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] jimgayhomemortgage.com.