Pay cash or get a mort­gage?


This ques­tion has be­come a very im­por­tant is­sue for those con­sid­er­ing a home pur­chase to­day. In this en­vi­ron­ment of over-the-top pa­per­work and re­quired dis­clo­sures, it can be­come a real chal­lenge to se­cure a mort­gage. So, if you can, why not pay cash? Why not live the dream of no mort­gage pay­ments? Do you also have a dreamof in­creased wealth as the years progress? Of course. But, while all of us want to in­crease sav­ings and lower taxes while en­joy­ing a home with no mort­gage pay­ments, most of us have no choice but to se­cure a mort­gage. It is those with enough cash to pay for a home out­right that have the dilemma: tie up their cash in an in­vest­ment with no yield or se­cure a mort­gage and put their cash else­where.

Let’s take a look at both­meth­ods to deter­mine which al­lows a pur­chaser the bet­ter chance of in­creas­ing wealth with lit­tle to no risk. The process is re­ally not com­pli­cated. It in­volves lever­ag­ing your home pur­chase with to­day’s low in­ter­est rates, cal­cu­lat­ing the tax de­duc­tion that can lower your taxes and then, in­vest­ing in a risk-free, tax-free bond. Boom!

With a 4 per­cent, 30-year mort­gage of $400,000, your pay­ments are $1,910 per month. As­sum­ing a 30 per­cent tax bracket, your tax de­duc­tion is $144,295 over 10 years, sav­ing you $43,288 in in­come tax. Then you could in­vest the $400,000, in­stead of pay­ing cash, in a tax free bond that is guar­an­teed by a gov­ern­ment en­tity. Now you have an in­vest­ment in a home that steadily ap­pre­ci­ates while your cash is pro­tected in a risk-free bond. Win­ning!

Let’s do the­math. At the end of 10 years, let’s as­sume you sell your home for $600,000. If you had paid cash, $600,000 is all you get: a net profit of $200,000. But lever­ag­ing your in­vest­ment with a mort­gage, af­ter 10 years you will re­ceive the following ben­e­fits:

• tax de­duc­tions of $144,295, sav­ing you $43,288 in taxes;

• in­come on your $400,000 bond, as­sum­ing a 4 per­cent rate, is $160,000, tax free.

• the value of your bond of $400,000; and

• the value of the sale of your home, less the mort­gage bal­ance of $315,136. Af­ter sub­tract­ing your mort­gage pay­ments for the past 10 years, your ben­e­fits to­tal $98,952, plus the gain made on your bond in­vest­ment.

Bot­tom line: se­cur­ing a tax-de­ductible mort­gage for 10 years will cre­ate a to­tal of $258,944 in net ben­e­fits as com­pared to the $200,000 gained by pay­ing cash.

While get­ting a mort­gage can be a pain with reg­u­la­tions and dis­clo­sure re­quire­ments that are bur­den­some, any way you work the math, it is ben­e­fi­cial. The up­side is that there are real pros out here to help you ev­ery step of the­way. Use a fi­nan­cial ad­viser and a mort­gage ex­pert to help you cal­cu­late the per­fect mort­gage for your fi­nan­cial sit­u­a­tion.

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 [email protected] jim­gay­home­m­o­rt­

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