH THE MONEY?
The article, "Make Money on Your Mortgage," (Personal Business, Aug. 29) on a new Fannie Mae-approved product, the asset-integrated mortgage (AIM), raised so much reader interest that the subject begged a revisit. Most people questioned the validity of a product that requires borrowers to get a larger 30-year loan at 8.5% while putting part of the downpayment in a tax-deferred annuity, currently earning 6.2%. (Our example assumed the purchase of a $100,000 home with a $20,000 downpayment and an $80,000 mortgage. Using the AIM alternative, the home buyer would put down $5,000 on the house and $15,000 in the annuity, so the loan would be $95,000.) A few readers questioned the tax consequences of the AIM. CPA Mark Kersting, a tax principal at Urbach, Kahn & Werlin New York, helped us formulate our
responses to the following questions.
Aren't there better ways to invest the difference between the $615 monthly payments on the conventional loan and the $730 on the AIM?
If you have the discipline to invest the difference every month--and for many people, that's a big if--there are better investment options, such as paying off the mortgage early. But if you're likely to fritter away that money, the AIM lets you divert part of your downpayment into a relatively safe, tax-deferred savings vehicle, which guarantees your principal and a market interest rate. It also diversifies your investment, so you can offset any loss in your home's value.
How can you borrow at 8.5%, invest at 6.2%, and save?
By calculating the annual mortgage-interest deductions and the effects of tax-deferred compounding on the annuity, you will save money after 30 years. That's because the compounding becomes more valuable with time. You will have to pay taxes on the annuity interest, but that only slightly offsets the gain. However, the AIM doesn't look as good after seven years, the average time people own a house. Your cash payout will be less, but you will also owe more than on a conventional mortgage. The equity, too, will be greater after seven years, but you will have paid more for it. Sometime after 10 to 15 years, you start to come out ahead.
An important point we missed was that the AIM rate can be reset periodically, with a floor rate of 3.5% to 4%. You can sign a contract that adjusts every year or up to every 10 years. Your return reflects prevailing interest rates.
If you liquidate the annuity before age 59 1/2, will you have to pay a 10% penalty plus income tax on the interest?
Yes, except if the owner dies or is disabled, the proceeds are transferred to another annuity, or are paid out over at least five years.
Since the annuity is collateral, is the interest taxable before you cash it in?
No. With the AIM, you pledge only the principal. If the entire annuity were collateral, the interest would be taxed.Pam Black