I recently paid off my house and in conversation a mortgage broker tried to tell me I was foolish (he may be biased). All things considered, the minimal tax advantage, and minimal potential income from an alternative "safe" investment don't make me feel like I'm making a bad decision. I have no other debt, no school loans, no car payment. He's biased.
Do you sleep well at night?
Pay cash whenever possible. Invest your available excess cash. You'll be far better off in the long run. (I'm assuming you have no other debt.)
btw. CONGRATULATIONS!! Use your theoretical mortgage payment to invest. I will bet in 5 years, your investments will be worth more than the principle you would have paid on the mortgage. Report It
First of all, NEVER invest in something that you are not comfortable investing in, or you do not understand, or you do not understand the benefit of. If someone is pushing you to invest money in something, it is for their benefit, NOT yours.
OK, having said that, you have no mortgage. Good! Do you have other debt? If yes, and it is reasonably substantial (Would take you several years to pay it off) then there are advantages to holding a mortgage versus a car loan (for example). Typically, a mortgage will have a lower interest rate then a car loan (there are exceptions) and you do get a bit of a tax break.
BUT, if you do not have any other debt to pay off, it is just plain stupid to be paying interest on a mortgage for the "tax break". If you are paying $1000 a month in interest on your mortgage, and you are in the 30% tax bracket, that only represents a savings of $3600 off your total tax bill. Which means that you spent $8400 in interest unnecessarily.
Aside from using your house as your bank, I cannot see any reason to refinance. Put your money in savings, mutual funds, vacations, college, or just blow it on things that you want.
Congratulations! Why is that foolish?
Spend $3 so you can save 1 in tax?
Sure technically mortgage money is cheap and you SHOULD be able to make more investing BUT no mortgage is a guaranteed 6% return on you money...can't beat that. The point of using your home is that if rates are 6.5% on a mortgage and you are getting a tax benefit on the interest you pay, that makes your effective cost about 4.875%. Let's say you took 100,000 and invested that into an account. Here's some options out there:
1. Savings account: HSBC.com offers 5.05% right now.
2. Lipper: average return on their accounts is 9%. go to lipperweb.com
3. Stock market: average return in past 100 years is 12% if you simply invested in the NYSE fund.
the point I'm making here is this. No matter how much or little you owe on your home, the value will continue to increase year by year at the same rate.
If you take out a 30 year mortgage, the balance will eventually reduce to zero and the interest will not be able to accrue. Conversely, your investment account will not only accrue a higher rate of return than your tax effective cost, but it will accrue interest on interest. So let's have an example:
You have a free and clear house: Let's say it's worth 200k. The annual average for home value increase is 6%. 10 years from now your home will be worth 358k and 20 years from now it will be worth $641k. This is great, but the only way you can access those funds is either to sell your house or to get a loan right? Now, let's look at my scenario
What if you only took 100k out? at 6.5%, your payment would be 927 a month. If you are like most people, you get about 25% taken out of your income. This means that your effective rate of cost on interest is 4.87%. If you took your 100k and invested it in a lipper fund (low-moderate investment) at 9% rate of return, 10 years from now, the investment balance would be $245k and the balance of the mortgage will be $84k... your net worth would be $280k in equty plus the $245,000 in the cash account or about 530k in net worth... 20 years from now it would have grown to $600k, the mortgage would only have 55k left in it so your equity would be 545k, so you would be worth over 1.1 million dollars... this is far better than simply letting the equity sit all alone, plus you have actual cash you can draw from if you need it right?
Now, one of the major arguments that people give me is this: what if I simply just put $927 a month into an account instead of paying a mortgage? That's fine. Let's look at that. First of all keep in mind that the $927 you are paying into an account is not tax deductible like a mortgage payment. In the mortgage, you were actually getting $2780 back every year on your taxes. You could have reinvested if you wanted to, but in our scenario you didn't. what this means is that if you kept apples with apples, your monthly equivalent contribution should only be $695 a month. at 9%, the balance would be $134k in 10 years and $464k in 20 years. Though the numbers are impressive, you can see that your net worth would not be nearly as high.
Why is it so much lower? Simple. 100k is able to grow at 9% every year and the compounding interest is huge on it. If you were contibuting on your own, you don't have the intial momentum of a starting balance... you actually have to contribute it yourself month after month after month to build.
the power of taking equity out of your home and placing it into a higher yielding moneky market account is exponentially better for your financial position for many reasons including:
1. A much higher overall net worth (as proven above)
2. The cash in hand to payoff your mortgage at anytime if you wanted to (the key is not to spend the money you invest)
3. The power of compounding interest on a lump sum of cash.
The power is in your hands. Obviously the broker you talked to is on the right track but may not have all of the tools to evaluate your situation.
I am licensed nationwide as a mortgage banker with Chase and am fully qualified as a senior mortgage banker to evaluate your situation to see if equity repositioning would fit your needs.
please feel free to email me at casey.x.casperson@chase.com or visit my website at caseycasperson.com to verify that I'm not some shifty spammer like the rest of these guys on here. You can also look at my profile to see for yourself if my information is professional.
My best to you. |
