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Our
parents told us to pay off that
mortgage. As parents, we most likely
told our kids to pay off that mortgage.
Send in extra principal when you can.
Sign up for twice monthly payment
programs. Get a mortgage with as short a
term as your wallet will handle.
Suppose all that is bad
advice? Here are some reasons you should
get the biggest, longest mortgage you
can get, ways to begin winning the money
game
First, the size of your
mortgage does not affect the value of
your home. A $200,000 home is worth
$200,000 whether the mortgage is
$190,000 or $80,000.
Second, the size of your
mortgage does not affect how the value
of your home increases over time. If
your home appreciates 4%, again using a
home with a value of $200,000, the new
value of your home in one year would be
$208,000 regardless of the size of the
mortgage.
Next, mortgage money on a
principal residence is the cheapest
money you can borrow. Mortgage interest
rates change, to be certain, but even
when they have been at the highest
levels they were still lower than credit
cards and most car loans.
Next, consider an interest
only loan. With a traditional mortgage
that requires you to pay principal and
interest, you earn nothing on the
principal you send to the lender every
month. Nothing. Nada. Zilch. If you send
an extra $100 to the lender to pay down
the principal every month for a year,
you have deposited $1,200 in an account
that earns you nothing. If you did that
for 10 years, you would have sent your
lender $12,000 and your return would be
$0. Even putting that money in a money
market account earning 4 percent would
be better; at the end of 10 years you
would have $14,725 (assuming you earned
4 percent annually and you never touched
that money). If you had earned 8 percent
on those $100 a month payments, at the
end of 10 years you would have $18,295.
Of course, you would have
even more if you put away more, or
invested such that your money earned
more than 8 percent a year.
Next, think about the
mortgage interest deduction on your
income tax. With a traditional mortgage,
the amount of interest you pay decreases
over time and so does your deduction.
Each person’s situation is different,
but think about taking the tax savings
and adding them to your $100 a month. In
other words, invest your tax savings in
addition to the principal payments you
are no longer sending to the lender.
Finally, does it make sense
for someone with a large amount of
equity in their home to just let that
money sit there earning nothing? Suppose
the main wage earner became sick or
injured? Or was laid off? Or died?
Would equity in the house be of any use
at that point? No, because lenders don’t
lend money to people who can’t work,
don’t have jobs, or are no longer
breathing. Better to get your equity out
while you can, invest that money, and
have it available. You would be able to
cope with life’s major setbacks if you
have savings to get you through the
tough times.
Right about now, or maybe a
few paragraphs ago, you might have
discovered something: the principal you
pay off (that’s called “equity”) is used
to lend money to other borrowers so the
lender can earn more interest. On
your money.
As my Grandpa Murphy used to
say: “The only way to make money in a
bank is to own one.” |
