Do not pay cash

Home - Santa Fe Real Estate Guide - - MORTGAGEMATTERS YOURMONEY’SWORTH - JIM GAY

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.

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