Charlie Bit My Mortgage! And Look How We're Using it to Pay for His College...

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Mortgage and Lending with Stearns NMLS #232164 CA BRE #01380812 BRE 01380812 NMLS 232164

I love this YouTube video (so do millions of others, as of this posting, it's been viewed over 27 million times!)

But watching it as a mortgage planner, I wonder if the parents of Charlie and his brother have started a college savings account for their boys. I also wonder if they have a good mortgage planner who can show them the difference between them saving monthly, or taking some equity out of their home and letting a lump sum grow in a safe, fully diversified investment account. When you compare the after tax cost of saving for college this way, you will see that it's a more cost effective strategy.  DISCLAIMER: This is NOT for every homeowner. If you have assets, stable income and a good savings track record, using equity management might be right for you.

A good mortgage planner will consider your income, tax bracket, current mortgage, debt and assets and the age of your child (or children) and show you how much faster you can save with a much lower monthly outlay.

 

Watch Charlie Bit My Finger Again and read on to see a strategy for how to save for your little one's college.

To keep it simple, let's Charlie's parents have one child to send to college.

They have a $100,000 combined annual income, and are in the 25% tax bracket, and are married, filing jointly.

They're British aren't they? I love the way Charlie's brother annunciates the word "OUCH!" Well let's pretend they live in the USA. 

We'll assume an 8% annual return on their savings.

Annual cost of college in today's dollars: $19,188. 

Wonder what Charlie will want to be when he grows up?  Well as time marches on, the cost of college will rise, so we have to factor that in.

College Cost Inflation Rate= 5%

Age of child when savings begins: 3

Total cost of college: $171,932.  Yikes!  Don't worry, it's not as hard as you think.  Now pay attention:

Option 1 - Monthy Savings Needed: $527.68

That's what it costs if Charlies mum and dad start w/ zero college savings at age 3, when Charlie is still a cute little imp.  

Option 2 - Current lump sum needed to fund college: $54,200.43

We will assume the parents refinance and take out the lump sum on a 30 Year Fixed Rate Mortgage @ 6%:

Payment on lump sum: $324.96

After tax payment on lump sun: $257.21Ah ha!  If you use your mortgage as a tool, it will cost a lot less per month, and they can sign Charlie up for Taekwondo, so he can put his strength to better use.  

Monthly amount saved using Option 2: $270.47

I know what you're thinking now: Charlie's going to be educated, but his parents are still paying on that mortgage.

True, so if they put the $270.47 they are saving monthly using our strategy in a diversified account earning 8%, how does that look over time?

$56,956 saved in 11 Years

$93,593 saved in 15 Years, when Charlie is going off to college. So they can "repay' the mortgage, or put that savings toward your retirement.

If you think this strategy may work for you, you'll of course want to consult your CPA and Financial Planner, as mortgage planners are not tax advisers and we do not recommend investments like financial planners do, but we work with both to help you make the most of your mortgage.  See my other posts about how the top financial planners and Fed Reserve Board Members are espousing these mortgage planning strategies.

If you would like to "run the numbers" for your college savings plan and a referral to a good financial planner, please call me today. 

 

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Rainmaker
212,683
Jennifer Monroe
Savvy + Company Real Estate - Charlotte, NC
Real Estate REALTORĀ®/Broker in Beautiful Charlotte

Mary Anne... I've been scrolling through your posts and wonder how I missed you. Please email me the link to the exact post you attempted to submit to the Mortgage Creative Writing Challenge. I would love to read it and link it to our summary post.

The interesting thing about your numbers above are that I began this process for my son when he was just a tyke and at the time, they projected that an ivy league college would cost about 20k per year when he was ready to enter. I pay almost twice that for his private school and his college education will likely cost 4-5 times the projected amount. It is not a reflection on the wisdom of long term financial planning, but rather the sad state of our education system.

Apr 01, 2008 03:12 AM #1
Ambassador
534,876
Jason Sardi
Auto & Home & Life Insurance throughout North Carolina - Charlotte, NC
Your Agent for Life
Mary Anne - This is great, I haven't read many posts dealing with planning to put away money for your children's schooling.  This is so relevant and will become even moreso down the road.  College isn't getting any cheaper...
Apr 01, 2008 03:22 AM #2
Rainer
25,107
Bryan Flynn
Regency Mortgage Corporation - Worcester, MA
Central Mass and Worcester Mortgages
good info to give your clients,  that is a great tool I have it as well..... i love that video too I saw that on America's Funniest Videos last year.
Apr 01, 2008 11:56 AM #3
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Mary Anne S. Daly

Queen of the Loan & Radio Broadcaster
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