Do You Want to Be Debt Free? Or Do You Want to Be Wealthy?

Mortgage and Lending with Prime Equity Mortgage Group

Should you leverage your home or pay it down rapidly?  This is a very personal question and the answer can vary greatly from person to person based on his or her disciplines.  Many planners today espouse the idea of paying down your mortgage completely for the piece of mind.  But do you think having a mortgage makes Bill Gates any less wealthy?  Would it be better to have liquid assets equal to or greater than your mortgage rather than giving all of your money to the mortgage company, especially if you suddenly found yourself without a job and in need of cash?

In order to understand why you'd want to borrow as much as possible for your home purchase, you must first grasp the concept that "down payments" have a zero rate of return.  In other words, whether you put zero down or a lot down, the amount your home will appreciate is exactly the same.  What becomes important is how you choose to manage the money you didn't use as a down payment. If you use it for frivolous activities, such as buying toys or going to Las Vegas, it would be more prudent for you to use that money as a down payment; especially if it will enable you to obtain a lower interest rate.

However, if you were to invest the money in a vehicle that can out-earn the cost of that debt, then this could be a formula for success.  This is why some lending professionals suggest putting as little down as you possibly can, maximizing your tax write-off, and investing the rest.  The key is taking the money you would have used as a down payment and creating an asset accumulation account.  This account should earn a significant enough rate of return to enable you to pay off your mortgage entirely if you needed to.  This is the difference between being "debt free" and being "wealthy".

Comments (2)

Konnie Mac McCarthy
MacNificent Properties, LLC - Cobb Island, MD
Broker/Owner - VA & MD "Time To Get A Move On!"
Thats hard...what would you consider a decent rate of retun
Nov 23, 2007 01:55 PM
Glory Gray
Prime Equity Mortgage Group - Weiser, ID
Mortgage Planner
Good question, Konnie.  This is where you'll want to work with your financial planner to determine the amount of risk you are comfortable with and that will answer part of the question (i.e. higher risk equals higher return) And of course, if your post-tax mortgage rate is 5%, you'll want to make sure your post-tax investment rate is at least that high, which isn't hard to do.   You will also want to consider how long you want to invest the money and how long you will keep the home, based on life goals.  The advantage of leveraging as I described in the post is moving assets "sunk" into a home appreciating only on paper and at the whim of the real estate market into assets that can be moved about freely into other investments to take advantage of other opportunities.  Meanwhile, the home is continuing to appreciate according to the real estate market on its own, but if it suddenly depreciated, you've diversified your investments.  This can be a great strategy for your real estate investor clients who want to invest in different geographic markets as well, to spread out that risk.
Nov 26, 2007 04:30 AM