annual tax savings ultimately result in more money than the amortization that has been sacrificed?”
These tax savings can be:
WHAT IS A Reduced Amortization Mortgage( RAM)
A Reduced Amortization Mortgage, in effect, extends the amortization period of the Existing 1st Mortgage by using a specialized“ Wraparound Mortgage”, a Reduced Amortization Mortgage( R AM). A wraparound mortgage is secondary, and subordinate financing, like a second mortgage; but is structured differently. The wraparound mortgage is inclusive of the 1st Mortgage. It wraps around the primary mortgage, without disturbing it. A monthly mortgage payment is made on the wraparound mortgage, and the wraparound mortgagee makes the monthly payment on the underlying mortgage. This is usually accomplished using a bank or financial institution, via an escrow type of account, providing protection that when the wraparound mortgage payment is made, the underlying mortgage payment will also be paid.
A RAM is an interest only mortgage, with a balloon payment. The RAM maximizes the benefits of the second and third above bulleted items. The subject property retains the degree of leverage as exists at the time the RAM is placed; and, as a result, increases in property values, due to inflation, increased rents, etc. are more highly leveraged than with an amortizing mortgage.“ The ratio of debt to equity in a RAM is constant throughout the entire term of the loan, providing greater leverage than with an amortizing mortgage.” and the entire“ monthly mortgage payment consists entirely of interest, so it should be tax deductible for Individual Federal, State, and Local Income Taxes.”
Property values are affected by Inflation, with the degree of Leverage affecting Inflation’ s effect on the“ return on investment”. Information obtained on the Internet indicates that the Inflation Rate in the United States averaged 3.30 % from 1914 until 2023, 3.8 % per year from 1960 to 2022, and recently has been running at a much higher rate. Whatever rate is deemed most appropriate by the property owner can be used in computing the Present Value Breakeven point. The higher the actual Inflation Rate the greater the benefits of the RAM.
Reducing or eliminating the amortization portion of the mortgage payment; and replacing it with an interest deduction means less taxable income on Individual Federal, State, and Local Income Tax Returns. Yes, the owner is giving up the amortization! So, for most property owners, the key question becomes:“ Will the investment of the
• Invested in the subject real estate, such as kitchen renovations, or other capital expenditures, which can result in increased rents.
• Invested in other ventures( real estate or nonreal estate).
• Used to pay down other mortgages, with a higher interest rate than the interest rate on the RAM.
• Used to boost“ Net Cash Flow After Taxes”, if that is the priority.
Typically, there are no upfront fees for obtaining a RAM, and the monthly mortgage payment on the RAM are usually identical to the present monthly payment on your Existing 1st Mortgage; however, there is normally a 3 % Fee on the monthly RAM payment to cover Legal, Administrative, and Other Expenses. This 3 % Fee should also be tax deductible.
The lower the Interest Rate and the longer the remaining amortization period on an Existing 1st Mortgage, the lower the Breakeven Point / Present Value Cost of a RAM, resulting in greater benefits derived from a RAM. It is essential for parties considering a RAM to understand that the Present Value Breakeven Rate is being computed, and based, on the property owner being in the highest Federal, State, and Local Tax brackets for Individuals; and who would still be, even after placing a RAM. Because“ Tax the Rich!’ plays well with the largest block of voters, it is likely that tax rates will increase in the future, which results in greater benefits from a RAM.
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