Is a Long- or Short-Term Personal loan the most effective Tactic?

The new Federal tax regulation, which decreases the federal government subsidy of mortgage-interest payments, raises some elementary questions on borrowing tactics for property prospective buyers and for house owners contemplating about refinancing to reap the benefits of latest very low charges.

Over the surface, it will seem that the reduction in tax personal savings involved with property mortgage-interest bills must stimulate owners to cut back these expenses by trying to keep personal debt to the minimum amount and by signing up for shorter-term financial loans.

The surging attractiveness with the 15-year mortgage very last year signifies that buyer mindset toward personal debt may possibly previously be transforming. But tax and finance specialists express that for some persons, the reward for paying out from the home finance loan promptly is commonly additional psychological than monetary.

These professionals argue that the new tax legislation shouldn't, in by itself, make the short-term mortgage irresistibly interesting mainly because tax personal savings with the borrower keep on being sizeable. The brand new law even now lets a deduction for home finance loan curiosity payments, however it is worthy of less for the reason that there are actually only a few tax brackets ranging as many as 33 %, when compared towards the aged leading bracket of fifty percent. To be a result, even though many owners may have decreased tax expenses, in addition they can have bigger after-tax home finance loan carrying fees and, most likely, a wish to help keep that maximize to some minimum.

''Everyone includes a various perspective on this,'' stated Lawrence S. Kaplan, a tax associate with Kenneth Leventhal & Company, a national accounting and consulting concern. ''But I wouldn't make the decision based around the fact that you're not saving as much in taxes. We're dealing with 15- and 30-year property finance loan payouts and it will be a miracle if the tax structure stayed the same for that lengthy. Taxes usually go up.'' Several property potential buyers, of course, are priced out of this dilemma: They have to get the largest loan with the prolonged time period to make their purchases.

Economic planners say short-term loans can be an important part of a family's cost savings plan for college or retirement. But they add that families should really first just take full edge in the additional beneficial tax-deferred financial savings accounts and corporate stock or saving plans available to them.

''With property finance loan payments, you are pouring equity into your house,'' said Suzette Loh, a monetary planner with Chen Planning Consultants in Manhattan. ''With retirement accounts like the I.R.A. and 401(k), you are earning tax-deferred money for yourself -and that is much extra worthwhile. It's psychologically great to own your house free and clear, but what will you live on if you have to bankrupt your asset base to do it?''

Unless a family feels it needs the sort of enforced price savings plan inherent in a short-term home loan with high monthly expenses, fiscal experts suggest that home owners put their disposable income in extra productive investments - including a vacation dwelling that could appreciate in value and be rented out part of your calendar year to cover fees. Shelling out off a residence mortgage loan promptly, they point out, increases one's house equity and reduces desire bills but does not raise the home's value by one cent.

There is no question that 15-year-term financial loans provide interesting price savings - 180 fewer monthly payments than with a 30-year bank loan. But the reality is that most of the people usually sell their homes and move lengthy before the mortgage loan is paid off, so the long-term benefits may well be illusory.

Lenders and institutional investors, who buy most mortgages to the secondary market, like the 15-year loan because the shorter expression reduces their exposure to rate changes and 15-year borrowers tend to be better credit risks than 30-year borrowers.

''What we see is that the typical 15-year borrower has additional wherewithal, puts far more money down within the house and represents a better risk to the lender and investor,'' mentioned George Alexander, director of marketing at the Federal National Home loan Association, the congressionally chartered home loan wholesaler known as Fannie Mae.

The corporation, which helps create a secondary market for property mortgages, began buying the 15-year financial loans a few years ago, but only formalized its program past 12 months when it bought a whopping $11 billion in loans from 4,000 lenders. By comparison, it also bought $14.5 billion of 30-year-loans and $1 billion of 30-year adjustable-rate financial loans. (Most lenders keep adjustable loans in their own portfolio and sell fixed-rate loans to institutional investors like Fannie Mae.) To promote the 15-year house loan, Fannie Mae recently published a nine-page brochure for affiliated lenders to distribute to house loan shoppers. The brochure, entitled ''A Home loan You Can Bank On: How a 15-Year Home loan Can Help You Save for your Future,'' describes the advantages of a 15-year bank loan, but glosses over the disadvantages. IT notes that lenders generally charge fewer interest for 15-year fixed-rate financial loans than for 30-year fixed-rate financial loans. (In metropolitan New York, they usually price the 15-year mortgage a quarter to your half percentage point below the 30-year financial loan.) HSH Associates, a publisher of home loan information, reports that 15-year household and condominium property finance loan loans are available at premiums between 8.5 and 9.5 percent, depending to the amount of loan and down payment; 30-year-loans are available at premiums that typically range between 9 and 10 p.c, depending to the size of mortgage and down payment. Co-op loans and loans with no income verification are usually priced a quarter to a half percentage point larger. (HSH publishes comparative mortgage data for area lenders; for a $12 homebuyer's kit, call (201) 831-0550 or write the company at 10 Mead Avenue, Riverdale, N.J. 07457.) To be a outcome from the decrease rate and shorter term, a borrower's fascination charges can be fifty to 60 % fewer (before tax benefits are calculated) than those of a conventional loan.

In comparing a 15-year, $75,000 house loan with a fixed rate of 10 % and a 30-year home loan with a fixed rate of 10.5 per cent, Fannie Mae found which the 15-year borrower would pay a total fascination charge of $70,072 and the 30-year borrower would pay a total desire charge of $171,980. Since curiosity payments are tax deductible, these amounts would be discounted by a taxpayer's overall marginal tax bracket, which combines Federal, state and local income taxes.

