Do not pay cash
Why not pay cash? You have always wanted a house with no mortgage payments. Yes, that can be a dreamfor all of us. However, do you also have a dreamof more wealth as the years progress? Most families do want to increase their savings and lower their taxes as well as enjoying a homewith low or no mortgage payments. Let’s take a look at how you can increase your wealth with a mortgage with practically no risk. Isn’t that why you think you want a home with no mortgage? Because you want no risk.
The process is not complicated. Just leverage your home purchase with today’s low interest rates, take the tax deduction to lower your taxes, and invest in a riskfree, tax-free bond.
With a 3.75 percent, 30-year mortgage of $400,000, your payments are $1,852 per month. Your tax deduction is $134,742 over 10 years, which saves you $40,423 in income tax (assuming a 30 percent federal tax bracket). Invest $400,000 that you would have used to buy the home in a tax-free bond that is guaranteed by a government entity.
Let’s do themath. At the end of 10 years you sell your home for $600,000. If you paid cash, you sell at $600,000 and that’s all you get after 10 years: a net profit of $200,000.
If you leverage with a mortgage, after 10 years you will receive the following:
- Tax deductions of $134,742 that save you $40,423 in federal taxes;
- Income on the $400,000 bond, taxfree, of $160,000 (assuming a 4 percent rate); - The value of your bond, $400,000; - The value of the sale of your home less the mortgage balance: $287,553.
These benefits total $265,681 after subtracting your mortgage payments for 10 years and your original bond investment. So we can see that using a tax-deductible mortgage for 10 ears will create a total of $265,681 in net benefits at sale compared to the $200,000 gain from paying cash. You are $65,681 ahead using the mortgage. Remember that your increased benefits will vary depending on your tax bracket, the amount of down payment, and whether you invest your funds in bonds or securities.
Of course, getting a mortgage is very different now. There are many changes in disclosures and documentation that make getting a mortgage seem like a nightmare, you say. Well, people are getting mortgages every day. There is a lot of paperwork, but there are companies out there that will help you.
Use a financial adviser and a mortgage person who can help you calculate the correct mortgage for your financial situ- ation. It is really your choice, of course. Speak to experts. And, try not to pay cash.
Jim Gay was a real-estate broker for 20 years and has been a financial consultant to Fortune 500 companies. He is currently a broker/owner ofThe Mortgage Place (986-9080) and can be reached at jim@ jimgayhomemortgage.com.