I wanted to do a follow up on my $25,000 mistake post and present another example straight from my seminars. This topic is titled "A Tale of Two Brothers" and shows the different ways of thinking and the benefits of adapting to today's rules of money. In fact, it is an adaptation from the book, New Rules of Money by Ric Edelman.
Brother A Brother B
Believes in the "Old Way" - Believes in the "New Way" -
paying off your mortgage Carrying a big, long mortgage
as soon as possible and keeping it
15-Year Mortgage at 5.875% APR 30 Year interest-only loan at 6.375% APR(1)
$100,000 Big Down Payment (20%) $25,000 small down payment (5%)
$0 left to invest $75,000 remaining to invest
$3,348 monthly payment $2,523 monthly payment
(57% tax deductible first year/33% average) (100% is tax-deductible for the life of the loan)
$2,983 average monthly net after tax cost(2) $1,690 monthly net after-tax cost(2)
Sends in $200 extra each month with mortgage Adds $200 monthly to invesment account, plus $1,293
payment in an effort to pay mortgage off sooner saved from lower mortgage payment, earning 6.0%(3)
Who made the right decision?
Results After Just 5 Years...
Brother A Brother B
Received $33,976 in tax savings(2) Received $49,955 in tax savings(2)
Has $0 in savings and investments(3) Has $205,330 in savings and investments(3)
What if both brothers suddenly lose their jobs?
Brother A Brother B
Has no savings to get through the crisis Has $205,330 to tide him over
Can't get a loan - even though he has $210,532 Doesn't need a loan
in home equity - because he has no job
Must sell his home or face foreclosure because Can easily make his mortgage payment even if he is
hecan't make payments unemployed for years
At this point he must sell quickly, possibly at a Has no reason to panic since he is still in control -
discount, then pay real estate commissions remember - Cash is King!
Results After 15 Years...
Brother A Brother B
Received $60,517 in tax savings Received $149,866 in tax savings(2)
Has $51,832 in savings and investments(3) Has $618,249 in savings and investments(3)
Owns home outright He has enough savings to pay off $475,000 mortgage and
and still have $143,249 left over!
Results After 30 Years...
Brother A Brother B
Received $60,517 in tax savings Received $299,732 in tax savings(2)
Has $1,092,503 in savings and investments(3) Has $1,951,434 in savings and investments(3)
Owns home outright Never plans to pay off his home - he enjoys the liquidity,
safety, tax savings, and investment returns too much!
The above hypotheticals are for illustrative purposes only. Plans vary based on the needs and wants of the customer...
(1) This example is based on a 30 Year Interest Only loan at 6.375% APR
(2) Assumes a combined federal/state income tax rate of 33%
(3) Assumes 6.0% rate of return on investments. Rate of return may vary based on type of investment.
Hopefully this will help clear up some other "myth-conceptions" about mortgages. There are many different strategies like this, and this one may not apply to your situation. What it does show you though is that you must seek a certified mortgage plnning specialist (CMPS) designated professional in order to ensure you are receiving the best loan for your unique situation.
Please feel free to leave a comment or contact my via my website or email.
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