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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