Under the new Federal system, there will be a few brackets - 15, 28 and 33 p.c -after a phase-in period this calendar year when there will be a fourth bracket of 38 %. After local and state taxes are figured in, the major Federal tax bracket will be increased by 5 to 8 per cent in most parts on the country, according to Jerry R. Barrentine, whose Virginia firm, Barrentine Lott & Associates, advises lenders on mortgage policy.

Fannie Mae calls its 15-year loan affordable, but that is actually a relative time period. A family's income would have to be about $34,500 to qualify for that $75,000 bank loan with monthly payments of $806. By comparison, a family's income would need to be about $29,400 to qualify for a 30-year personal loan of the same size with monthly payments of $686 - or $120 a month significantly less than the shorter-term personal loan. Generally, the payments on 15-year loans are 10 to 20 percent higher than those for 30-year financial loans.

At the end of fifteen years, the 15-year time period loan is repaid and there however remains $62,066 in principal to repay within the 30-year mortgage. According to Fannie Mae, which assumes no tax changes for 30 years, a taxpayer in the 28 p.c bracket who takes this particular 15-year financial loan will do better than a similar taxpayer who signs up for the 30-year bank loan - unless the 30-year borrower can invest the $120 payment differential every month in an investment with an annual rate of return greater than 12.05 p.c.

Generally speaking, a homeowner will be better off with an alternative investment only if its after-tax return is increased than the after-tax financial savings available with a 15-year mortgage. ''My personal check out,'' claimed Mr. Kaplan, the accountant, ''is that to make money, you have to leverage your money - and that means taking the largest bank loan with the longest phrase available on anything you buy.''

Why, then, did the 15-year mortgage surge in popularity final 12 months, even before the implications with the tax changes were fully understood? The market alone dictated some of this enthusiasm: Lenders offered decreased premiums to the 15-year personal loan, and many stopped offering large 30-year fixed rate financial loans.

Institutional investors became significantly less willing to buy 30-year loans that exceed Fannie Mae's congressionally set limit on house loan size - final year it was $20,000 fewer than the present maximum of $153,100 for a single-family residence mortgage loan. Several lenders charge additional for these ''nonconforming'' long-term loans or do not offer them at all, forcing borrowers to sign up for adjustables or the 15-year fixed-rate loans. Some lenders also offer 15-year adjustable financial loans.

Chemical Bank, for instance, does not offer its 30-year, 10 1/4 percent conventional home home loan for additional than $153,100. Nonetheless it will write 15-year financial loans of around $1 million for cooperatives, condominiums and homes at the fixed rate of 9 3/4 per cent plus a 2-point finance fee (a point is 1 percent of the bank loan amount) paid before the loan is closed. The bank's adjustable mortgage that has its rate changed every yr starts out at 7 7/8 plus 2 points before closing.

Not surprisingly, 70 p.c with the bank's mortgage loan business past 12 months was in 15-year fixed-rate loans. ''That activity primarily reflects the loan's lower rate,'' reported Pazel G. Jackson, senior vice president at Chemical. ''I am not saying it produces tremendous economic advantage to borrowers, but a great lots of people today in their 40's are interested in owning their property free and clear when they retire and a lot of others have the strong feeling that they would rather have a fixed rate even if they might come out a little bit ahead with an adjustable if they plan to sell within a three- to five-year period.''

Citibank reports that the 15-year personal loan is eye-catching to borrowers who made significant down payments on their new homes to avoid shelling out capital-gains tax to the proceeds from the sale of a previous primary residence. Since they needed a relatively small property finance loan, they could easily handle the extra cost of a 15-year financial loan, according to Albert J. Sorrentino, vice president of Citibank's Northeast division for residential lending. HAVING satisfied the tax regulation, howeve's several of these borrowers simultaneously applied for a home equity mortgage. Under the new tax legislation, the desire payments on dwelling financial loans are deductible as many as the original cost of your household plus improvements and medical and tuition prices.

Some lenders are offering innovative products to make the monthly payments within the 15-year financial loan extra competitive with those for 30-year financial loans. For example, American House loan Banking, a metropolitan home finance loan banker based in Westbury, L.I., offers a 15-year home finance loan that has a fixed rate of 9 p.c - with payments starting off at the rate of 6 %. The rate then increases each calendar year until the fifth calendar year, when the rate reaches 9 percent and remains constant for your remaining 10 years.

The financial loan fees 2.75 points to originate -the same price the lender charges for originating its standard 15-year financial loan. There is no extra cost for this reduced-payment feature due to the fact the lender has simply rearranged the amortization schedule so that most in the payments in the first five years cover the curiosity and very little is used to lessen the principal. ''The yield towards the investor who buys the mortgage is almost the same as with the standard 15-year bank loan,'' explained Ivan Kaufman, president from the company.

This unusual 15-year financial loan is available for around $500,000 and the loaned amount can be up to 90 % from the price or value of a dwelling or condominium. The program is not available for co-ops. If a property finance loan is being refinanced, the financial loan can cover approximately 80 % with the home's appraised value.

The loan's annual percentage rate, which combines the loan's simple curiosity rate and the points, is 9.46 %. On a $100,000 personal loan, for example, the monthly payment is $843 the first year; $907 the second 12 months; $975 the third calendar year; $1,048 the fourth year and $1,068 thereafter. The early payments are kept reduced by postponing principal repayment; in the first yr, for example, the principal is reduced by only $93 a month compared with a $264 monthly reduction in the first year of the lender's standard 15-year mortgage.

The Greater New York Price savings Bank is also doing most of its business in fixed-rate loans, explained Charles J. Ohlig, executive vice president. '''What does it cost me a month?' - that is the borrower's basic question,'' he stated. The 15-year loan was recently priced at 8 3/4 percent for homes and condominiums and 9 % for co-ops; the 30-year bank loan for homes only was 9 %. Three points are charged on all three loans.