Keep your investments earning
The concept of financing a purchase of a home and keeping your investments safe is more important now than it has been in years. Done properly, a family will accumulate more wealth by leveraging. The year of 2017 was expected to be a year of increased inflation. This means that your investments in the stock market, your IRA, your 401(k) plan and even savings accounts show increased yields.
Let’s take a look at how you can increase your wealth with a mortgage with practically no risk. Isn’t that why you may think youwant 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 risk-free, tax-free bond.
With a 3.875 percent, 30-year mortgage of $400,000, your payments are $1,881 per month. Your tax deduction is $139,511 over 10 years, which saves you $41,853 in income taxes (assuming a 30 percent tax bracket). Invest the $400,000 that you would have used to buy the home in a tax-free bond that is guaranteed by a government entity.
Lets do the math. 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 what you get after 10 years: a profit of $200,000. If you leverage with a mortgage, after 10 years you will receive the following:
- tax deductions of $139,511 that save you $41,851 in federal taxes;
- income on the $400,000 bond, taxfree, of $160,000 (assuming a 4 percent rate);
- the return of your bond for $400,000; and
- the value of the sale of the home less the mortgage amounting to $286,203.
These benefits total $262,340 after subtracting your mortgage payments for 10 years and your original bond investment. So we see that using a tax–deductible mortgage for 10 years will create a total of $262,340 in net benefits at sale compared to the $200,000 gain from paying cash. You are $62,340 ahead using the mortgage. And without risk.
Of course, getting a mortgage today requires more paperwork and disclosure frustration. You must decide if the extra cash benefits are worth going through the mortgage process. It is a must to have an experienced mortgage person help with the disclosures and verifications. After more than a year of the newmortgage rules, I find that assisting borrowers through the process is very smooth and feasible. Also, use a financial adviser who will communicate with your mortgage person. Speak to experts and keep your money invested.
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